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Life Insurance

Term Insurance

Just like the title implies, Term life insurance is generally purchased for a specified period of time. For example Dr. Patricia just graduated from Medical school and has a 10 year payback period for her school loans and wants to make sure that her loans are paid off should she die prematurely. She might want to opt for a 10 year level term plan. Term insurance is the least expensive way to buy a death benefit on a coverage amount per premium dollar basis.

What has been growing in popularity (since its inception and design in the early 80’s) are the guaranteed level premium term plans. With this type of coverage the premium paid each year remains level for the duration of the contract. The longer the duration, the higher the premium. This is because the older more expensive to insure years are averaged into the premiums. Again, these types of plans are very effective planning options for life coverage if you have specified periods of time that you want to address.

Return of Premium

This form of coverage is an interesting form of coverage whereby the insured pays about 20% more in premium in exchange for a complete return of all premiums paid which include the extra 20-25% paid over and above the pure cost of protection. This additional money is invested by the carrier to meet the return of premiums after the guaranteed period, typically 20 and 30 years.
Universal Life or GUL (Guaranteed Universal Life)

This is a form of permanent life insurance coverage which can provide not only protection, but flexibility as well. You are able to change within limits the face amount, timing as well as the amount of the premium you are paying. You can structure the policy to provide protection for your lifetime or to accumulate more cash value for a later date.(Though there are many planners and “Financial Guru’s “ out there that espouse having 5% of your portfolio in permanent coverage. Regardless, you want to take advantage of any retirement plans, Employer 401K’s, IRA’s etc. first and if you have the additional funds and have a need for Protection consider the permanent policy option.)The growths in these policies are based on periodically declared interest rates by the carriers that offer this coverage. If rates fall as they have, you will see that these policies have suffered considerably. In those cases many people were unable to continue with the increased premium that they were required to pay. Adjusting your policy’s death benefit or premium can affect your policy’s performance and guarantees. This could result in payment of higher premiums.

I prefer to err on the side of caution at all times and focus on the carriers GUARANTEES, this way you highlight the worst case scenario regarding long term performance of the policy. The periodic rate, typically on an annual basis, declared by the company is based on current and projected market rates often tied to Treasury Bills or Treasury Notes. You can’t assume that they will pay the declared rate which in almost all cases is higher than the guaranteed rates for the duration of the policy. That will not happen.

Whole Life Insurance

This is probably the simplest form of permanent coverage. The highlights are guaranteed premiums, death benefit and cash values which grow tax-deferred. Premiums will not increase and the death benefit is guaranteed. A lot of these policies will pay a dividend after a few years which can then be either reinvested to purchase more coverage, used to lower the premium or put into a separate accumulation account. The last option is the least favorable use of dividends because the carrier generates a 1099 at the end of the year and you must declare the interest that was earned on those accumulated funds. When you are younger and own one of the permanent plans available, the most prudent use of dividends is to have them reinvested.

Premiums are initially more costly than term, but they are guaranteed to never increase. Beware of anyone who tells you that dividends are guaranteed because they are NOT. While many companies have an excellent track record of paying dividends, you can’t expect them. Also beware that loans as well as withdrawals can and in almost all cases reduce your death benefit.

Survivorship Life Insurance

This type of policy covers two people, typically spouses, under one policy and is designed to pay off at the second person’s passing. The typical uses for these types of policies are for estate planning purposes for those that might have estate taxes due upon their death. Many estates do not have the liquidity to pay the liabilities that come with larger estates. This is also an excellent option for those wishing to leave money to a charity or perhaps a favorite institution. These policies generally cover two people less expensively than two individual policies would cost.

No amount of life insurance coverage will ever replace the loss of a human being, NO AMOUNT. However it is necessary to properly plan for a premature death because of the potential consequences it could have on those who are financially dependent.

With a thorough Needs Analysis, it is fairly easy to determine an amount of protection that would be adequate to address your life insurance needs!