Term
Life Insurance
When Is Term Life Insurance A Good Choice?
Term life insurance is pure
insurance. When you purchase a term policy, you are buying
coverage for a specific period of time. If you die within the time
period specified in your policy, the insurance company will pay
your beneficiaries the face value of your policy.
Term insurance offers temporary
protection. This differs from the permanent forms of life
insurance, such as whole life, universal life, and variable
universal life, which generally offer lifetime protection. And
unlike other types of life insurance, term insurance accumulates
no cash value. You don’t receive a refund at the end of the
policy period if you haven’t died. Term life insurance maybe
appropriate for temporary life insurance needs or when your cash
needs make permanent life insurance unaffordable.
Term insurance is sold for a
specified period of time. Annual renewable term life insurance is
renewable every year, without proof of insurability. The main
drawback associated with annual renewable term, as well as other
types of term insurance, is that premiums increase every time you
renew your life insurance coverage. The reason is simple: As you
get 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 with it. Unfortunately, term
insurance can become too expensive right when you need it most –
that is, in your later years.
There are several variations of
term insurance that allow for level premiums. For example, you may
be able to obtain 5-, 10-, 20-, or even 30-year level term, or
level term payable to age 65. In addition, you can buy decreasing
term life insurance, for which you pay level premiums for a death
benefit that decreases every year. Each of these types of term
life insurance has its own particular uses. For example,
decreasing term insurance is often used to provide the funds to
pay off a home mortgage if a spouse dies.
Life insurance can be used to
achieve a variety of goals.The cost and availability of the type
of life insurance that is appropriate for you depends on factors
such as age, health, and the type and amount of insurance you
need. If you are considering purchasing life insurance, consult a
professional to explore your options.
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Whole Life Insurance
What are the Pros and Cons of Whole Life Insurance?
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 premium, the insurance company promises to pay a set
benefit upon your death.
In addition to providing a
death benefit, whole life policies build cash value.
Part of your premium goes to
the insurance company to pay for the pure protection element of
your policy. The remainder is invested in the company’s general
investment portfolio. The insurance company will pay a guaranteed
rate of return on the balance of your policy that is in the
investment portfolio.
This cash value buildup is part
of the reason the premiums on a whole life policy generally remain
fixed for the duration of the policy instead of increasing to
match the increased risk of death. As the cash value within your
policy grows, the risk to the insurance company declines. Your
stake represents an increasing share of the face value of the
policy.
Although the cash value in your
policy is "your" money, you can’t simply withdraw it
as needed as you would with a savings account. You do have access
to your funds, though.
In order to withdraw funds, you
can either surrender the policy for its cash value or take the
needed funds as a policy loan.
However, outstanding loans will
reduce the policy’s death benefit.
Be aware, though, that in
addition to charging you a modest interest rate for borrowing the
funds, the insurance company may pay a lower rate of return for
that portion of your cash value that represents the amount you
borrowed. But policy loans are generally not taxable and can
provide the cash to help with unexpected expenses.
The cash value on a life
insurance policy accumulates tax deferred. If you surrender the
policy, you’ll incur an income tax liability at that time, but
only for those funds that exceed the premiums you have paid.
One of the attributes that
makes whole life policies so attractive to some individuals
troubles others. That’s the fixed premium and fixed death
benefit.
To some, this means one less
thing to worry about. You know in advance what you’ll have to
pay in premiums and exactly what your death benefit will be.
To others, this doesn’t
provide enough flexibility. If your situation changes, you will
likely be unable to increase or decrease either your premiums or
death benefit on your whole life policy without surrendering it
and purchasing a new policy.
The level premium and fixed
death benefit make whole life insurance very attractive to some.
The cost and availability of
the type of life insurance that is appropriate for you depends on
factors such as age, health, and the type and amount of insurance
you need. If you are considering purchasing life insurance,
consult a professional to explore your options.
