Life Insurance – a look under the coversSubmitted by QSSA - Better Financial Solutions for Life on April 26th, 2018
I am often asked about the different types of life insurance and where these products fit into their individual situation. So, let’s start with the basics.
Without getting into the weeds, there are basically three different types of life insurance: Term, Whole Life, and Universal Life. From a cost and cash flow perspective term life is the least expensive and has a limited shelf life, Whole life is the most expensive and can last for your lifetime. Universal life is in-between from a cost and cash flow perspective; however, choose these products carefully because they can become underfunded or become very expensive in your later years.
Another alternative that is often talked about is purchasing a long time period (20 or 30 years) Term insurance policy and investing the whole life premium difference for the term of the life insurance protection. If you are young and disciplined than this might be a viable alternative and if it’s a choice between buying whole life or investing in a retirement plan (401k, IRA, etc.) then doing both might be a better alternative for you.
Whole Life Insurance - policies require financial discipline to maintain the premium payments yet these policies can offer you protection for life and many other benefits that the other policies cannot. They are more expensive than comparable Term or UL policy yet they build cash surrender value, pay dividends and, you can take loans and withdrawals against the policy’s cash surrender value. Often without jeopardizing the policy’s protection value. Additionally, if you have a significant cash value, you can easily take a loan against these policies with little paperwork. This can give you great flexibility. These policies also offer additional riders you can attach to these policies including critical illness coverage and long-term care coverage and, they can also be structured to accomplish other needs like retirement supplement, estate tax protection, inheritance concerns, final expense, etc. Please consult with your financial advisor to use these options correctly.
Term Insurance is like a utility bill. You purchase a set amount of insurance protection for a set amount of time (10 years, 20 years, 30 years) and your coverage stays in existence as long as you pay your premiums. Keep in mind that this type of insurance is generally purchased to protect specific issues like; income replacement, mortgage cost, education cost, loss of a business partner, etc. These policies generally have no cash surrender value. However, some of these policies may be convertible to a whole life policy for a period of time without additional health underwriting. The premiums for new whole life policy will cost more; however, your health is locked in and you will not be required to go through additional underwriting when you convert it to a whole life policy. Though if you increase your coverage then you will have to go through new underwriting requirements. The rates you pay for the new policy will be based on your current (attained) age.
Universal Life Insurance- These policies are often referred as “UL” policies. Many offer a flexible premium term, a level or increasing death benefit and they offer many some similar characteristics as a whole life policy at a fraction of the cost. Because the initial premiums are reasonable, many people see universal life as an attractive alternative to whole life and unlike term insurance, they can offer protection coverage for life. Various insurance carriers are also offering combination policies that give you the ability to cover other risks such as long-term care and critical illness under one policy.
If you currently own a whole life policy with significant cash value and you are in good health, you may want to investigate converting this policy to a Universal life policy with long-term care benefits.
Universal life policies offer good solutions: however, make sure you understand the details of these UL policies. With UL policies you should be aware of the cost of insurance “COI”, management fees and surrender charges. Your COI may increase, as you mature. Also, be aware of the illustration interest rate and the guaranteed interest rate that is being used in your illustration. If you have a flexible premium policy, make sure the premiums you are paying are adequate to support the policy. In fact, you may want to consider over funding the policy while your working to build up your cash surrender value. The built-up cash surrender value in your policy can supplement your premiums in later years as your COI increases.
Please contact me for more information or if you have any questions.