Life Policies 101

Written by Rob Pinner

Term Life Insurance

Term Life insurance is probably the easiest to understand of the 3 types of life insurance policies.  It’s the least expensive of the 3 policies also. The most common term sold is level term, but we also have return of premium term, decreasing term, & ART (annual renewable term).

Level Term Insurance

Level term insurance functions just like it sounds.  The premium and death benefits are level for the coverage period chosen.  The coverage period ranges from 10-30 years. To give you an example if you chose a 10-year term you would have the coverage for 10 years.  After the 10 years, you would have to purchase another insurance policy at your new age. I like to compare buying a term policy to renting a house.  You are renting the coverage.  There is no equity/cash value with a Level Term Insurance.  The one great clause that most level term insurance comes with is guaranteed insurability.  What this means is that once your term is approved you lock in your health.  It does not matter what happens to your health status during the coverage period, the company’s guaranteed insurability clause allows you to convert that term policy into a permanent policy without asking any health questions.

Return of Premium Term Insurance

Return of premium term insurance works just like level term insurance.  The 2 main differences are:

  1. Return of premium term is going to be more expensive.
  2. At the end of the coverage period the company returns all premium paid in.

Decreasing Term Insurance

Decreasing term insurance is a type of term policy that the death protection decreases each year.  Usually the premium stays the same while the benefit is decreasing.  These types of policies are mostly used to protect a mortgage or loan because these items decrease over time.

Annual Renewable Term (ART)

An annual renewable term is a policy that renews every year.  The death benefit stays the same, however the premium increases each year.  Usually the policy is guaranteed to age 90, but the growing premium usually is not cost effective and most people choose a different type of term.

Whole Life/Final Expence Life Insurance

Whole Life Insurance

Sometimes called “straight life” or “ordinary life”, whole life insurance is permanent life policy designed to cover the insured his or her entire life.  The premiums and death benefit are guaranteed for the life of the policy.  Whole life insurance does build up cash value.  The interest rate is set by the company at the time of issue.  Some of these policies also provide a non-guaranteed cash value which consists of dividends earned each year.  The dividends are based on the insurance company’s overall growth.

Final Expense/Burial Insurance

Final Expense insurance or also referred to as Burial insurance is a type of whole life policy which covers the cost of a funeral or other related costs.  The death benefit for final expense insurance ranges from $7,500-$50,000.  The underwriting process is simplified and in some products, no underwriting process at all.  Age 50 and above is who is mostly purchasing these types of policies.

 

 

Universal LifeUniversal Life Insurance

Ok this is where things start to get a little confusing.  Universal Life is a flexible premium permanent policy that mimics both term and whole life insurance.  It has the lower premium of term with a cash accumulation value like whole life. One feature universal life that whole life doesn’t, is that the premium and death benefit are flexible and can be adjusted.  Universal life has evolved since it was introduced in 1979.  We started out with 1 and we now have 4 types of universal life policies.  They are traditional/non-guaranteed, no-lapse guaranteed universal life, indexed universal life, and variable universal life.

Traditional/Non Guaranteed UL

Traditional universal life was created out of the concept of “buy term, invest the difference”.  It gave you the best features of both term life and whole life.  It had lower premiums than whole life does and builds up cash value. This is a win-win!! Not so fast.

These types of policies have what is a COI (cost of insurance) attached to them.  This means every year that you get older your COI (cost of insurance) increases.  The way these policies were set up was that the cash value build up would offset the COI (cost of insurance) increase each year.  The only problem is that agents will sell this product with lowest premium possible based on non-guaranteed interest rates.  This is a recipe for disaster. We all know if you bought one of these policies in the 80’s or 90’s interest rates have changed a lot and not for the good.  So these policies are not earning the interest illustrated, and the cash value is not building up to offset the COI (cost of insurance) each year.  When this happens the client is faced with some difficult decisions.  When the COI (cost of insurance) gets to the point where it is higher than the actually premium that is being paid, the insurance company can raise your premium, since the premium is not guaranteed.  It also can lead to tax consequences if you were to cancel the policy.

If you own one of these types of universal life policies I recommend contacting us for a review.  If caught early it can be fixed.

No-Lapse Guaranteed UL

This universal life policy is just like the traditional UL except it comes with a guaranteed premium.  You don’t have to worry about a premium increase as long as you pay that guaranteed premium is paid on time.  This policy will build up some cash value but is geared towards keeping your premium as low as possible.  I call these types of products “Term on Steroids”, because they are low cost and never expire.  These policies are great for someone looking a  permanent policy with a guaranteed premium without breaking the bank.

Indexed Universal Life

This policy is unique to say the least.  It can come with a guaranteed or non-guaranteed premium.  What makes this policy different from the the two above is the way the investment side works.  Sure you still have the COI (cost of insurance) but the extra money being invested is tied to major market index like the S&P 500 and Nasdaq. What really makes this policy interesting is how the interest is credited.  The company declares a cap each year on your policy effective date.  Whatever interest the index you chose makes, you get up to the declared cap, and guess what……there is no downside!!! If the index is in the negative for the year, the worse you get is 0%.

Here is an example:

The declared cap is 10% Annual Point to Point (APP) and you chose the S&P 500.  Lets say your effective date is March 1, 2018.  Then your annual point to point (APP) would be from March 1, 2018 to February 29, 2019.  So no interest accrues until the APP end date.  Let’s say the S&P 500 did 8.23%. Then you would be credited with 8.23% because it was under the 10% cap.

Same scenerio but lets say the S&P 500 did 14.35%.  You would then be credited with 10% since that was the cap, if the index is negative (say -8%) the worse you get is 0%.  That is what I call having your cake and eating it too.  Indexed Universal Life can be a great tool for funding college education, paying for a marriage, and even a tax free retirement.  Give us a call for details.

Variable Universal Life

Variable universal life (VUL) is similar to traditional universal life or non-guaranteed indexed universal life. The premiums in these types of policies cannot be guaranteed. The investment side of VUL mirrors mutual funds.  They are called separate accounts.  Your investment return is tied to the separate accounts which are invested in the stock market.  With that said, you can lose cash value in these types of policies. The variable universal life insurance (VUL) policy has all the drawbacks of non-guaranteed universal life insurance policies. I personally feel that these types of  policies are disasters waiting to happen and they usually happen when the client needs the policy the most. Only way you can win with this policy is if you die sooner and your policy is still in force.

Rob Pinner
Rob Pinner

I have been a licensed insurance agent for over 15 years.  If you have any questions or comments please don’t hesitate to give us a call.

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