Insurance Strategies

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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