Term life insurance is usually available in 5, 10, 15, 20, 25, and 30 year terms. Some term policies are able to be converted into a permanent life insurance policy before the term period is up. Although each families situation is different, for young families with low to moderate income, term insurance will most likely be the best choice for protecting your family against an untimely death.                                                             

 Term Life Does:

• Provide a high level of protection at a lower cost than most permanent policies.
• Some term life insurance policies will convert to a permanent policy before end of term.

Term Life Does Not:

• Provide permanent life insurance protection
• Build cash value

The fixed account will usually offer around 4 or 5% with a minimum guarantee of around 3%. For a person who would like the opportunity for more growth than a fixed account but is opposed to the risk associated with a variable universal life policy that fluctuates with the returns of the stock market, an indexed account can be a good choice.

The indexed account’s found in IUL policies tracks or “mirrors” the performance of indexes such as the Standard & Poor’s Composite Index of 500 Stocks and the Dow Jones World-Ex U.S. Index without actually investing in the stock market. The (cap) that is set for crediting interest to the cash accumulation values each year offers the upside potential of growth; some policies will set the cap between 11% and 16%. The (floor) is usually set between 0 and 2%. This provides downside protection against negative performance that would be associated with investing in the stock market.

Over the last 30 years, an investment that reflected the performance of the S & P 500 would have averaged a little over 9% growth. It would be a good idea to choose a policy that allows the policy holder to change from a fixed to an indexed account and vice versa. IUL can be a cheaper way to provide permanent protection than a whole life policy but it can also be a powerful tool in building cash value with tax deferred growth if the policyholder pays enough premium.

As with any cash value life insurance policy, it would be a good idea to work with an insurance or investment advisor to help you understand exactly how the policy works and to choose an appropriate strategy to match you and your families needs and goals.

Equity Indexed Universal Life Insurance Does:

• Offer permanent life insurance protection
• Build cash value with tax deferred growth
• Allow you to borrow from the cash value
• Offer premium and face amount flexibility
• Offer a choice between indexed or fixed account

Equity Indexed Universal Life Insurance Does Not:

• Allow you to manage the investments (with the exception of index choice)

Like Whole Life insurance, UL offers a savings of cash value that grows tax deferred. Most UL policies pay a minimum interest rate such as 3 or 4%.  Just like in a whole life policy, the company assumes the risk in a UL policy because they guarantee a certain minimum return on your investment. Most whole life and UL ledgers or illustrations that are presented to a prospective policy holder will show two different columns, a guaranteed column and a non-guaranteed column.

If the insurance company’s investments do well in a particular year, then the interest rate paid on the cash value will increase. The policy will at least perform at the rate that the guaranteed column illustrates but hopefully the insurance company will have a good return on their investments and will credit a higher amount of interest which will perform more closely to what the non-guaranteed column illustrates.

UL policies offer two different death benefit options. Option A will pay the face amount only. Since cash value will have accumulated within the policy, the insurance company does not have a high amount of risk and therefore, Option A is less expensive. Option B will pay the face amount plus the cash value that has accumulated. Option B makes the insurance company assume a higher amount of risk and therefore is more expensive. Most UL policies offer what is known as a “secondary guarantee” which means the policy will not lapse regardless of the performance of the policy as long as you pay the minimum designated premium.

The reason that a UL policy is cheaper than a whole life policy is that the minimum premium required to keep the policy in-force until age 100 or 120 does not allow for much cash value growth. Just as paying more than the minimum premiums due on a credit card statement is necessary for quickly eliminating debt, paying more than the minimum premium in a UL policy is necessary to build a significant amount of cash value.

Universal Life Does:  

• Offer Premium and face amount flexibility
• Build cash value that is tax deferred
• Allow you to borrow from cash value

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Universal Life Does Not:

• Allow you to manage the investments

Although cash value is not guaranteed, most VUL policies offer a rider at an additional cost that will guarantee the face amount until a specific age such as age 100 or  age 120. As the policyholder, most variable universal life policies will allow you to manage the investments yourself, or you can have an insurance or investment advisor help you with your investment strategy.

