Designing Our Future

Chapter 5

 

Life Insurance

 

 

 

  Although many forms of insurance are used in the United States it is the life insurance policy that typically creates the first asset in our estates. Young families seldom have accumulated sufficient assets outside of their life policies.  Even if they are in the process of purchasing their home, equity is usually low in the beginning.

 

  Life insurance products typically relate in some way to estate planning. Many life insurance products are purchased for the wrong reasons. They should always relate to actual need or performance. While we say life contracts buy “peace of mind” the actual reason for purchasing such insurance is financial security for the beneficiaries.  Most life insurance is purchased to protect a person or family against loss of income due to the death of a wage earner. There are other reasons for purchasing a life insurance policy, but the primary purpose of life insurance is protection from the risk of income loss.

 

  A life insurance policy is a contract between the insurer and the policyowner based on the risk of premature death.  As such, life insurance is pretty basic: for a guaranteed loss (the premiums paid) an individual is protected from the potential larger financial loss (future income earnings) resulting from premature death. The peril being insured is the premature loss of the wage earner.

 

  Individuals and families did not always feel they needed to insure against the peril of premature death.  Large families and even friends could be counted on to help if disaster struck, whether that was a barn that burned down or a family who lost a wage earner.  Grandparents could be counted on to help raise children if the wife entered the work place.  Aunts and uncles might even take in children and raise them.  It was an informal understanding that families could count on.

 

  While we may still have the intent of helping friends and family we know how impractical it is in today’s society.  Grandparents are often wage earners themselves and in no position to take care of their grandchildren.  Families live all across the country and tend to be highly mobile.  Our families are also much smaller than they used to be so there are less family members to lean on.  As all of these factors developed over the years, it became common to purchase life insurance.

 

 

How Much Is Enough?

 

  The types and amounts of insurance an individual purchases are usually based on several factors: marital status, types of beneficiaries, and family financial stability.  Other factors and specific circumstances may also affect how the purchase of a policy is viewed.

 

 

  There are two basic insurance terms no matter what type of policy seems appropriate for the circumstances.  The guaranteed systematic loss is the premiums paid.  Premiums are usually a guaranteed loss with no means of their return. There are some policies, however, that do return premiums if no claims are made and specific conditions are met.  The potential financial loss, which insurance protects against, is the peril or risk that is insured against.

 

  There are many variations of life insurance, including mortgage insurance and other types that relates to the death of the insured person. Most life insurance products relate to security against an unexpected loss of income. Even though a life insurance product may generate a large lump sum settlement, it should never be considered a financial windfall.  The reason is obvious: it involves the death of the insured person.

 

  The primary considerations at the point of policy purchase are supplying financial needs for the immediate moment of death and for the long-term practicalities of life. In other words, there must be funds for burial, taxes, medical bills, or other immediate needs and funds for the costs of raising children, paying the mortgage each month, as well as property taxes, and meeting other day-to-day needs of those still living. While views may vary, most professionals feel the amount of the policy should at least meet the basic needs of the family members for ten years.  There may be other considerations, such as sending the remaining parent to college or technical school enabling him or her to better their personal income. The family may also want to factor in the cost of sending their children to college.

 

  Income consideration will depend greatly upon the source selected.  Some professionals believe all contingencies should be included in the amount of life insurance purchased while others feel the goal is merely to get the family on their feet and become self-supporting.  Perhaps the easiest way to decide how much insurance is necessary is to make a list of current obligations and a list of expected future obligations.  These lists might include:

 

Today’s Monthly Expenses			Future Monthly Expenses
Item	Cost		Item	Cost
Mortgage	$1,500		Mortgage	$1,500
Property Taxes	200		Property Taxes	200
Food	600		Food	750
Clothing	200		Clothing	300
Child Care	0		Child Care	600
Utilities/Fuel	500		Utilities/Fuel	700
Medical Premiums	1200		Medical Premiums	1200
Auto Premiums	100		Auto Premiums	100
Auto Loan	300		Auto Loan	500
College Expenses	0		College Expenses	1000
Miscellaneous	500		Miscellaneous	500

 

  While it may not be possible to know exactly what future monthly expenses will be, such lists will provide estimation for life insurance purposes. Families who have utilized a monthly budget will find this an easier process than those who have not. Once the monthly figure is achieved it will have to be multiplied by 12 to get the yearly figure.  That figure will have to be multiplied by the number of years the income will be needed.  Most families are shocked by the resulting figure, perhaps even questioning the correctness of the figure.

