Life Insurance

Term life insurance is “pure” insurance. It offers protection only for a specific period of time. If you die within the time period defined in the policy, the insurance company will pay your beneficiaries the face value of your policy.

Term insurance differs from the permanent forms of life insurance, such as whole life, universal life, and variable universal life, which generally offer lifetime protection as long as premiums are kept current. And unlike other types of life insurance, term insurance does not accumulate cash value. All the premiums paid are used to cover the cost of insurance protection, and you don’t receive a refund at the end of the policy period. The policy simply expires.

Term life insurance is often less expensive than permanent insurance, especially when you are younger. It may be appropriate if you want insurance only for a certain length of time, such as until your youngest child finishes college or you are able to afford a more permanent type of life insurance.

The main drawback associated with all types of term insurance is that premiums increase every time coverage is renewed. The reason is simple: As you grow older, your chances of dying increase. And as the likelihood of your death increases, the risk that the insurance company will have to pay a death benefit goes up. Unfortunately, term insurance can become too expensive right when you need it most — in your later years.

Several variations of term insurance do allow for level premiums throughout the duration of the contract. You may be able to obtain 5-, 10-, 20-, or even 30-year level term, or level term payable to age 65. An advantage of renewable term life insurance is that it is usually available without proof of Insurability.

Life insurance can be used to achieve a variety of objectives. The cost and availability of the type of life insurance that is appropriate for you depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.

Universal life insurance was developed in the late 1970s to overcome some of the disadvantages associated with term and whole life insurance. As with other types of life insurance, you pay regular premiums to your insurance company, in exchange for which the insurance company will pay a specific benefit to your beneficiaries upon your death.

As with whole life insurance, a portion of each payment goes to the insurance company to pay for the pure cost of insurance. The remainder is invested in the company’s general investment portfolio, with the potential to build cash value.

Most universal life policies pay a minimum guaranteed rate of return. Any returns above the guaranteed minimum vary with the performance of the insurance company’s portfolio. The policyholder has no control over how these funds are invested; funds are managed by the insurance company’s professional portfolio managers.

However, universal life policies are very flexible. As the policy owner, you can vary the frequency and amount of premium payments and also increase or decrease the amount of the insurance to suit changes in your situation.

For example, if your financial situation improves significantly, you can increase your premiums and build up the cash value more rapidly. On the other hand, if you find yourself under a financial strain, you can reduce your premiums, or you may even be able to deduct premium payments from the cash value of the policy.

Of course, changing the premium or withdrawing part of the cash value in your policy will affect the rate at which your cash value accumulates. It may also reduce the size of the death benefit.

Any cash you withdraw from your universal life policy is considered “basis first.” You won’t incur a tax liability until your withdrawals exceed the premiums you’ve paid into the policy. Any amount that exceeds the premiums will be taxed as ordinary income. It is possible to structure many universal life policies so that the invested cash value will eventually cover the premiums. You would then have full life insurance coverage without having to pay any additional premiums, as long as the cash-value account balance remains sufficient to pay for the pure cost of insurance and any other expenses and charges.

Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, increase the chance that the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase. Guarantees are contingent on the financial strength and claims-paying ability of the issuing company. Under current federal tax rules, loans taken will generally be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse or matures, and is not a modified endowment contract. This assumes the loan will eventually be satisfied from income tax free death proceeds. Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered, or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

For investors who want the flexibility to change their premiums or death benefits, a universal life insurance policy may be ideal. If you are considering purchasing life insurance, consult a professional to explore your options.

Most people are familiar with whole life insurance. For many years, whole life policies were the predominant type of life insurance sold in America. When you purchase a whole life policy, you traditionally pay a fixed premium for as long as you live or for as long as you keep the policy in force. In exchange for this fixed premium, the insurance company promises to pay a set benefit upon your death.

In addition to providing a death benefit, a whole life policy can build cash value, which accumulates tax deferred. Part of the premium pays for the protection element of your policy, while the remainder is invested in the company’s general portfolio. The insurance company pays a guaranteed rate of return on the portion of your premium that is in its investment portfolio, building up the value of your policy.

Note: Guarantees are contingent on the financial strength and claims-paying ability of the issuing company.

This buildup in cash value is part of the reason the premiums on a whole life policy generally remain fixed instead of escalating to match the increased risk of death as you age. As the cash value grows, the risk for the insurance company declines.

Although the cash value in your policy is “your” money, you can’t simply withdraw it as needed, as you would cash from a savings account; but you do have limited access to your funds. You can either surrender the policy for its cash value or take the needed funds as a loan against the policy.

Under current federal tax rules, loans taken will generally be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse or mature, and is not a modified endowment contract. This assumes the loan will eventually be satisfied from the income-tax-free death. Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered, or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values. Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase.

You should be aware that, in addition to charging a modest interest rate for loans against a policy, the insurance company may pay a lower rate of return for the portion of your cash value that you borrow. However, loans against the value of an insurance policy are generally not taxable and can provide the cash to help with unexpected expenses.

The cash value of a life insurance policy accumulates tax deferred, but if you surrender the policy, you’ll incur an income tax liability for funds that exceed the premiums you have paid.

The fact that whole life policies have fixed premiums and fixed death benefits can be either positive or negative, depending on the situation. To some people, it means one less thing to worry about. They know in advance what they’ll have to pay in premiums and exactly what their death benefits will be.

To others, whole life policies don’t provide enough flexibility. If their situations change, it is unlikely that they will be able to increase or decrease either the premiums or the death benefits on their whole life policies without surrendering them and purchasing new policies.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. If you are considering purchasing life insurance, consult a professional to explore your options.

Last-survivor or second-to-die life insurance covers two lives under one policy. The death benefit is paid after the second person covered under the policy dies. Generally, premiums continue to be paid after the first insured dies. However, this type of policy may feature less expensive premiums than two individual policies, allowing the policy owner(s) the potential to buy a policy with a larger death benefit than might otherwise be affordable using separate policies.

Last-survivor life insurance may serve several purposes. For instance, last-survivor life insurance can be used to increase the inheritance for the beneficiaries of a married couple with an otherwise modest estate. Or, this type of insurance can be used to preserve an existing estate by providing cash for estate settlement costs and taxes. A last-survivor policy can be used to protect a two-income family when the loss of one income may be tolerable but the loss of both incomes would leave dependents without financial support. Last-survivor life insurance may be used for funding the estate taxes of wealthy couples whose estate plans make maximum use of the estate tax deferral at the first death. In this situation, there may be a likelihood of greater taxes due at the death of the surviving spouse than when the first spouse dies. The last-survivor policy can be used to provide cash for the taxes due at that time.

A person who is in poor health may not be able to obtain an individual life insurance policy. However, insurance companies often issue last-survivor policies even when one of the insureds in poor health (presuming the other insured is in better health) because only one death benefit is paid and not until the last insured person dies. On the other hand, there may be some tradeoffs to last-survivor life insurance.

Since the death benefit doesn't pay until the death of the second insured, it is possible that the surviving insured could be left without sufficient financial resources. And since premium payments must continue to be made, the surviving insured may not have the money available to pay the ongoing premiums. Some policies consider the insurance paid up at the first death so no additional premium payments are needed following the death of the first insured. Check for these features on any last-survivor life insurance policy you are considering.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.