The great thing about life insurance is that it is one of the few things you can buy
where you know exactly what it’s going to worth someday. Whether that be $0,
$100,000 or $1,000,000, you know this answer on the day you buy it.
There are basically 3 types of life insurance and we will discuss each one of
those here briefly.
Term insurance is exactly what it says. It is insurance that you buy for a specified
period of time.
A 20 year term policy means that you will have that coverage for 20 years, where
the death benefit and the premium will stay the same for the whole 20 years. At
the end of the 20 years you have the right to renew the policy for another period of
time but at a new price. However, they have to let you renew for a new period of
time regardless of your health condition at that point in time. So when you buy
term insurance you are actually buying 2 things. One you are buy insurance for
that period of time and two you are buying yourself “insurability” for a later point in
time. Term policies come in different lengths of time. The most common are 10
year, 15 year, or 20 year. Some of the factors that would help you pick the length
of time are things like specific needs such as to cover a mortgage or until the
children are grown or until you reach retirement age. As stated earlier, you have
the right to renew the insurance at the end of the period but you do not have to
renew it for the full amount. That choice is yours. You might want to have
$250,000 of coverage till you reach retirement age but then decide that you only
want $100,000 after that. In that case you have the right to just renew the
$100,000. You also have the right to convert the term policy to one of the
permanent forms of life insurance. Most companies will not allow you to have
term insurance past age 80. So somewhere before that point if you wish to have
insurance till the day you die, no matter what that age is, you would want to
convert part of your policy to a permanent form.
Insurance rates decreased dramatically after the year 2000. That is when the
government and the industry started using a longer life expectancy table showing
that on average we are living longer. So if you have a policy that was “originally”
issued before that you may be paying too much. The reason I say originally is
because when policies renew they still use the payment tables that were in effect
the day you bought the policy not the tables in effect the day you renew. So even
if you have a 10 year policy but has already renewed twice, you could be paying
1980’s prices instead of today’s. If you have one of these you may want to have it
reviewed and get a new quote.
There are actually 3 varieties of these and we will cover them all.
What all 3 have in common though are that they build cash value in the early years
to help pay for the insurance cost in the later years. The original ones, those that
were mostly written in the 1980’s, used unrealistic projections showing how the
cash values would accumulate and increase. They were unrealistic because they
used interest rates of 8%, 9% or higher and of course the rates dropped to an
average of 4.5% to 5.5%. So now as the people are getting older and actually
need and want the insurance protection, the policies are running out of money.
The people in these cases are having to either drop the insurance or pay much
higher premiums. What we try to do is teach people to watch their cash values
and once they start dropping then they need to convert those policies into paid up
policies of lesser amounts of insurance. Even though they now have less
insurance, at least they get something for their money, instead of waiting till there
is nothing left to work with.
As time progressed a new version of Universal Life came out that was called
Variable Universal. These policies enabled the insured to invest the cash
accumulation in the stock market. These work great when the market is doing
well. As we’ve seen in the last 10 years though many of these policies got
decimated along with the stock market at least twice. This is one of the main
reasons where insurance really should never be viewed as an investment. There
are times when life insurance can work as an investment, but only if you put a plan
in place to use that money someday, such as to help supplement your retirement
on a tax free basis.
The third version of Universal Life is actually fairly new in that it has only evolved in
the last few years. This version is probably what Universal Life should have been
from the beginning. They project a reasonable rate of return and guarantee that
so long as you keep making the payments that at the very least the death benefit
will stay in tact. With the old policies if the cash value went to zero then the death
benefit also went to zero. With this new variety the cash value could go to zero
but the death benefit stays the same all the way through to the end.
Theses policies are for those people or that particular amount of insurance that
you want to have no matter how long you live. These will actually pay out as life
insurance all the way to age 121. They are basically a high bred form of
insurance between term insurance and whole life insurance. They are kind of like
buying a term insurance policy without an expiration date.
These were the most common forms of life insurance 50 years ago but times
change. About the only time you see them now is in what’s called, “Single
Premium Whole Life”. These policies not only have a guaranteed death benefit
but also a guaranteed cash value for every year that the policy is in existence.
The most common use for these policies is when people have every intention of
passing money on to the next generation, or especially if they want to pass on a
particular amount on to the next generation. The real beauty of these policies is
that you pay the money out once and you are done. A 65 year old person, in fairly
good health can put aside $20,000 in one of these policies and end up having
$40,000 to $50,000 of totally paid up insurance. The cash value and the
insurance amount can increase, but it can never decrease and the insurance
company can never ask for more money. The newest versions of these can also
be used to supplement income needed if someone were to go into a nursing
home or be diagnosed as terminally ill. Furthermore, all the money that comes
out of these policies for either of those purposes is still tax free.