 

  It may not be necessary for the life insurance policy to provide all the income. Families may receive Social Security benefits, Veterans’ benefits or other types of income. Some incomes, such as Social Security benefits have limitations.  This should be factored in.  If both spouses are already working, it may only be necessary to cover the lost income if expenses are not expected to dramatically change.

 

 

  If the surviving spouse has not been in the job market for several years, it is important to be realistic as to his or her chances of finding a job that pays a meaningful wage. If childcare would require the majority of the income, would it even be worthwhile to take a job?  Perhaps funds for college or technical school would be a better choice.

 

  Some consumers may consider the cost of adequate life insurance more than they are willing to pay, even for term. If this is the case, it is important that they purchase an amount they can afford, try to cut current expenses, and save more for future use. It might even be wise to begin putting the spouse through school now so that he or she is better equipped to handle the death of a major wage earner.

 

  Many agents have traditionally used a multiplication rule of current income to establish life insurance needs. While this does simplify the process, it is often inaccurate.  Quadrupling or quintupling an annual income may present a general figure, but it has no personal characteristics of the people involved.

 

  Once the list of income is compared to expenses, the difference is the figure that will be considered for life insurance purposes. That difference is called a “capital gap.” It should be assumed that more would be needed than the capital gap reveals. In most cases, families have more needs than they anticipated.

 

  It is common to name the spouse as the primary beneficiary and children as the secondary beneficiary. If the children are under legal age this is often a mistake.  It may be better to list a trust as the secondary and set up such a trust with detailed instructions with a trusted and experienced trustee in charge. It may be best to pay a professional trustee rather than leave the funds in the hands of a friend or relative.  It is impossible to know what future circumstances may change the relationship with the person named as trustee.

 

  It is likely that individuals will continue to need life insurance even after their children are older and their spouse more financially independent. Life insurance will simply be needed for different reasons.

 

  A life insurance policy is either written on the life of the policyowner (one’s own life) or on another person that will not own the policy (someone else’s life). In either case, it is important that a beneficiary designation exist.  Since life insurance has the ability to pass outside of probate proceedings, not stating a beneficiary takes away one of the major advantages they possess: avoiding probate delays. Even if the policy is placed into an irrevocable trust, it is likely that the need to state beneficiaries will continue to exist.

 

 

  Life insurance is not always necessary. Typically, it is necessary when a financial hardship would result from the death of an individual.  In this context, life insurance may not be necessary for single individuals with no dependents, for nonworking spouses, for children, or for retired persons currently living from the proceeds of past investments and income. Of course, not all agree with this. For example, even if a spouse does not produce income from a job, he or she may be contributing to the family in other ways.  Their death could mean the surviving spouse would suddenly have additional expenses, such as childcare.  Therefore, each case must be individually considered.

 

  Statistically, few children die prematurely. If insurance is desired on the life of a child, most professionals recommend no more than $5,000 to $15,000 in benefits (or enough to cover the expenses of burial). Children do not typically produce income so that is seldom a consideration. If a person wants to give something of a financial nature to a child an annuity could be a better choice since it would benefit the child in his or her life, rather than pay only at their death. The cost of an annuity would seem higher since the individual would have to put in either over time or all at once a significantly larger amount than the premium of a life policy would be, but the financial potential is much better.

