Life Insurance is among the most useful, and most often overlooked of all the purchases that you will ever make.

It’s a product that can overwhelm you with options that don’t necessarily fit into a financial budget.

And at the same time considering an Insurance Plan also forces you to consider the most difficult decisions:

• needing to replace income for your survivors,

• estate equalization among heirs,

• wanting to avoid selling assets when the markets are down (preserve them and give them time to recover), and

• smoothing out monthly income when you are dependent on commissions or a year-end bonus.

Some people become paralyzed with fear and will avoid the subject of Insurance entirely.

Doing your own research, asking questions to a trusted advisor enables you to choose wisely appropriate Life Insurance Plan(s).

When Life Insurance is properly tailored to your needs and purchased at a competitive price it offers important financial advantages.

Which Insurance building blocks will strengthen your Financial Planning?

• Term Life Insurance

• Participating Whole Life Insurance (PWL)

• Guaranteed Universal Life Insurance (GUL)

What is Term Life Insurance?

It’s primary purpose is coverage for a specific amount of time; your beneficiaries named in the policy will receive a lump sum of money, generally tax free, if you pass away during that duration of time.

Reasons why Term Life Insurance may be purchased:

• Mortgage (your loved ones will know its paid for)

• Debts (won’t be passed on to your loved ones)

• Children until they graduate college (to insure there are enough funds for your children through graduating college)

• Income replacement for a certain number of years (provide funds for loved ones to pay expenses)

What is Participating Whole Life Insurance (PWL)?

PWL is a type of permanent Life Insurance that’s primary purpose ensures a guaranteed death benefit; your beneficiaries named in the policy will receive a lump sum of money, generally tax free, when you pass away, regardless of how long you have lived.

Reason why permanent Life Insurance may be purchased:

• An asset that generates income for surviving loved ones

• Estate equalization among heirs

• Predictability to your Legacy and Estate plan (investments, real estate, business interests can vary in value in time)

• Funding for special needs children

• Liquidity to pay estate and inheritance taxes

• For Businesses, to attract talented employees, by having group Life Insurance

• Creating a Split Dollar Compensation Plan for Key Employees

• To create a business continuity strategy - a Buy/Sell Agreements with your Partners

Permanent Life Insurance features a cash value or savings benefit:

• When you make premium payments part of your payment is allocated to the policy’s cash value.

• The cash value accumulates on a tax-deferred basis.

• The cash value is guaranteed to earn a minimum amount of interest.

• The cash value grows, at a set rate each year, based on the company’s performance (the rate of return will vary by company and policy type) and will never decline in value due to market conditions.

• Plus the cash value will continues to grow until it is equal to the face amount of the policy at a specified age, typically age 100 or 121.
  

Your Life Insurance and its cash value will be protected from creditors (will vary from state to state and doesn’t apply to the IRS).

What is the MEC Test?

MEC (Modified Endowment Contracts) went into effect after Congress passed the TAMRA (Technical and Miscellaneous Revenue Act) in 1988. Congress was concerned that individuals, in the initial years of owning a Whole Life policy, would overfund them and benefit from exceeding legal tax limits.

The MEC test was created, defined as the “7 pay test.” The first 7 years of a policy the total amount of premiums minus dividends received will be tracked in order to enforce the law of not overfunding your policy.

What is the added value in purchasing a PWL Policy?

A PWL policy pays dividends to their Policyholders; they participate in the profits generated by the Insurance Company. Although dividends are usually not guaranteed, some companies have paid them every single year for over 160 years, including during the great depression!

Dividends can be distributed as either: cash, used to pay premiums, or to purchase PUAs (paid-up additional Insurance).

By choosing to purchase the PUA option, you can increase the amount of Insurance coverage (the death benefit) without providing proof of insurability. The PUAs, once purchased, increases both the guaranteed death benefit and guaranteed cash surrender value of the policy.

Policy loans are made possible from the cash value that grows in your policy. This option will become attractive once you start to see sizable growth of cash in your policy, usually after 10 years.

Features of a policy loan:

• There is no approval process, credit check or income verification.

