Were Hamlet a contemporary American rather than a fictional prince of Denmark, here is what would perplex him:
“To buy, or not to buy life insurance? That is the question! Whether Whole Life ‘tis better for the family fortune, or to invest in a Term policy in the event of a sea of troubles, And, by thus investing, end them?”
According to the Life Insurance Marketing and Research Association’s 2018 Insurance Barometer Study, just 60% of people in the United States were covered by some type of life insurance in 2018. Among those, one out of five surveyed said that they do not have enough coverage.
Are you among the 40% with NO life insurance, or are you among the 60% but the one in five people who have some insurance, but not enough?
When I discuss this with clients, I find that the majority of those who have life insurance not only don’t know what kind they own, they don’t know why they own that policy.
What Kinds of Life Insurance are Available?
Life insurance policies include whole life, premium finance whole life, term life, universal life, indexed universal life, and variable life.
Confused? That’s what the insurance industry banks on. Essentially: Term insurance is for a specific period whereas Permanent life insurance is for life if the premiums are paid. Unfortunately, what should be very clear becomes confusing with all those other categories…and because our lives are in flux.
The average professional will cycle through seven jobs during the span of his or her career.
One may be offered the opportunity to purchase group Term life insurance at their job at, generally, five to six times their annual salary. This is great for many people because, when you are just beginning your career, a group policy offered through work is an inexpensive and easy way to establish life insurance. These group policies offered as part of a comprehensive HR benefits package are also great for middle-aged professionals who may have a history of health issues restricting their ability to secure coverage. If you are offered life insurance as part of your benefits package, take it and value it!
When one leaves a job, they lose their life insurance. Even though you may start over and possibly have more insurance because now you are more senior in your career and earn more money, you are also older, and it is quite possible your health has changed over time. Should one die while employed the payout to heirs might be higher but so would the premiums. How likely are you to die and how much does this coverage cost?
See how life insurance is, ultimately, a financially investment tool? Would your money be better invested in stocks, bonds, gold, real estate, or art? What are the tax consequences of your various investments, including insurance?
What would happen to your dependents if — G-d forbid — you pass away without any life insurance in which you have independently invested? Are you leaving enough other assets to provide for them? I advise everyone investigate having Permanent coverage life insurance on your own, as a supplement to whatever Term insurance is given to you at work.
Now that you are thinking about investing in a life insurance policy aside from the one in your benefits package, let us discuss the basics:
Why Get Life Insurance?
People generally take out life insurance policies for four reasons:
- Income supplementation for loved ones upon death and debt i.e. mortgage and bills
- Adopting a retirement savings strategy
- Tax advantages
- Increased resources for retirement, emergencies, and other needs
How Much Coverage Do I Need?
There are many factors to consider:
- How many people depend on you?
- What’s your current budget?
- How much can you afford?
- What’s the purpose of you getting the life insurance policy?
How the Underwriting Process Works
Your age and health are the two main factors that determine the cost of life insurance premiums. As you might guess, the older you are, the more expensive life insurance can be. If you are in good health, you will have more options for coverage than if you have medical conditions.
Term life insurance is generally designed for seniors in good health. Before you can purchase term life, you must meet the insurer’s specific underwriting requirements and standards. The company typically examines several risk factors, including:
- Current health, physical condition, and height/weight
- Personal health history
- Hazardous occupation
- Personal habits (tobacco, alcohol or drug use)
- Factors including military status, driving record, financial status, and potentially hazardous hobbies (are you a skydiver or do you play golf?)
When it comes to underwriting guidelines, every insurance company is unique. One might not accept you if you are taking blood pressure and cholesterol medications, even if you have these conditions under control and are otherwise in good health. Another company might classify that person at their best rate.
Medical Exam vs. “No Medical Exam” Policies
It’s possible your carrier will request a complete medical exam that often includes an EKG. And after age 70, many carriers will include a cognitive and physical function test.
The insurance company pays for these in-home exams to measure your current health and determine your longevity. The longer they expect you to live, the lower your premiums.