 

  The biggest decision relating to the purchase of a life insurance policy is basic: how much is enough? Not everyone agrees on how to arrive at this figure. Some suggest multiplying a set number of years of potential income (five years, for example) by the amount that would have been earned had he or she lived: five years multiplied by $60,000, for example, would equal $300,000 in life insurance. A straight formula such as this one would not take into account inflation or wage increases. Nearly everyone agrees it is better to have too much than not enough insurance. Therefore, if $300,000 is considered a base figure, it might be wise to add an additional amount of coverage to this.  How much additional? This is typically an individual choice based on individual needs (such as college tuition or medical costs).

 

  Most life insurance proceeds are paid out in one lump sum upon the insured’s death.  This often leads to errors on the part of beneficiaries. For example, the surviving spouse might be persuaded to pay for a grandchild’s college education, leaving her with insufficient funds to cover her life’s needs. Many professionals advocate life insurance proceeds be paid out through installments, if available. If the life insurance policy does not allow this option, it may be wise to take the full lump sum payment and purchase an annuity. The annuity would have multiple payout options available, including a guaranteed lifetime income for the beneficiary if that is appropriate.

 

 

  Since life insurance is designed to replace lost income, the age of the survivors will impact how proceeds should be paid.  If there is enough life insurance to cover five years of income, for example, it might be appropriate to receive five payments over five years or monthly payments for a five-year period. While an annuity is not always the best vehicle since the age of the beneficiary would impact payout, it is a consideration for older beneficiaries.  Younger consumers may want to consider the payout options offered by the insurer prior to committing to one company or another or prior to committing to one particular product being offered.

 

  When beneficiaries receive large sums from the policy, many errors are made by those receiving them. The lump sum settlement can seem so vast that little consideration is given to the amount of time that it must last. Studies show that insurance money is often gone in less than five years due to bad investments, expenditures that would not otherwise have been made (new cars, furniture, and so forth), persuasion by family and friends (that grandchild’s college education), or simple lack of financial wisdom. If the surviving spouse or other beneficiary has no reasonable way of earning their own income, misuse of insurance proceeds has serious consequences.

 

 

  Estate planning is never related to the products used. Rather estate planning is the use of procedures that best suits those involved. This may mean the use of a life insurance trust, proper payout of insurance proceeds, or even utilization of a guardian. In all cases, however, there must first be assets before there can be a trust or other plan. A life insurance policy is often how the assets are created.

 

 

The Life Insurance Trust

 

  Life insurance trusts distribute funds provided by a life insurance policy.  While there may be variations, usually the insurance trust creates a continual stream of income for the designated beneficiaries, often a spouse and children.  The goal is to ensure adequate income over a specified period of time, such as five or ten years.  Sometimes the goal is to provide income for the beneficiary’s lifetime.  Typically, the income is distributed monthly, just as the insured’s earnings would have been received.

 

  Life insurance trusts may have other goals besides replacing lost income, including:

1.     Controlling from the grave how insurance proceeds are invested.

2.     Preventing one or more of the beneficiaries from acquiring the insurance proceeds in a lump sum, which might be a threat to future needs of day-to-day survival.

3.     Enabling the life insurance proceeds to flow into another trust, removing them from the estate for tax and probate purposes.

 

  Trusts, including life insurance trusts, are always legal documents.  Therefore, it is necessary to designate a trustee or multiple trustees (whichever is desired).  Simply naming a person to be the trustee does not guarantee that he or she will accept the position.  As a result, it is necessary to name an individual or institution that is actually able to perform the task.

 

 

  The beneficiaries of a trust are still the heirs even though a trust exists.  The trustees are required to perform their duties according to the laws that exist and according to trust instructions, if possible.  If no trust instructions exist, then the trustees will perform their duties following fiduciary requirements of the position and to the best of their personal abilities.

 

 

Term or Cash Value?