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Universal Life Insurance
What Flexibility Can Universal Life Insurance Offer Me?
Universal life insurance was
developed in the late 1970s to overcome some of the disadvantages
of term and whole life insurance.
As with other types of life
insurance, you pay regular premiums to your insurance company. In
exchange for these premiums, the insurance company will pay a
specific benefit to your heirs upon your death.
And, like whole life insurance,
a portion of each premium goes to the insurance company to pay for
the pure cost of insurance. The remainder is invested in the
company’s general investment portfolio.
Most universal life policies
pay at least a minimum guaranteed rate of return. Any returns
above the guaranteed minimum will vary with the performance of the
insurance company’s portfolio.
You won’t be able to exercise
any control over where these funds are invested. The insurance
company’s professional portfolio managers will manage them.
But there is an area where
universal life policies offer a great deal of control.
Universal life policies are
very flexible. As the policy owner, you can vary the frequency and
amount of the premium payments. You can also increase or decrease
the amount of the insurance to suit changes in your situation.
If your financial situation
improves significantly, you can increase your premiums and build
up the cash value more rapidly. If you find yourself under a
financial strain, you may even be able to deduct premium payments
from the cash value of the policy.
With some universal life
policies, you may even withdraw some of the cash value in your
policy directly. Of course, you can also take a policy loan, just
as you could with a whole life insurance policy. You have the
flexibility to decide which will best meet your needs.
Changing the premium or
withdrawing part of the cash value within your policy will affect
the rate at which your cash value accumulates. It may also reduce
the size of the death benefit.
And, unlike other tax-deferred
investments, 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 amounts that exceed the premiums will be taxed as
regular income.
With many universal life
policies, it is possible to structure your policy so that the
invested cash value will eventually cover your premiums. You’ll
then have full life insurance coverage without having to pay any
additional premiums as long as the cash value account balance is
sufficient to pay for the pure cost of insurance and any other
expenses and charges.
There can be surrender charges
if the policy is surrendered prematurely.
For investors who want the
flexibility to change their premium or death benefit, a universal
life insurance policy may be ideal. The cost and availability of
the type of life insurance that is appropriate for you depends on
factors such as age, health, and the type and amount of insurance
you need. If you are considering purchasing life insurance,
consult a professional to explore your options.
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Variable Life Insurance
What Are the Advantages of Variable Life Insurance?
Whole life insurance provides a
solution to many of the shortcomings of term life insurance.
However, as consumers demanded even more changes from the life
insurance industry, insurers responded with yet another
development: variable life insurance.
A Modern Alternative
Variable life insurance
introduced a whole new concept to life insurance — the concept
of investment control. While whole life insurance provided fixed
rates of return on the cash value — rates that were determined
by the insurance company — variable life insurance provides you
with investment discretion over the cash value portion of your
policy.
How Does Variable Life
Insurance Work?
Variable life allows you to
allocate your cash value among a variety of investment subaccounts.
The premiums you pay are fixed throughout the life of the
contract. The performance of your chosen subaccounts determines
the growth of your cash value. They can also determine the value
of your death benefit.
There are usually several
subaccounts to choose from, including stock, bond, money market,
and fixed-interest options. You can allocate your cash value as
you see fit. And you can be as conservative or aggressive as you
wish.
Financial Flexibility and a
Guaranteed Death Benefit
Variable life offers the
flexibility to design your own portfolio together with the
security of the guaranteed death benefit. As long as you pay your
fixed premiums, your death benefit cannot go away. This is not the
case with universal or variable universal life insurance.
While your insurance needs will
be determined by your situation, you may want to consider variable
life. The cost and availability of the type of life insurance that
is appropriate for you depends on factors such as age, health, and
the type and amount of insurance you need. If you are considering
purchasing life insurance, consult a professional to explore your
options.
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Evaluating
Insurance Companies
How Can I Determine the Financial Strength of
My Insurance Company?
