Insurance Fundamentals
When considering life insurance, it’s important to understand the fundamental differences between permanent and term life insurance. Each type serves distinct needs and preferences. The choice between term and permanent life insurance largely depends on your financial goals, coverage needs, and budget. Understanding these differences can help you make a more informed decision.
Term Life Insurance
Term life insurance provides coverage for a specific period. If the insured person passes away during this term, the beneficiaries receive the death benefit. If they outlive the term of coverage the policy expires, and no benefits are paid. Term life insurance is generally more affordable, making it an attractive option for individuals seeking coverage at a lower cost. It’s ideal for those who want insurance to cover specific financial responsibilities, like a mortgage or other debt or income replacement, for a defined period.
Permanent Life Insurance
Permanent life insurance, on the other hand, provides lifelong coverage as long as premiums are paid. This type includes several subcategories, such as whole life, universal life, and variable life insurance. Permanent policies not only offer a death benefit but also can build cash value over time, which policyholders can borrow against or withdraw. The premiums are typically higher than term policies, but they provide a combination of insurance and investment. Permanent life insurance is suited for those looking for long-term financial planning and stability, as it can serve as a financial asset throughout the policyholder’s life.
Let’s take a closer look at the various types of life insurance coverage
Term Life
Term life insurance is the most basic form of life insurance coverage providing insurance protection for a specific period of time, typically at the lowest initial cost. Term life policies are generally available for 5/10/15/20/30-year terms at most ages, and the premiums is usually guaranteed for the duration of the coverage.
It is a suitable life insurance product if you need short-term death benefit protection and have temporary financial obligations, such as income replacement, mortgage payments, car payments, or short-term debts. Coverage provides lower premiums for people who cannot afford permanent life insurance premiums. If you want the flexibility to exchange your term life policy for a permanent life insurance policy in the future, you can select a policy with conversion rights; this allows you to convert your term life policy to a permanent life policy later, without medical underwriting (within certain parameters).
If you elect to convert your term life policy to a permanent policy or wish to renew the policy at the end of its term, you should expect the cost to be significantly higher.
Whole Life
Whole life insurance provides permanent death benefit protection throughout your life – from the moment you purchase your policy until the day you die – provided you pay the minimum scheduled premium.
While the outlay for a whole life policy is greater than a term life policy, the contract will generally have a fully guaranteed level premium, cash value and death benefit for your lifetime. The guaranteed elements of a whole life policy can provide safe, predictable, life insurance protection and a variety of riders allow for customization to your specific objectives.
Policy cash value is invested by the insurance company which hopefully will generate projected accumulations over time. Participating whole life policies issued by mutual companies will hopefully generate dividends over time and many insurance companies have a longstanding history of attractive annal dividend performance.
In a properly designed policy, the cash value account accumulates within the policy on a tax-deferred basis, the policyowner can access cash value via tax-free policy loans and the policy provides a death benefit which is income-tax free to your named beneficiary.
Universal Life
Universal Life insurance is a permanent life insurance product with a flexible premium structure and the ability to build cash value under various assumed policy performance and investment return scenarios.
- You can set your premium amount and modify the payment schedule provided that the policy values are sufficient to support the death benefit and sustain the policy.
- Your premium payments are used to pay policy expenses including the cost of insurance. Premiums in excess of these projected costs are then credited to the policy’s cash value, which in turn earns a stated interest return by the carrier.
- The policy cash value belongs to the owner of the policy. The policyowner may allow the cash value to accumulate over time, withdraw or borrow against it, or use it to pay policy premiums.
UL policies generally do not offer the same degree of guarantees as whole life policies. Cash value accumulations and death benefits are generally not guaranteed and based upon the contract assumptions. You should consider a no-lapse rider so that the coverage can be guaranteed as long as you pay the no-lapse premium annually.
In a properly designed policy, the cash value account accumulates within the policy on a tax-deferred basis, the policyowner can access cash value via tax-free policy loans and the policy provides a death benefit which is income-tax free to your named beneficiary.
Indexed Universal Life
Indexed universal life insurance is a permanent life insurance product in which the rate of return credited to your policy is determined by the performance of a market index that you select. Policy cash values are not invested in any equity accounts.
The annual crediting rates within your policy are not determined by insurance company performance, nor are they the result of management by a professional investment advisory firm. Rather, the credited rate is the result of the movement of an index measured over time. For example, the credited rates may be the result of performance of the S&P 500 over time. Upside caps still allow you to reap the benefits in a solid-performing market, and downside minimum crediting rates of 0-3% provide assurance that you won’t experience a negative crediting rate even if the index loses money.