 

  Unfortunately, there are many who try to convince the public that life insurance unfairly robs them. Life insurance is seldom an investment; rather it is intended to financially protect others in the case of one’s death.  It is not the policies that rob the consumer, but rather poor choices in the types of insurance bought. Whether to buy term or cash value products depends upon several things, with no one specific policy designed for everyone’s needs. Cash value policies are generally called permanent insurance. Each type of policy has a value in specific circumstances. There are several general rules used when deciding which type to purchase, but like all general rules they may not always apply to all situations.

 

  One general rule that we often see or hear is “buy term and invest the difference.”  This makes sense when the buyer is young and new in their career or just beginning their family.  It makes the most sense when the “difference” is actually invested rather than spent (which is what typically happens). Especially at younger ages, term is much less expensive than permanent insurance, supplying the same face values.  Even when the difference is spent rather than invested, at younger ages term insurance may be the best choice since finances are likely to be tight while need is great.

 

  Another general rule is: buy term insurance for “term” needs and cash value insurance for “permanent” needs.  As is so often true of general rules, there is validity to them, but their simplification may lead to critical mistakes in estate and retirement planning.  In this case, it is doubtful that most people would have any idea what a term or permanent need is. While it can be different from person to person, usually “term” refers to a financial need that will end at some point while a “permanent” need continues for a long period of time, sometimes until death.

 

Term Insurance

  Term insurance covers the insured for a specified period of time, such as ten or twenty years. As long as premiums are paid as required, the insurance company will pay a benefit if the insured dies during that time. The primary advantage of term insurance is its low cost. Term insurance offers no other benefit, such as savings or investment features.  Its only function is to insure the life of the individual named in the policy.

 

  There are both annually renewable term and level premium term policies.  In annually renewable term contracts, the policyowner pays the premium and the policy remains in force. The benefit (amount that would be paid at death) stays level but the cost of the protection goes up every year. Such policies are “age rated.”  Annually renewable term is the most common type purchased.

 

  Level premium term contracts cost more per year initially than annually renewable term policies.  The premium stays level for specified time periods, such as five, ten, fifteen, or even twenty years or more. While annually renewable products will use “current premium” or “maximum guaranteed premium” in their policies, level premium term contracts are locked into rates so they have no need for such things. There may be physical exam requirements in order to receive the steady premium. If the exam is failed (meaning the applicant is not in prime health) the cost will be greater.

 

 

  Many term policies allow the policyholder to convert from term to cash value without evidence of insurability, but this is not guaranteed in all policies.  Having the ability to convert has great value since no one can be sure how their health will be in ten or twenty years.

 

For example:

  Jon purchased a term policy when his children were young.  Now, at age 40, he has diabetes and related health conditions.  Since his wife, Susan, has not worked for most of her life he knows that she would be unable to find meaningful employment.  Jon’s term policy allows him to convert to a permanent policy.  Because he is concerned that his term policy may not renew or be the best financial avenue, he converts his policy (without evidence of insurability) to a permanent policy to protect Susan’s future needs.

 

  Jon was able to convert his policy, but it is important to note that many term policies have specific time periods during which the conversion must be made.  Once this time period has passed it is no longer possible to make the conversion.

 

  Term policies have many variances, including declining, decreasing, or reducing coverage that diminishes the death benefit over time.  A common use of such declining values is to insure a house or automobile, since the remaining mortgage or payment declines with each payment that is made.  Term policies may also include a disability waiver (for additional premium) that would automatically make the payment of the premium if the policyowner becomes disabled.

 

 

  Guaranteed level term policies guarantee a ten to thirty year lock in on premiums. Over the period of time, these policies are almost always less expensive than term policies that increase in cost each year. Of course, it is doubtful that the insured will be able to renew his or her policy at the same price when the guaranteed time period ends. If there is a conversion clause in the policy, a wise insured will investigate the possibility of converting to a permanent policy prior to the term’s end. This may be possible to do at the standard risk classification it was purchased under. All policies are not the same so it is always important to refer to the actual policy for details.