How do you compare one life
insurance company with another? What features do you examine? What
criteria do you use? How do you know what to look for?
These are difficult questions.
Even so, making sure your insurance company is financially sound
is an important part of ensuring family security.
Fortunately, there are a number
of independent companies that will make these evaluations for you.
These rating companies carefully examine each insurance company in
the areas of profitability, debt, liquidity, and other factors.
From the results of these examinations, they then issue overall
ratings.
Looking up a company’s rating
will provide you with a snapshot of that company’s financial
health. And tracking that rating on a regular basis should give
you some advanced warning of trouble.
The four most prominent rating
companies are A.M. Best, Standard and Poor’s, Moody’s, and
Duff & Phelps. Each of these services uses slightly different
criteria when rating companies. As a result, each may have a
slightly different view of a given company. A.M. Best ratings are
based on financial conditions and performance; Moody’s, Standard
and Poor’s, and Duff & Phelps ratings are based on
claims-paying ability.
You should be able to find
copies of at least one of these ratings in the reference section
of your local library. If you are unable to find them, or if the
ratings in your library are outdated, you can contact the services
directly. All four services will provide ratings over the phone.
The A.M. Best Company:
908-439-2200, www.ambest.com
Standard & Poor’s:
212-438-2000, www.standardandpoors.com
Moody’s Investor Services:
212-553-0377, www.moodys.com
Duff & Phelps:
312-629-3833, www.dcrco.com
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Long-Term-Care
Costs
Am
I Prepared for Long-Term-Care Expenses?
The vast majority of Americans
are not sufficiently prepared to face long-term care. They go
through their lives reassuring themselves that they will probably
never need it.
Unfortunately, that’s simply
not the case. A study by the U.S. Department of Health and Human
Services indicates that people aged 65 face a 43 percent lifetime
risk of entering a nursing home. About 21 percent may stay there
five years or longer.1 And
according to the AARP, the average cost of this care is $56,000
per year.2
Also, the odds that you will
need some kind of long-term care increase as you get older.
Self-Insurance as an Option
To self-insure — that is, to
bear the cost yourself — you must have sufficient income to pay
the estimated $56,000 or more per year for nursing-home costs.
The cost of long-term care is
not stable, however. It is rising with inflation and is expected
to exceed $148,000 per year in the next 20 years.3 So even if you have the
resources to afford a $56,000 yearly expense now, you may not be
able to handle rising future costs without drastically altering
your lifestyle.
The Medicaid Option
Medicaid is a joint federal and
state program that covers medical bills for the needy. If you
qualify, it will pay for your long-term-care costs. Unfortunately,
Medicaid is welfare. In order to qualify, you’ll have to spend
down your assets.
State law determines the
allowable income and resource limits. If you have even one dollar
of income or assets in excess of these limits, you will not be
eligible for Medicaid.
To receive Medicaid assistance,
you’ll have to transfer your assets to meet those limits.
This can be tricky, however,
because there are tough laws designed to discourage asset
transfers for purposes of qualifying for Medicaid. If you have
engaged in any “Medicaid planning,” consult an advisor soon to
discuss the new Medicaid rules.
Long-Term-Care Insurance
A long-term-care insurance
policy enables you to transfer a portion of the economic liability
of long-term care to an insurance company in exchange for regular
premiums.
Long-term-care insurance can
pay for skilled, intermediate, and custodial nursing care. Some
policies even pay for home health care. It can protect your family
from the potentially devastating cost of a long-term disability or
chronic illness.
Long-Term-Care Riders on
Life Insurance
A number of insurance companies
have added long-term-care riders to several life insurance
contracts. For an additional fee, these riders will provide a
benefit — usually a percentage of the face value — to help
cover the cost of long-term care.
Sources:
1. 2001 Field Guide, The National Underwriter Company, 2001
2. AARP, 2001
3. Assumes 5% inflation over the 20-year period
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