VUL insurance can be a powerful tool in supplementing retirement because of the tax free cash accumulation. This type of policy can also be a powerful estate planning tool to help preserve a family’s wealth by reducing tax liability. Choosing to maximum fund a VUL can be a an alternative for individuals whose annual income exceeds the limits for investing in a Roth IRA. A knowledgeable insurance or investment advisor should assist in setting up an appropriate strategy.

If a VUL has been funded properly for 15 to 30 years, and it has performed well, a policyholder can supplement their retirement income by taking distributions from the cash values in the form of a loan (loans are not taxable) and then eliminating the loan by reducing the face amount of the policy to repay the loan. This generally allows the policy holder not to have to pay income taxes on the gains according to current tax laws. Gains are growth of cash value over the total amount of premiums paid.

VUL policies usually offer 3 different death benefit options that should be considered before making your choice. One option is a (level) death benefit which means that the policy will pay only the face amount upon the death of the insured. Another option is the (increasing) death benefit which means that the policy will pay the face amount plus the cash value that has accumulated.

The third option is a (sum of premiums) which means the policy would pay the face amount plus the sum of premiums paid. If your goals and/or needs change, you can usually change your death benefit option after the first year.

If a VUL policy offers flexible premiums, this feature would allow you to choose when to make premium payments and the amount that you would like to pay, subject to certain limitations. The more premiums you pay, the greater your policy’s potential to build tax-deferred cash value.

Variable Universal Life Does:

• Offer permanent life insurance protection 
• Build cash value with tax deferred growth  
• Allow you to borrow from the cash value
• Offer premium and face amount flexibility
•  Allow you to manage the investments

Variable Universal Life Does Not:

• Guarantee cash value because it is subject to the performance of its investments

An AL insurance policy is considered a fixed product. The portion of your premium that becomes the cash value in your policy is managed within the general account of the insurance company which means the insurance company takes the risk since it pays a fixed amount of interest for specified periods of time.

 A young person in their 20’s or 30’s can get a high death benefit for a low premium but as the insured gets older and as the cost of insurance goes up, it may be necessary to fund the adjustable policy with a higher premium to keep the policy in force in later years.

 Most people however, find that they need less insurance as they get older, no longer have a home mortgage and their children are no longer dependent on their income.  At that point, an adjustable life insurance policy will allow the policy holder to reduce the death benefit so that either the payment will be reduced or will stay the same.

AL insurance protects the policy holder’s insurability, meaning, even if your health were to become uninsurable, as long as you keep your policy in-force by funding it properly you cannot be denied for coverage. The interest that is paid on the cash value in adjustable policies is based on short term interest rates.  During parts of the 1980’s and 1990’s adjustable policies were paying close to 10 percent interest.

As those interest rates were reduced in these adjustable policies, the guarantees in these policies were reduced as well. This is not a pleasant situation for the policy holder or for the insurance agent to have to deal with.  In 2009, some of these policies are paying 5 percent.

 This could be ideal timing for a person who is contemplating buying an adjustable policy. When buying stocks the ideal situation is to “buy low and sell high.” If you purchase an adjustable policy when it is paying a low interest rate, at least you know that the guarantees are based on a low number that is sustainable and not on an inflated number that will likely come down. Working with an insurance advisor who understands the inner workings of adjustable policies is a good idea.

Adjustable Life Insurance Does:

• Allow changes in face amount and premiums     
• Build cash value with tax deferred growth 
• Allow you to borrow from the cash value

Adjustable Life Insurance Does Not:                               

• Allow you to manage the investments

Some newer whole life policies are currently extending coverage until age 120 with payments stopping at age 100 since people are living longer. In a WL policy, the life insurance company invests your money in their own general investment account.

Since the insurance company assumes the risk, the guaranteed return on your investment is usually a very moderate amount of 3 or 4 percent. WL insurance offers a fixed payment that cannot be increased during the life of the policy as long as you make your payments.

A mutual life insurance company will usually offer a “participating” policy that pays dividends which can be taken in the form of a check or can be reinvested back into the policy to reduce your future payments or to buy additional paid up amounts of coverage. Whole life policies that are issued from stock companies usually do not offer dividends to the policy holder because the dividends are paid out to the stockholders annually.