 

  Many state insurance regulators are concerned that 15-year fixed premium policies are straining some insurance companies’ surpluses and reserves. As a result, many state authorities are moving to reduce the attractiveness of this product option.

 

  An annually renewable term policy that contains a conversion option may still be a good choice for those who plan to convert their term policy to a permanent life policy. Even though the premium will climb yearly, if it is converted before the rates become too high it can allow the policyowner to establish his or her finances under the lower rate and then convert their policy when they can afford to do so.

 

  Most term policies are convertible, although some convert more cheaply than others.  Anytime health becomes an issue it is probably a good idea to convert the term policy to a permanent policy. Obviously, someone who may die is likely to want to convert to permanent coverage. Even when health is not an issue, however, an individual may want to convert their term to permanent coverage. One reason for doing so is strictly financial: if the insured realizes he or she has need for life insurance past the 15- or 20-year term period, the cash buildup and tax advantages from a cash value policy may be an advantage while enabling the insured to keep the premium level.

 

 

 

Cash Value Insurance

  Cash value insurance is initially more expensive than term but it offers a wide variety of options, including savings, investment, and payment options.  It is more likely to be purchased by those who can afford the higher premiums.  Ernst & Young compare it to renting or buying a home.  Term insurance is analogous to renting a house, while cash value is more like purchasing a house and having a monthly mortgage.[1]

 

  Young families with limited incomes are likely to prefer term.  Once there is more discretionary income, cash value policies are often preferred since the consumer feels it will return at least part of the premium if the insured lives so his family does not collect the death benefit.

 

  Those who have long-term life insurance needs may do better with a permanent policy since, over time, the premiums might be less costly.  This depends upon the insured’s age, the type of policy purchased, and other factors.  A cash value policy usually requires at least 15 years to develop enough after-tax cash surrender value to beat a buy-term-and-invest-the-difference approach.  As a result, assuming the difference was in fact invested rather than spent, those who will need life insurance for less than 15 years may want to choose term insurance while those who believe they will need life insurance for more than 15 years may want to purchase cash value policies.  Some professionals use 20 years rather than 15 years for this equation, but it often comes down to personal opinion.

 

  For long-term life insurance needs, whether one uses 15 or 20 years as the marker, most professionals recommend permanent insurance over term.  The actual cost of the premiums will be no more with permanent insurance over that time period and may actually be less.  When the surrender value is factored in, it is certainly less over long periods of time.  Considering that people often do not invest the difference in premium, let alone invest it well, term proponents often fail to meet their own declaration, having spent just as much in term premiums and having no investment to show from the difference saved in early premium years.

 

 

  There are three basic kinds of cash value policies:

·        Whole life;

·        Universal life; and

·        Variable life.

 

  Like annuities and IRA’s, cash value insurance policies grow on a tax-deferred basis. The accrued value is not taxed until it is withdrawn.

 

Whole Life Policies

  Whole life policies (also called ordinary life) are the traditional cash value products that we often see. Their name comes from their intention: to cover the insured for his or her whole life, with premiums also being paid for his or her whole life. Whole life policies have both advantages and disadvantages over term products. Advantages include:

1.     There is a fixed premium for the life of the policy.

2.     There are automatic savings built into the program for the policyholder.

3.     The owner can borrow from the cash values.

4.     The cash values grow on a tax-deferred basis.

5.     Premiums can be paid from the accrued cash value or dividends within the policy.

6.     There is the option to convert cash value to an annuity upon retirement.

 

 

  The disadvantages include:

1.     Premiums are higher in the beginning years of the policy.

2.     A long-term commitment is necessary, reducing flexibility by locking the owner into continual premium payments.

 

  There are multiple whole life formats. One of these is the participating whole life policy where the insurer may pay dividends to the policyholder. Dividends are not guaranteed, however. When dividends are paid, there is no guarantee as to the amount that will be received.

 

  Another whole life format is the interest-sensitive policy. These contracts often look and work the same as the participating type. Any returns paid above the guarantees are called excess credits.