• Policy loan Interest rates are lower than what you would get for a personal loan or credit card and are devoid of high fees and closing costs.

• You determine your payback schedule of the loans.

• Repay your loans and have access to cash for future events.

• The loan amounts are limited to the cash value you hold in the policy.

Interesting fact about policy loans:
When you take out a policy loan, the money for that loan is not removed from the cash in your Insurance policy; the loan itself comes from the Insurance Company. The cash in your policy is pledged as collateral for your loan. If you do not pay back the loan the Insurance Company simply uses the collateral, which is the cash, to pay back your initial loan along with the interest that accrued.

The above point is also significant for something called "Non-Direct Recognition". Here the Insurance Company will continue to pay out the same dividends to your policy regardless of the amount of the policy loan you took out.

Taking control and becoming your own banker with Participating Whole Life Insurance Policy Loans:

• Providing flexibility to have low cost policy loans for:

  • unexpected expenses that weren't budgeted

  • smoothing out monthly income when you are dependent on commissions or a year-end bonus

  • a short term illness that prevents you from working

  • avoid selling assets when the markets are down (preserve them and give them time to recover)

  • a business venture and/or

  • taking the edge off paying your present mortgage when you've signed a contract on your next dream

What is Guarantee Universal Life (GUL)?

It’s primary purpose ensures a guaranteed coverage up to a specific age; typically, 90 or older. Your beneficiaries named in the policy will receive a lump sum, generally tax free of money if you pass away during that duration of time.

Here is how a Guarantee Universal Life Policy will differ from a Participating Whole Life Policy:

• face amount of insurance is fixed at the time of purchase (death benefit)

• offers little or no cash value/growth

• you choose the age your coverage expires (Options range between 90 and age 121)

• lower premiums than PWL

Reasons why a GUL may be purchased:

• Funding a special needs trust

• For seniors over 65 it’s tough to get Life Insurance. Several GUL companies will issue coverage up to age 85.

• Creating that inheritance plan that you just didn’t have the time to plan for earlier in your life

• Liquidity to pay estate and inheritance taxes

Disclosures: Each state may have their own parameters for Life Insurance plans. Insurance Companies will further customize/design their products. I do not provide tax advice. Contact your tax, legal or accounting professional regarding your individual situation.

What features to consider with all 3 products?

Coverage:

Term: can range from 10, 15, 20 or 30 years

Participating Whole Life: coverage is permanent

Guaranteed Universal Life: you select the age at which your policy ends; typical ages are: 90, 95, 100, 105, 110 or 121

Premium paying periods:

Term: common premium paying periods are: 10, 15, 20 or 30 years

Participating Whole Life: you make payments to fully pay the policy in: 5, 10, 15, 20 years or pay annually up to age 65

Guaranteed Universal Life: premium payment period coincides with coverage

Premiums are fixed:

Term: are fixed

Participating Whole Life: are fixed

Guaranteed Universal Life: are fixed

Four Common factors affecting rates:

Age: The younger you are the less costly the premium will be. When you are younger the logic goes your: health risks are usually lower and chance of death is smaller. As you age your Life Insurance Policy will become more expensive.

Sex: According to the National Center for Health Statistics, females have a life expectancy that is longer than males by nearly 5 years.

Health: This is an important component of your rate. You will be evaluated on your past and current medical condition. This will help to calculate your life expectancy.

Lifestyle: Are you a higher risk with a shorter life expectancy? They will look at: driving history (for example DUI convictions), criminal record, dangerous occupations and hobbies (for instance scuba diving) all can result in higher rates.

Premium affordability:

Term: more affordable

Participating Whole Life: more expensive

Guaranteed Universal Life: cost is cheaper than PWL because larger premiums aren’t required to build the policy’s minimum cash value accumulation

Accelerated Death Benefit/Chronical Care rider:

All 3 plans off this rider: If terminally ill, the rider allows you to access a portion of your policy’s death benefit before you die. The funds may be used for any purpose. There usually is no cost for this rider however there is a fee if the rider is exercised.

How do you see Life Insurance impacting your Financial Planning?

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