Term Life Insurance Advice

Buying The Right Life Insurance

If you had a decision to make that could potentially cost you hundreds of thousands of dollars, would you get a second opinion? A majority of people would probably answer that question with a “yes.” Yet, you’d probably be surprised to learn that even people who ordinarily would shop for a television, car or other expensive items usually don’t shop at all when they buy life insurance.

The need for life insurance.

First, if you don’t have anyone depending on your income and no one would be harmed financially if you were to die, then you probably don’t need life insurance. This is obviously not the case if you have a spouse, children, parents or anyone else depending on your income. Under those circumstances, it’s wise to have an appropriate life insurance plan in place to take care of your dependents should something happen to you.

Term insurance versus cash value insurance.

In my opinion, there are two fundamental categories of life insurance policies. They are term life insurance-type policies and cash-value-type policies.

Term life insurance has been called pure protection, because it has no savings portion attached to it, as does cash-value insurance. If you die and have term life insurance, your beneficiary gets only the face value of the policy.

There are different types of term insurance. There is increasing term, in which the payment increases every year. There is decreasing term, which has fixed payment amounts, but the face amount of the coverage decreases every year or so. Then there’s level term, which features both level payment amounts and coverage for a fixed period of 10, 15, or 20 years, or longer.

You still need to shop around, however, because rates for and types of term life insurance can vary quite a bit.

The alternative to term life insurance is cash-value insurance, which is insurance with a built-in savings plan. Many types of cash-value products have been available over the years. A couple of these types of plans are whole life and universal life.

In most, if not all whole life and universal life plans, your excess premium dollars (monies you paid that weren’t needed to pay for insurance costs and expenses) were invested with that particular insurance company. These policies have historically offered very poor returns. Because of this, they weren’t good for the policyholder.

There is however, a relatively new (by insurance industry standards) type of cash-value insurance on the market called variable universal life insurance or VUL. Most of these plans have numerous investment choices that you can switch around, (usually without a charge), such as stock, bond or money market sub-accounts. These mutual fund-like sub-accounts give VULs the opportunity to earn returns that have seldom been seen in other permanent life insurance plans. Be aware however, that since the insurance company doesn’t guarantee the cash value that supports the VUL insurance, it’s possible to lose money on the investment portion.

VUL takes the good of traditional Universal Life insurance (U.L.), which is giving the consumer the flexibility of when to make payments, and couples it with the flexibility of allowing the consumer the benefit of determining where to invest the excess premium dollars.

Most of these plans have numerous investment choices that you can switch around in (usually without a charge) such as different stock or bond or money market sub-accounts. These choices can mean the difference of thousands, if not hundreds of thousands of dollars over the life of the plan.

These sub-accounts give VUL’s the opportunity to earn returns that have seldom been seen in other permanent life insurance plans. However, since the cash value supporting VUL insurance is not guaranteed by the insurance company, the possibility to lose money exists as well.

Of course, like other permanent insurance plans, the cash value grows tax-deferred, meaning that you pay no tax as your money compounds. An added benefit of the VUL is that many charge virtually no interest on policy loans* taken after a certain period of time!

There are numerous VUL plans on the market today. How can you determine which plans are possibly best for you? Look at the expenses involved in the product, such as management and cost of insurance. The lower these costs are, the more dollars are usually generated for you. However, I believe you must find a balance between these expenses and the other important consideration, which is what sub-accounts are offered for investment. You don’t help yourself much if the VUL you choose is inexpensively run, but offers below average investment choices.

To summarize, (and generalize) it is possible with the right VUL plan, you may have the opportunity to get great returns, tax-deferred growth, and tax-free zero interest loans!

From my experience, most people would be better served by buying term life insurance and investing the money they would save over whole life or universal life cash-value insurance. With a little bit of investment knowledge, most people can get a better return on their investments than they can with most of those types of cash-value insurance policies.

But for some, a VUL is a better choice. I recommend getting all the facts and then sitting down with your financial advisor to see what is best for you.

To wrap up with some final thoughts, it’s normal for an insurance company to require that you to pass a physical before issuing a policy. But make sure to get a policy that doesn’t require any other physicals after the initial one for the duration of that policy and for all renewals. Otherwise, if you’re asked to take physicals at the insurance company’s discretion, the onus of staying healthy so you can stay insured rests with you. And let’s face it, if you knew you were always going to be healthy, you probably wouldn’t need the insurance in the first place.

Also, keep in mind that all life insurance contracts are subject to insurance costs and other charges. These costs and charges are the basis for comparison when shopping for insurance. Also, be sure to check with a good insurance rating service to make sure the insurance company is financially strong. And if you’re thinking about replacing your old insurance policy, never cancel your old policy until the new one is in force. If you determine that you need life insurance, you should do it as soon as possible. Waiting to buy the right life insurance plan can be a mistake because the older you get, the more it will cost you. More importantly, if you become uninsurable while you’re waiting, it can’t be purchased at any price. Someone once said, “Life insurance is like a parachute, if you ever need it and don’t have it, you’ll never need it again.”

Financial Planning For Retirement

Investment Advice

Retirement Investing

Disclaimer:

In an attempt to provide the reader with accurate information, material has been obtained from sources believed to be reliable; however, the accuracy and completeness, and the opinions based thereon, are not, cannot and will not be guaranteed.

All examples in this text are hypothetical. Any negative statements or criticisms of individuals or organizations is unintentional. The information contained in this text represents the opinion of the author and is to be accepted as opinion only. It is not intended to provide legal, accounting or financial advice for individual readers.

Each individual's financial needs are different. This text is not meant to be utilized as a substitute for a sound financial plan. An individual financial plan should be developed only after consultation with a qualified professional.

In this set of principles in the Investment Advice: Retirement Planning series we'll be covering dollar cost averaging versus lump sum investing, how to use tax-deferred growth In building your retirement as well as how to set financial goals that have real chance to work!