Dividends are excesses of paid premium. A life insurance company sets its initial premiums based on conservative assumptions to ensure that they collect enough money to be able to honor their promises to policyholders despite possible future adverse economic conditions and other scenarios.

It is important to know that dividend payments are not guaranteed. Dividends can be declared by the insurance company for several reasons such as, a better return on investments than expected or paying fewer death claims than expected. 

Although WL policies give you the option to withdraw some of your cash value during the life of the policy, they are not as flexible as other types of permanent life insurance. Neither the premiums nor the death benefit can be changed, however additional riders may be purchased that will allow the owner to increase the death benefit at certain specified ages. The guaranteed life insurance in a whole life contract is an attractive feature for individuals who do not want to assume any risk.

Whole Life Does:

• Offer permanent protection to age 100 or 120      
• Build cash value that is tax deferred       
• Provide a fixed payment for life with guaranteed cash values

Whole Life Does Not:

• Offer payment or death benefit flexibility   
•  Allow the policy holder to manage how the cash value is invested

Life insurance riders are options that offer additional levels of protection in a life insurance policy. These riders or options will usually incur an additional cost since they offer different types or levels of protection than what is offered in the original contract. Below is a list of the riders that may be available in a life insurance policy.

Waiver of Premium Rider will waive the policies premiums if the insured becomes totally disabled. Since periods of disability make it difficult to earn income, this can be a valuable form of protection. Some policies will not allow this rider to be issued after 55 years of age. Most policies will drop the rider at age 60.

Accelerated Death Benefit Rider allows the insured to collect a portion of the death benefit if the insured is diagnosed with a terminal illness. This is usually offered at no charge. Some policies will pay up to 75%. This can help the insured and his/her family through a financially and emotionally difficult time.

Guaranteed Insurability Rider guarantees either the option to purchase an additional policy on the primary policyholder without evidence of insurability or guarantees future increases in protection at optional dates.

Children’s Term Rider provides the insured’s children with their own life insurance protection. This will usually apply to natural children, stepchildren or legally adopted children. The coverage in most cases will terminate when the child reaches 21.

Accidental Death Benefit Rider provides an additional death benefit amount if the insured’s death results from an accidental. This amount is usually the same amount as the face amount and is sometimes referred to as Double Indemnity.

Level Term Rider provides a fixed amount of term insurance that is added to a permanent life policy for a specified period of time. Generally, a level term rider is written for an amount that may be up to several times the death benefit of the permanent policy to which it is attached.

Disability Income Rider provides the insured a monthly income if he or she becomes totally and permanently disabled. This rider will guarantee a specified level of income for as long as the disability lasts or for a specific period of time stated in the rider.

Most likely you are planning to eventually turn the life insurance policy over to your child when he or she starts a family of their own. Choosing a permanent life insurance policy that builds cash value is the best way to ensure coverage for their entire life and also to protect the insurability of the child in case a health condition develops that may make it difficult or even impossible to obtain coverage later in life.

Since the life insurance policy will need to be able to adapt to your child’s ever changing life insurance needs, it is a good idea to choose a policy that allows for increases in the amount of coverage without further health exams or underwriting. Some whole life insurance policies will allow for scheduled increases at certain ages such as, age 22, 25, 28, 31, 34, 37 and 40. These scheduled dates can in some cases be substituted for the date of marriage or the birth or adoption of a child.

Participating whole life policies offered by mutual companies pay annual dividends to the policyholders as earned. Although dividend payments are not guaranteed, these WL policies offer choices as to how the policyholder can use the dividends when paid. Some of the available options are, cash (paid directly to the policyholder), they can be used to purchase paid up additions of life insurance, or they can be used to reduce the amount of your future payments.

Try to look for a policy offered by an insurance company that will issue the preferred health rate for healthy children. Some insurance companies will issue healthy children at the standard health rate which has higher charges than the preferred health rate. This means that if you purchase a cash value policy that has the standard health rate, less of the money that you pay into it will accrue as cash value.

These are just some of the main points to consider when looking for a life insurance policy for a child. As with any other type of life insurance, it can be helpful to work with a knowledgeable insurance professional that you can help you make an informed decision.