Maybe you have heard of No Medical Exam coverage and you want to pursue it so you don’t have to ‘fess up to any medical issues. Buyer beware: these no medical exam policies will have higher premiums because the insurance carrier is having to account for not having your complete health picture.
If you have serious health issues, a good option may be a Graded life insurance plan. With this type of policy, full death benefits may not be available for the first two to three years. You’ll be paying in to have the potential for coverage, just not in the near term.
A savvy financial advisor who understands the insurance industry, as well as your needs and goals, may be more critical to your insurance investment process than the insurance broker.
How is insurance an investment?
Whole Life Insurance
You generally make level equal premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to company’s ratings and balance sheet). Whole life insurance can provide coverage for a set period, as well as your lifetime. One might equate whole life to owning a home where cash build up and part payment secures one’s ownership.
Your only action after purchase of the policy is to pay the fixed premium. The cash value may be accessible via policy loans or withdrawals. This can affect the cash value, death benefit, and even policy guarantees the insurance company gives.
Premium Finance Life Insurance
This is where you arrange for a bank to pay your premiums and you pay only the interest on the bank loan. Over time, your cash build up grows and you can pay off the loan to the bank as well as use the available cash to supplement a stream of nontaxable income to you when you borrow out cash. This strategy acts as another paycheck for you to live off on for your retirement coupled with social security, retirement funds and outside investments like real estate and stock market.
Universal Life Insurance
You may pay premiums at any time, in any amount (subject to certain limits), if the policy expenses and the cost of insurance coverage are met. Should one pay less amount towards one’s insurance coverage the policy can be changed upon one’s death. In addition, the cash value will grow at a declared interest rate, which may vary over time. The cash value may be accessed via policy loans or withdrawals. But it can affect the cash value, death benefit, and policy guarantees.
Indexed Universal Life Insurance
Indexed universal life insurance is very similar to universal life insurance. It gives the policyholder a choice of allocating cash value amounts to a fixed account or a fixed-index account. The policy offers flexibility to pay premiums at any time, in almost any amount but subject to certain limits, so long as the policy expenses and insurance coverage cost are met.
The amount of insurance coverage can be changed. The cash value will grow at an interest rate declared annually and based on the performance of a stock index, which may vary over time. If there are any negative index changes, your cash value is protected. In these ways, it is similar to how a fixed index annuity functions: growth potential linked to rising index values and protection in the case of falling index values.
Indexed universal insurance policies typically guarantee the principal amount in the indexed portion but cap the maximum return that a policyholder can receive. Since they’re seen as a “hybrid” universal life insurance policy, they tend to not be expensive. They offer greater safety than an average variable universal life insurance policy, but their growth potential is limited compared to variable options.
Term Life Insurance
A term life insurance policy is generally considered to be a good option for younger individuals with families. It may also be a good fit for people who anticipate their life insurance coverage requirement is temporary in nature.
Policy premiums are determined by the insurance provider on the basis of various factors, including the applicant’s age, overall health condition, family history, and life expectancy. If a policy owner dies within the policy term, then the face value of the policy is paid by the insurer. However, there is no payout for deaths taking place after the term expires.
Term insurance will usually last for 10-30 years, with a 20-year period being the most common. If the policy owner passed away within the 20-year term, the death benefit would be paid to the beneficiary. If the policy owner was to decease after the 20-year term, there would be no death benefit.
The premium payments are at a very low cost and there is no cash value. You are purely purchasing for the death benefit only. There is also (ROP) Return of Premium Term Life Insurance which comes at a much higher cost. I think there is a need for this type of coverage and insurance companies are happy to pay you back your premiums should you not die during said term as the companies saves substantial money in offering this insurance. Let’s say you pay premiums of $100.00 a month for 20 years. That comes to 24,000.00 versus $200,000 in death benefits. The insurance company is happy to pay you back your $24,000 instead of the $200,000, especially because they earned interest from your money.