In a properly designed policy, the cash value account accumulates within the policy on a tax-deferred basis, the policyowner can access cash value via tax-free policy loans and the policy provides a death benefit which is income-tax free to your named beneficiary.
Variable Universal Life
Variable universal life insurance is a permanent life insurance product in which the return earned within your policy is determined by the investment return of the sub-accounts you select. Policy cash values are invested in one or more sub-accounts managed by professional investment advisory firms.
The insurance company provides the policyowner a pre-approved list of managed sub-accounts to choose from, with each option managed by a professional investment advisory firm. Your VUL policy is not built with guarantees in mind, as your policy cash value performance will depend solely on the performance of the sub-accounts you select.
A variable life insurance policy provides a powerful opportunity to obtain death benefit protection with the ability to build cash value through allocation among a family of professionally managed sub-accounts. You decide how to invest your net premium among the investment options offered for the policy, or you can choose a professionally developed asset allocation option based on your investment goals, risk tolerance and time horizon.
The upside rewards can be greater, but the contract is inherently riskier in the event of multiple negative return scenarios. You should be prepared to monitor policy performance to understand fully how actual annual equity returns are impacting the life insurance policy.
In a properly designed policy, the cash value account accumulates within the policy on a tax-deferred basis, the policyowner can access cash value via tax-free policy loans and the policy provides a death benefit which is income-tax free to your named beneficiary.
Private Placement Life
A private placement life insurance policy is a permanent life insurance product in which the return earned within your policy is determined by the investment returns of the investment manager you select to manage the policy assets.
While very similar to a variable universal life policy, the PPLI policy provides the widest array of investment options in virtually any asset class selected by the independent investment advisor of your choice. Policy cash value assets are generally held within an Insurance Dedicated Fund, managed by an independent investment advisor. Your independent advisor will make the day-to-day investment allocations among any asset class, which can include the most attractive investment opportunities available worldwide.
In order for the private placement policy to be treated and recognized as a legitimate permanent insurance contract, there are additional guidelines which must be followed regarding investor control and diversification. The policyowner is strictly prohibited from directing the investment advisor, who must act with independence at all times.
Your PPLI carrier can generally source needed death benefits from a variety of reinsurers, allowing the client to benefit from the most attractive cost of insurance pricing available in the market. Policies are available to accredited investors in concert with their tax and legal advisors, who can opine on the policy structure and ongoing management with respect to meeting the guidelines.
In a properly designed policy, the cash value account accumulates within the policy on a tax-deferred basis, the policyowner can access cash value via tax-free policy loans and the policy provides a death benefit which is income-tax free to your named beneficiary.
Survivorship Life Insurance
The policies listed above are generally written on the life of an individual insured, insuring that person for a coverage amount payable upon that person’s death. Many policies can also be underwritten upon two lives for a coverage amount payable upon the death of the surviving insured.
A Survivorship Life or Second-To-Die Life policy, provides coverage for two insureds, and pays the death benefit upon the death of the 2nd insured. Survivorship policies can provide the fundamental liquidity necessary to allow for a successful estate plan. Innovative policy designs can often provide an internal rate of return (IRR) of premiums paid to death benefits, at average life expectancy, far in excess of investment returns within the client’s portfolio. For this reason, Survivorship policies can be one of the most attractive, cost-effective, items in your Wealth Transfer arsenal.
Annuities
An annuity is a contract between you and an insurance company offering numerous potential benefits and favorable tax treatment. Cash accumulations within an annuity are tax-deferred, providing the opportunity to develop greater policy growth over time. Fixed annuity interest rates are often more attractive than other guaranteed investment products. Surrender charges and penalties can be zero when the policy is held to maturity.
Annuities can be an excellent solution designed to deliver a tax-advantaged, guaranteed source of income. Annuities can deliver an income stream for a fixed number of years and can also provide income guaranteed for the rest of your life, shifting mortality risk to the insurance company so that you cannot outlive your guaranteed income stream. Products vary widely and can be complex, often requiring a long-term commitment – making it important to consult an advisor who can explain charges, fees and benefits available to you.
Whatever your situation demands, The Affluence Group can help you achieve your current and future goals by selecting the right policy for your unique needs. In today’s strained economic environment, our equity indexed life insurance products can help you achieve wealth and protect you from market losses. We’ll incorporate the right plan into your portfolio as part of your overall investment strategy. Equity indexed policies can be utilized in many different scenarios such as, captive insurance company planning, premium financing, and the cash value can be used to supplement retirement income.
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