Life Insurance is used by individuals and businesses to insure the life of an important person. The policy has an annual cost and then the insurance carrier pays the owner/beneficiary a lump sum upon the death of the insured. Varying forms of Life Insurance can be Term or Permanent in nature depending on needs and goals. There is a wide array of products that fit all given needs. These Life Insurance products are referred to as Term, Universal, Indexed Universal, Variable Universal, and Whole Life. The latter is the original form of Life Insurance and generally the most expensive of all variations but has advantages for long term growth and lower, more conservative interest rates that are generally guaranteed for life.
Term Life Insurance
What is Term Life Insurance?
What is Term Life Insurance is the simplest and most efficient way to lock in a needed death benefit in the family of life insurance products. Most top carriers today will allow a range of $100,000 to $10,000,000+ of death benefit for fixed periods of time such as 10, 15, 20, 25, or even 30 years. The insured or owner pays an annual fee to the insurance company who then guarantees that the pre-determined amount of death benefit will be paid to the owner/beneficiary if the insured dies during that pre-determined time period. Just like auto or health insurance, you pay premiums to the insurance company to have benefits paid if warranted but there is no cash accumulation nor is there any other benefit during the life of the contract other than knowing you have the need covered should pre mature death occur. We have a Term Life Calculator link for you to review term options and pricing. Click here for that link…
How is Term Life Insurance Used?
Term Insurance is used by most families with younger children as working age adults begin to build and accumulate assets. Due to the very low cost of Term Life, we can lock in the “biggest bang for the buck” on two spouses for an appropriate period of time which typically will coincide with the youngest child’s estimated college education window. Expenses such as mortgage, loans, car payments, any other fixed living expenses are usually built into the determination of term duration and amount to secure. We often look at $1,000,000, for example, as being able to generate 5% annually in interest in paid in a death claim and invested for income purposes. This would generate $50,000/year (hopefully NET) to help replace the lost spouse’s income. If we need to replace $150,000 then we need $3,000,000 of Life Insurance.
Term Insurance is also used daily by business owners who need to insure a key person or business loans required by a business to operate or expand. The business can own these policies and benefits are then paid to the business upon the death of a key person to help with the originating need. This can also be money used by a business to help buy a replacement employee or move that person if out of state as part of a replacement for business productivity etc.
Lastly, a key feature to Term Life Insurance is its convertibility…this means that once we satisfy the original medical review requirements to get the policy issued and placed in force, we can turn the fixed term duration into a Permanent policy designed to stay in force until death, regardless of time frame. When converting to the new permanent structure, there is no new medical review required and even if health is turned negative, the policy retains its original underwriting classification. This can be especially critical if we near the end of a Term duration and there is a need to maintain coverage beyond the original term and health would otherwise prohibit someone from getting new life insurance issued.
Permanent Life Insurance
Permanent Life Insurance, unlike Term Life which limits to a finite period of insurability, is designed to remain in force until death occurs. There are several types of Permanent Life Insurance including Whole Life, Universal Life, Indexed Universal, and Variable Universal Life. Mensh Insurance is no longer in the equities or investment business and therefore we don’t offer Variable Life products. Below is a summary of Whole, Universal and Indexed Universal Life Insurance.
Whole Life Insurance
Whole life insurance, also known as traditional life insurance, provides permanent death benefit coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate. Interest accrues at a fixed rate and on a tax-deferred basis.
Keys to Whole Life
- Whole life insurance lasts for an insured’s lifetime, as opposed to term life insurance, which is for a specific amount of years.
- Whole life insurance is paid out to a beneficiary or beneficiaries upon the insured’s death, provided the policy was in force.
- Whole life insurance has a cash savings component, which the policy owner can draw or borrow from.
- The cash value of a whole life policy typically earns a fixed rate of interest.
- An outstanding loan principal and interest reduce death benefits.
Universal Life Insurance
Universal Life is a type of permanent life insurance with a cash value component that earns interest. Universal life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time and designed with a level death benefit or an increasing death benefit.
Indexed Universal (IUL)
Indexed Universal Life is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component. Most plans we bring to our clients will tie the performance of the S&P 500 to the cash within the policy. Even in years where the market might be negative, we have a floor guarantee of 0% so the insured does not LOSE cash. As such, we have the ability to see compound growth of cash year over year WITHOUT typical annual tax in years where we have gains. Additionally, since the cash is within the life policy, the growth of the cash is tax deferred and ultimately, allows us to borrow as supplemental income without tax down the road. We often design these plans as complements to traditional pre-tax retirement funding by placing after tax premium dollars into the policies in order to have yet another pool of retirement income to tap into after years of S&P growth. While we can’t ever guarantee any year’s gains, historically, we see double digit growth in the S&P over a 10-30 period. We have found that for those who have already maxed out retirement plans and have extra cash available, these IUL’s are ideal combinations of cash and insurance products. We can also add Long Term Care riders to these policies which provides yet another facet to coverage…a pool of living benefits to help offset any possible Long Term Health Care cost exposure…