After the end of the coverage period, the policyholder may renew or terminate the policy coverage. If a permanent life insurance policy might be of future interest, some term policies come with a “conversion privilege.” This means your term policy can be converted into a permanent one. But that may come with certain terms and conditions.
Variable Life Insurance
As with whole life insurance, you pay a level premium for life. However, neither the death benefit nor cash value is predetermined or guaranteed. They fluctuate depending on the performance of investments in what are known as subaccounts.
A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be allocated. This type of coverage has its rewards when you are investing in a bull market however you are paying anywhere between 3-5% alone for management fees for the mutual fund investments for each subaccounts and should the market drop like it did in 2000 and 2008 your coverage could be hurt dramatically.
Term Life Insurance or Permanent Life Insurance?
In general, people looking for a lot of coverage without hefty premiums may find more value in term life insurance. Permanent policy owners pay more in premiums for less coverage. However, they receive the benefit of lifelong coverage.
It is also important to recognize that the premiums for term insurance policies become more and more expensive as people age. As a result, carrying these policies into the later years of life can be extremely difficult. Those in good health may be able to opt for new coverage within a reasonable price.
People with issues such as declining health, or those traveling abroad, may be rated as higher risk or even deemed to be uninsurable. Unfortunately, this might mean that term policy owners will be stuck with their temporary coverage.
Permanent life insurance may be attractive for reasons other than lifelong coverage, too. Some people find it hard to swallow the idea of paying money towards something for potentially 10, 20 years, or 30 years, then having “nothing” in return for it. There is also the cash value component of permanent insurance and its potential uses.
A certain portion of each premium is allocated towards the growth of a cash value, or a savings component of a permanent policy. In many types of policies, the cash value is guaranteed. That may be a tool for tax-advantaged wealth building, tax-reduced retirement income, or other goals not possible with term insurance.
There is no universally applicable answer to the “term vs. perm” question. Ultimately, it depends on your personal needs and circumstances. But to partially answer Hamlet’s question: “YES! ‘Tis better to suffer the slings and arrows of low interest rates on life insurance to offset some inheritance taxes while providing for your loved ones.”
Beneficiaries & Contingent Beneficiaries
A beneficiary is the person or entity you name to receive your death benefit. Beneficiaries are often spouses, children and other family members, but you can name a friend or even a charity. Usually you name a secondary or contingent beneficiary to be next in line to receive your benefit if your first beneficiary dies before you. Note that should you have a primary beneficiary that individuals do not have to give any money to your contingent beneficiaries as you wish. He or she can do whatever they please unless you set you the policy to payout as you wish. Also, it can be a real problem if you do not review your beneficiary’s semi or annually on your various assets like Life insurance and retirement plans. I had a case where a husband forgot to change his beneficiary and his ex-wife received 2.7 million instead of his present wife.
Life Insurance for Seniors
Millions of Americans depend on life insurance for financial protection, as well as the benefits to their loved ones. But as people get older, insurance coverage may seem out of reach. Many seniors think they don’t have good life insurance options due to age or health. Even if you are in your golden years or not quite there, the good news is you do have choices. For example, there are some life insurance policies that may be bought up till age 90. That isn’t the most frequent age to get life insurance for seniors, but it’s helpful to know there are options for just about any life-stage. Some insurance options might also be available for those who may not be in the best health.
Finding the Life Insurance That is Right for You
If you are ready for personal guidance with your life insurance and want to either review what you currently own or to discuss what is the best option for you, not only now but projecting for your future needs, feel free to call us at 214-762-2327 for a personal evaluation.
Mark S. Gardner spent 23 years at Bear Stearns, overseeing the local Wealth Management department and managed over $175 million for high net worth individuals and families. His boutique, RetireWellDallas, mission is helping individuals and families enjoy higher standards of living and prepare wisely for retirement. He hosts complimentary consultations and workshops on topics ranging from taxes to college funding to Social Security and retirement planning. You can reach him at email@example.com