Practically speaking…in matters of life and death (part 2)
Life insurance is a powerful tool. Purchasing and updating your protection are important but often confusing decisions. To begin the conversation about your needs, ask yourself these questions. How much do I need? How long will I need it? How flexible do I need to be? How much can I afford?
Here are the five basic types of life insurance policies to consider. Each one provides a death benefit but differs significantly in design. “Term” life insurance is the least expensive because you are simply renting it for a specific period of time rather than potentially owning it for life. The remaining options are considered “permanent” because of lifetime death benefits and cash value components. As a general rule, the more you expect your policy to do for you, the higher the premium per dollar of death benefit provided. This is largely due to the savings feature, higher fees, and commissions. There are many features and nuances—too numerous to explain here—so be sure to seek qualified advice, especially if you have advanced planning needs, are a high income earner, business owner or are considering advanced charitable giving or estate planning solutions.
TERM…typically provides maximum death benefit for the lowest initial premium and comes in two forms: 1) Annual renewable term premiums start very low but increase as you get older, 2) Level term has a fixed premium for a set number of years such as 10, 20 or 30 years. For pure basic protection, this is typically the most affordable solution for families in need of significant coverage with limited financial resources. As family needs change, consider layering various term policies to coincide with time needed. This along with a systematic investment plan may eventually help you eliminate your need for a death benefit.
WHOLE LIFE… is designed for permanent coverage your entire life. It provides guaranteed benefits, level premiums, and savings accumulation. Many policies pay dividends that can be taken in cash or used to purchase paid-up coverage. Contracts require premiums to be paid over one’s lifetime, though they may be paid up sooner through dividends.
UNIVERSAL LIFE (UL)…provides both a death benefit and savings accumulation but differs from term and whole life in that you can vary the amount and timing of your premiums. You can also potentially increase or decrease your death benefit. As long as you maintain sufficient cash value, the UL provides more flexibility than Whole Life. Caution: with the flexibility in this type of policy comes additional risk that should be understood!
VARIABLE UNIVERSAL LIFE (VUL)… is a cousin to UL with a major difference—growth in cash value can be tied to performance of various investment options you select (equity, bonds, cash, etc.). It has the potential for greater cash value growth than UL because of good investment performance, but can also lose significant value in declining markets. The owner of a VUL bears the full investment risk, which can greatly impact the policy’s performance.
INDEX UNIVERSAL LIFE (IUL)… is another cousin to UL but can potentially provide greater growth opportunity than UL with less risk than VUL. It is important to understand that IUL policies are linked to the performance of one or more financial market indexes such as S&P 500 or Nasdaq-100, subject to floors for downside protection and caps that can limit upside potential. They usually include a fixed-rate crediting option, too. IUL may provide greater downside protection than a VUL, but the upside potential is also more limited.
As important as your initial purchase of life insurance might be, the need for a periodic review is just as important—because life happens! Major events such as marriage, adding dependents, significant debt or a new mortgage are among the triggers that should prompt a review. If you have older policies, evaluate the strength and stability of the insurer through “Best’s Insurance Reports” (www.ambest.com). And keep in mind, it may make the most sense to keep an older cash value policy from a quality insurer as upfront costs and commissions are typically spread over longer periods of time.
Experiencing any life changes lately? Life insurance, while initially perplexing and intimidating, is a powerful tool in your financial plan. Don’t let the confusing terms scare you off!
— by Janice Thompson
Thompson is a certified financial planner, and co-founder and CEO of One Degree Advisors, Inc. She speaks on financial topics and is a mentor for financial professionals, she also serves on the board of directors for Kingdom Advisors. Learn more at onedegreeadvisors.com. Advisory services offered through One Degree Advisors, Inc. Securities offered through Securities America, Inc., Member FINRA/SIPC. One Degree Advisors and Securities America are separate companies.