 

 

  With indeterminate premium whole life policies, there may be lower premiums than with other kinds of whole life, but the insurance company retains the right to increase premiums up to a guaranteed level stated in the policy. There are no dividends and no excess credits available.

 

  Premiums in whole life policies may be structured in various ways. Participating and nonparticipating policies often use level premiums. Another method is the modified premium, in which the premium might be a set amount for the first 15 years, but change in the 16^th year to as much as double the original amount. There may also be a graded premium, one that would increase for a certain number of years.  Some whole life policies are paid up after ten or twenty years or by age 65. At such points, the policy has contractually received the entire premium needed to provide the insured with coverage.

 

Universal Life Policies

  Insurance companies respond to consumer trends. Insurers felt the pressure of those advocating the purchase of term insurance for example.  In the 1970’s and 80’s insurers developed the universal life insurance policy. This was partly due to the high interest rates of that time as well as those who felt term presented a better option. This policy was designed to provide insurance and invest within a single financial vehicle. The policy shows the actual cost of the insurance, the rate of interest credited to the cash value, and the amount of expenses against the cash value. Under whole life policies, the consumer is not able to see any of these factors, which is a major reason whole life policies often face criticism.

 

  Universal life policies are appreciated for their flexibility in determining face amounts and premium payments. Annual reports keep policy owners up to date on present and projected insurance, cash values, fees, and so forth. The flexibility of these policies allows policyholders to determine their own premium within specified limits.  Obviously enough premiums must be paid to keep the policy active. In fact, this is a disadvantage of universal life policies: policyowners must keep a watchful eye on their policy to prevent its lapse should insufficient premiums be paid. Additionally, paying a lower premium will mean paying premiums longer, perhaps even longer than would have been paid under a whole life policy.

 

Variable Life Policies

  Variable life contracts allow policyowners greater investment choices. Unlike whole and universal life policies where the insurers manage the investments backing the policies, variable life contracts allow the policyowner to invest in various combinations of stock, bond, and money market funds. Investment choices are not limitless, however. Investments must be made within the separate accounts available through the insurer.  Some companies use only their own funds while others may have as many as ten or more separate outside funds to choose from.

 

  Variable life insurance may be a form of variable whole life or variable universal life.  Many professionals prefer variable universal life since they feel it allows flexibility while giving investment choice. Many consumers require the ability to determine their own premium through changing financial times. Therefore, variable universal life meets their needs and allows investment flexibility as well. These contracts allow people, within specified limits, to put more or less premium into their policy in a given payment period.  In addition, they have a much higher degree of input over where their investment share goes.

 

  As with all things, variable life insurance policies are not perfect.  Fees are higher than for other types of insurance because there is more administrative complexity.  Some say these policies allow those who purchase them to make grave financial errors since they may have unrealistic expectations for the investment portion of their premium.  While this type of life policy does have an investment aspect, it certainly cannot be considered all that is necessary to achieve a secure retirement.  Additionally, some may underfund their policy due to unrealistic investment expectations.  There is seldom an income guarantee.  If the investments selected do not perform the policyowner may have to pay more premiums than he or she expected to.  All of these elements must be considered.

 

 

  Variable whole life and variable universal life policies are more complicated than other types of life contracts.  Variable products require more attention than non-variables do.  If the policyowner is not prepared to spend more time monitoring these policy investments, he or she may be better off purchasing a more traditional life insurance product.

 

Endowment Life Policies

  Endowment insurance is not widely used anymore. The primary characteristic of endowment insurance is that the contract pays the face amount at the sooner of either the time of “endowment” (the maturity date) or at the insured’s death if prior to the endowment date.  Endowment policies have long been considered a type of forced savings, especially since the protection aspect of the policy is relatively low. Pension plans often have variations of endowment plans within them.  Those in high tax brackets may still seek out endowment policies since they can build up values on a tax deferred basis.