One of the most common reasons for looking for a life insurance policy that does not require a medical  exam is the possibility of not being able to pass an exam because of an undiagnosed health condition. Although certain life insurance policies do not require a medical exam, there are still a few questions that you can expect to have to answer when applying for a policy.

In addition to having to answer a few medical history questions, the life insurance company will search the MIB (Medical Information Bureau) database.The MIB is an extensive medical information database that is shared by many life and health insurance companies. Many insurance companies submit claims and insurance coverage data to the central database.

 Not everyone’s history can be found by a search of the MIB but there the possibility that a hospital visit or some other diagnosed health condition that is omitted from a life insurance application will be discovered after a search. Below is a list of questions that you may have to answer on an application for a no exam life insurance policy.

Has the proposed insured ever been diagnosed or treated for……..

1.  AIDS or HIV?                                                                   

2. Chronic Lung Disease such as Emphysema, Sarcoidosis or Cystic Fibrosis?

3. Coronary Artery Disease or Bypass Surgery, Heart Attack, Stent Placement, Valvular Heart Disease or Replacement or a Stroke?

4. Bipolar Depression, Schizoprenia, Dimentia, Parkinson’s Disease, Multiple Sclerosis, Huntington’s Disease, Quadriplegia, Paraplegia or Down’s Syndrome?

5. Diabetes with onset before age 50?

6. Cancer, Leukemia, Melanoma or any other internal cancer (except basal cell skin cancer)?

7. Systemic Lupus or Scleroderma?

8. Is the proposed insured bedridden or confined to a hospital, nursing home, or other medical facility?

9. In the last 6 months, has the proposed insured required assistance from another person or a device of any kind for: bathing, dressing, eating, or transferring?

10. In the last 12 months, has the proposed insured been advised by a physician to have an operation, diagnostic test or any other procedure that has not been done?

11. In the past 10 years, has the proposed insured required or been advised to seek treatment for alcohol or unlawful drug use?

12. In the past 10 years, has the proposed insured been convicted of driving under the influence of drugs or alcohol, been convicted of reckless driving, or had four or more moving violations? Been Convicted of a felony?

Some life insurance applications may ask some or all of these questions listed above. Policies that do not require medical exams are usually more expensive so as to offset the additional risk assumed by the company that offers the coverage. Consulting with an insurance professional who is familiar with this type of life insurance coverage can be helpful.

Are you currently trying to decide whether you should buy term or permanent life insurance? Choosing a life insurance policy is a very important decision and should be an informed one. The simple answer to the question is, it depends on you and your family’s individual situation. Both term and the various types of permanent life insurance can be powerful tools for financial protection for those you love.

If you are young and healthy and have just started a family, term life insurance is the more affordable option. Keep in mind though, that term insurance only offers coverage for a limited amount of time. If your health is still insurable at the end of the term, obtaining a new policy will most likely be significantly more expensive. The death benefit is not taxable in any life insurance contract and all cash value life insurance policies allow cash values to grow tax deferred and can be withdrawn tax preferred.

Permanent life insurance is more expensive than term in the beginning, but most policies will provide protection between age 100 and 120. In the long run, the cost associated with a permanent policy is more level than term insurance and your coverage is locked in despite any changes in your health as long as you pay your scheduled premium. Purchasing a permanent life insurance policy that builds cash value  as opposed to a term policy can be likened to the decision to either buy a home or to rent one.

 It is more expensive to purchase a home since the homeowner will assume extra responsibility such as maintenance, taxes and other expenses. However, in the long run, not only will you have a significant amount of equity built up, but the home will eventually be paid off and the payments will stop. This is also the case with a well designed permanent life insurance policy. Just as having equity in your home gives you the ability to borrow your own money, a policyholder has the ability to borrow against most of the accumulated money in his policy.

As you and your family’s needs change, as your debts change, as your mortgage is paid off, as you contemplate retirement, your life insurance needs will likely change as well. Certain types of permanent life insurance offer the flexibility to adjust the size of the death benefit and the amount of your payments which will provide your family with a life insurance strategy that can evolve with your families changing needs.  Remember, life insurance planning is an important decision, so consulting with a life insurance professional is an important aspect of designing a strategy that accomplishes your own specific goals.