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Key Considerations for Life Insurance

Though most of us don’t really like to talk about the inevitable, life insurance is one of the most important policies you can add to your portfolio. The loss of a loved one is devastating enough without adding the burden of financial insecurity. If there is someone you love, you owe it to them to remove the financial burden of your death.

To make matters worse, life insurance is one of the most controversial insurance contracts out there. There are a lot of financial pundits that have muddied the water by making general statements that don’t apply to every person or every policy. And quite fairly, a lot of unscrupulous agents have put consumers into inappropriate polices, creating a lot of mistrust in the life insurance market.  

Contrary to what you might hear from a financial column, friends or family, life insurance isn’t a choice between good and evil, but rather finding the best fit for an individual’s circumstances and goals. For this reason, you should go with a professional that you can trust to give you good advice and objectively help evaluate the best way to achieve your goals.

Life insurance doesn’t have to be expensive or complicated, so don’t put off this important planning! Here is some help:  

There are two main types of life insurance, term and permanent. Almost all life insurance requires a medical exam, health history, avocation/hobby questionnaire and drug/medication/supplement usage. Your given risk profile will be used to determine the amount you pay for insurance. In some case, certain risk profiles will not be able to secure life insurance.

There are a few life policies that don't require a physical exam. There are elimination questions and age restrictions with these polices, but can provide some coverage for those that don't have other options. The amount and the length of coverage is typically limited to compensate for the lack of a medical exam. These policies are also more expensive than a policy with a medical exam, assuming decent health.

The cost of insurance for both types of policies is based on the statistical likelihood of passing in the given time frame. The cost of insurance is the cheapest when you are young and gradually increases through your life expectancy. As you near your statistical life expectancy, the cost of the insurance starts to accelerate as you near your life expectancy and then climbs rapidly once you pass your life expectancy. For this reason, it is best to purchase life insurance when you are young and healthy.  

Beyond health, one's occupation, vices and hobbies can have a large impact on the cost of insurance. Tobacco usage is one of the largest controllable variables effecting the cost of insurance. Dangerous occupations can add a surcharge to the insurance or can even eliminate someone from being able to get insurance. Examples of dangerous occupations include members of the military in combat, miners oil riggers, pilots, smoke jumpers, etc. Hazardous hobbies include things such as sky diving, hang gliding, scuba diving and racing.

Term insurance last for a specified period of time ranging between 5 - 20 years. Term insurance provides the most amount of coverage for the premium because of the specified period of coverage. Since the start and end date are known in advance, the cost of insurance can be average for the specified period of time, so the payments will stay the same for the entire term.

Term insurance works great for covering known risks, such as a mortgage, getting kids out of the house or a specific date of retirement.  

At the end of a term policy, the insurance effectively ends with no money back. Technically speaking, the policy continues on a year to year basis, but the premium jumps so high that no one would realistically keep the policy unless they were on their death bed.

A term policy often has the right to convert to a permanent policy within a specified period of time. The policy typically converts at the same health rating that was assigned at time the policy was taken out without the need for any medical exam, however, the cost of insurance is reset to the attained age at the time of conversion.

Permanent policies come in all shapes and sizes, but typically share the common ability to extend coverage for an entire life span, whether that be 60 years or 150 years.
The cost of insurance for a permanent policy is the same as a term policy. However the difference is that a permanent policy is designed to go beyond the 20 - 30 maximum of a term policy.

Permanent policies are more expensive than term because of the ability to extend the coverage period. With term, the insurance company is betting that you will outlive the policy. With permanent, the insurance company assumes they will pay out on the policy, it is just a question of how long they will be able to collect premiums until that date.

Permanent policies are intended to cover final expenses, whenever they might occur, leaving a legacy, paying estate taxes or related expenses or providing for a special needs child.  

The unique difference between permanent and term policies, beyond the period of coverage, is the cash value feature of permanent policies.  

The two main types of permanent polices are whole life and universal life. Whole life policies have a set payment amount that results in the cash value equaling the death benefit of the policy at a pre-specified date, such as age 65, 95 or 100. The growth in cash value on a whole life policy is most often based on prevailing bond rates. Whole life policies will sometimes offer optional payments towards cash value from the insurance company based on the amount of death benefits paid out compared to the forecasted expectations.

Universal life policies have a wide variety of options. The most basic universal life policy has a fixed rate of return on the cash value accumulation that is based on prevailing bond rates. At the other extreme, the growth of the cash value can be determined by the market. There are also hybrid policies that can tie the cash value growth to an index, such as the S&P 500.  

Consumers should consult with an experienced agent when shopping for a universal life policy to make sure the policy will meet their needs, budget and risk tolerance. There are a lot of people that have been disappointed by how their universal life policy performs, whether in terms of the length of time the policy runs or the amount of cash value accumulation. This is usually the result of underfunding a policy, but can also come about by not understanding how the cash value interest rate is determined.  

At a minimum, one must pay for the cost of insurance. Everything above the cost of insurance will go towards the cash value. The more that is paid above the cost of insurance, the longer the policy will run.

If enough is contributed to the cash value, supported by the given interest rate on the policy, the cash value accumulation can be quite significant. The cash value can be used to pay for the increased cost of insurance in the later years of the policy, pay the premiums of the policy and/or supplement retirement.

The growth of the cash value occurs on a tax deferred basis. As long as the policy stays in force, withdraws of cash value are also tax free. If the policy is cancelled, the cash value will be taxed for any portion that is in excess of the total amount of premiums paid for the policy.

The maximum amount that can be contributed towards a universal life policy is determined by the IRS because of the tax advantage of the policy. Life insurance has historically been one of the best methods of passing money from generation to generation and is becoming a more and more popular option for funding retirement.

Remember to Review

• Often life insurance is purchased and forgotten. However, like all insurance, life policies should be review to make sure they are up to date. A families' needs will change over the course of their life and their insurance needs to be adjusted accordingly. This includes the amount of coverage, the length of coverage and beneficiaries.

"I had put off purchasing life insurance because I was admittedly intimidated by the expense and the process. However, Kevin made it easy and I was pleasantly surprised how affordable it was. I sleep better knowing my family is taken care of if something should happen to me." Brandon