 

 

Survivorship Life Policies

  Also called, Joint-and-Survivor life insurance, survivorship contracts are used to insure two or more people under a single policy. The death benefit is not paid until the last of the two or more named insureds have died. At that time, the full death benefit goes to the named beneficiaries. There are many variations in survivorship policies but most of the contracts use whole life products. They provide for an increase in cash values upon the first death of the insured persons. If the policy were a participating policy paying dividends, the dividends would then also increase. Depending upon policy terms, the premiums may continue until the survivor’s deaths. Some contracts may no longer require premiums once the first person dies, since there may be a policy option that pays up remaining premiums.

 

  As with other types of policies, there must be an insurable interest on the individuals insured.  This type of policy is typically used between spouses, parents and their children, or related business owners.  Survivorship life insurance contracts are effective in easing federal estate taxes on those who would be subject to such taxes and have elected to take maximum advantage of the marital deduction, which would have taxes due upon the survivor’s death. There is no requirement that all those insured be policyowners. The policy may be owned by a single person while insuring several people.

 

Single Premium Whole Life Policies

  Single premium policies, as the name indicates, have only one premium payment. The initial premium is paid up front with no further premiums required. Even though there is only a single payment made, the policy still builds up cash values that may be borrowed on a tax-free basis. Face values would still be distributed to listed beneficiaries upon the insured’s death.

 

  Single premium life policies may offer similar advantages seen in whole life policies:

1.     Money contributed to the policy builds up tax free through policy cash values.

2.     Policy owners may borrow available policy cash on a tax-free basis, just as a loan would be from a bank.  Many policies do not require that the loans be repaid, although that would reduce the settlement values available in the policy.

3.     The proceeds from the policy (the face value which is different than the cash surrender value) at the death of the insured would go to the beneficiaries’ income tax free.

4.     The policy’s settlement values would bypass the procedures of probate, although values would still be reportable during probate.

 

  Single Premium policies are often selected for their immediate cash value.  Individuals who have received large settlements from various sources may desire this type of product to conserve the funds, producing continuous income for a long period of time.  Values may be accessed through policy loans or even by surrendering the policy at some point in time.  Insurers are likely to have surrender penalties for surrendering the policy prematurely, however, so it is important to give suitable consideration to this policy feature.

 

 

 

Policy Options

 

  All life insurance policies are not created equal. Whether the policy type is term or cash value or a combination of the two, there are some options to consider, such as the nonforfeiture option. Insureds have certain legal rights when a policy is purchased.  While the exact rights will vary from state-to-state, the basics will be similar.

 

Nonforfeiture Options

  Nonforfeiture options guarantee the policyowner will have some value at a given moment during their policy term. Any cash value product must offer the consumer specific nonforfeiture options, which may be taken as cash value and applied in certain ways.

 

  In a participating policy that pays dividends there are typically several options for applying them:

1.     They may be taken in cash;

2.     They may be applied against future premiums that would otherwise be due;

3.     They may be used to purchase additional paid-up insurance within the same policy;

4.     They may be used to purchase term insurance.

 

  Paid up additions are small, single-premium policies that are bought at net rates without commissions.  They have their own cash value and death benefits.  Paid-up additions pay their own dividends.

 

Disability Waivers

  Some life insurance policies offer the option of adding a disability waiver, which would continue paying the life insurance premiums if the policyholder develops a qualified disability. Disability waivers are not all the same so it is important to understand how the one being considered works. In some policies the waiver is for the entire premium while others simply waive the cost of insurance during the disability period, enabling the policy to remain active even though premiums are not being paid.

 

 

  The term “disability” may also vary among policies. Some require the policyowner to be totally disabled, unable to perform any job, while others may only define it as being unable to perform one’s usual job.

 

Cash Values

  Every life policy is based on the term policy even though cash benefits may be involved.  After all, the primary reason for a life insurance policy is to pay a benefit should the insured die during the contract term. That is what a term life policy does. Every policy provides a death benefit in exchange for premiums, and every policy must cover the insurer’s administrative expenses.

 

  Despite what many would have us believe, people need life insurance for a variety of reasons. Whether one decides on term or permanent is merely a side issue, although making that decision can affect the total cost over the term of a policy, whether there is money set aside, or whether one’s family is adequately cared for.

 

  Those with high incomes often find permanent life insurance vehicles helpful. They are able to use cash-value vehicle to provide survivor protection while utilizing the cash value portion for tax-deferred income earnings. He or she may be able to take out the cash value in various tax-free ways at retirement.

 

  For those who really will “invest the difference” it may be best to buy term insurance even though rates increase each year. The discipline required to consistently invest the premium savings has traditionally been the problem for most people. They may invest initially but fail to continue doing so on a regular basis. Many professionals recommend that individuals who are against purchasing permanent insurance consider buying term and setting up an automated payment program for investing.  In this way, both protection and investment are guaranteed.

 

 

Insuring the Life of a Child

 

  Buying life insurance for a child has traditionally been discouraged by professionals and for valid reasons.  Statistically, the child’s parents are far more likely to die than is the child.  If there are limited funds it makes sense to place those premium dollars where it will be most beneficial – on the wage earners.  That doesn’t mean that children should never be insured.  There are situations that may warrant it.  For the majority of children, however, most agents feel life insurance is not likely to be a financial need.

 

 

  As we know, professionals often hold different opinions, even when viewing the same set of facts. Some agents do take a different view on insuring the life of a child. Life insurance on children can lay the groundwork for insurance as an adult. While most of us expect to remain healthy into old age that doesn’t always happen. A policy taken out in childhood may end up allowing coverage as an adult when a medical condition would not have otherwise allowed it. Most child policies have conversion rights to larger amounts of coverage at specified ages. Therefore, if a policy is taken out on a child, it may be important to view future conversion rights.

 

  If an individual is considering insuring a child, however, it must be stressed that this should only take place if the child’s parents are already adequately covered. Never should premium dollars be diverted to other policies until there is adequate protection for the family.

 

 

The Agent’s Role

 

  Agents are often made to feel that his or her role in the decision to purchase a life insurance product is somehow unethical or cloaked in self-interest. How unfortunate this is. Without the services of a life insurance agent, many families would go unprotected or under-protected. Too often it is the appearance of an agent at someone’s door that prompts him or her to take this necessary step to protect those they love. The role of the insurance agent should never be minimized or overlooked. Unfortunately, not all who call themselves an agent are professional. It is important that agents understand their profession; it should not be taken lightly since incorrect or misleading advice is not only detrimental to the image but to the consumer as well. A misplaced policy robs the consumer not only of their dollars, but more importantly the protection they thought they had.

 

  The public is increasingly moving to the Internet for their insurance needs.  Needless to say, this is not good news for agents. Consumers do not always understand the products they are buying and may make errors that will greatly impact them at retirement or when their estate is settled. A professional agent is worth their commission considering the number of consumer mistakes they prevent.

 

  There are a growing number of individuals who charge a fee (not a commission) to research the products available and make informed suggestions. Buyers pay a fee for the time and effort required to research products for the consumer. Whether or not the individual actually buys any product is not a concern of the researcher.

 

  Some types of insurance may be more easily purchased without an agent than others. In the life insurance field, the majority of policies are still sold through an agent. Few consumers feel confident enough of their knowledge and skills to complete a purchase. Additionally, most life contracts require an initial medical evaluation that must be set up and followed up. Agents still seem the most practical way to handle the life application and complete follow-up services.

 

  Life insurance agents provide a valuable and worthwhile service. While it may be possible to go online and decide for oneself how much insurance is necessary, consumers often do not consider the full picture. Agents provide the guidance necessary to purchase correct amounts and correct types of products. As such, the professional agent earns every commission they receive.

 

 

End of Chapter 5