~ The Various Types of Life Insurance Explained ~
Life Insurance is a unique product that can fulfill a variety of needs. Life Insurance can create instant Estates, replace family income due to the death of the primary family wage earner, and can also provide instant liquidity to pay inheritance taxes, funeral expenses, and such outstanding financial obligations as home mortgages, car loans, and business debts. It can also serve as a meaningful place to imbed capital, and compound it tax deferred, while providing professional money management with investment flexibility and multiple tax efficiencies.
Life Insurance pays a cash, lump sum death benefit, upon the death of the insured. There are two basic types of Life Insurance, and both types pay an income tax free death benefit (death benefit guarantees depend on the claims paying ability of the issuing insurance company), and each requires the payment of mortality costs and policy expenses through the policy “premiums”; however, only one offers the potential of “in-life” premium cost recovery and capital appreciation.
Therefore, what often distinguishes the two types of life insurance is the manner in which one pays for them. The question often remains…which one is best for you and your ever changing circumstances?
[DISCLAIMER: Life insurance policies and contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Paul M. League, QFP, CFP® (800.482.5347), as a licensed professional, can provide you with the cost and complete details. Availability varies by insurance carrier and by state.]
I. “CASH VALUE” Life Insurance is typically a level premium insurance designed to meet LONG DURATION needs (typically those exceeding 15+ years). Purchasing a Cash Value policy is similar to owning -Vs- renting a home. Renting represents pure cost with no equity, whereas owning offers both cost recovery & the potential of asset appreciation. A CASH VALUE policy accomplishes this by allocating a portion of its’ premiums thereby creating a “cash value” or internal accumulation account. Typically, by the 5th-15th year, the policies’ accumulated value CASH VALUE (“CV”) equals or exceeds all paid premiums (assuming a hypothetical gross rate of return & other plan variables), often referred to as the policies premium cost recovery point, or cross-over-point (“COP”).
Accumulated values* can also later be used to tax favorably supplement retirement income, based upon current law. The cost recovery, cash accumulations and potentially tax free income features make CASH VALUE Life Insurance a highly flexible, less costly choice, for those needing LONG DURATION, lifetime, coverage.
What is of particular interest with this type of policy is that, over time, more and more of the policy costs are paid from internal policy earnings, thereby using pre-tax dollars over after tax dollars, which provides a much more cost efficient way to buy any type of life coverage. This is particularly true when such a policy is “maximum funded”, since the Insurer’s cost of insurance (“COI”) charges decline as the internal policy cash values increase. COI charges are based on the net difference between the face amount of the policy and the policies accumulated cash values (i.e. the net amount at risk). The particular type of Cash Value policy one should choose is an important decision and one that should only be undertaken with professional assistance. Cash Value policies are also highly flexible vehicles offering significant tax and other customizable financial advantage.
Click Here to learn about a way of using Life Insurance as a means of tax favorably accumulating and distributing assets (“LIAAP”).
[DISCLAIMER: *Life insurance policy cash values are accessed through withdrawals and/or policy loans. Loans are generally not taxable. Withdrawals may be taxable under some circumstances. Unpaid loans and/or withdrawals will cause a reduction in the policy cash values and death benefits. Please consult with your tax advisor for advice regarding your particular situation].
II. “TERM” Life Insurance is an increasing premium policy where premiums increase either annually or over fixed/level time periods. Term Life is for needs that are of a SHORT DURATION, typically not greater than 15 years (e.g., to indemnify loans & other short term debt obligations). TERM Life Insurance plans, as the name indicates, provide coverage for a stated number of years, or a “term period” of time. A disadvantage of Term Life is that it does not have any cash value; therefore, it can not provide any tax free income nor, capital appreciation, or cost recovery, until after life ends and then only via its’ death benefit. However, an advantage of Term Life is that its’ premiums are initially low, allowing for the acquisition of larger amounts of coverage. Term Life is now available with either annual rates (costs increase each year as you age) or Level time period rates (5, 10, 15, 20,and even 30 years in length). Very often TERM Life is bought in conjunction with CASH VALUE Life to address any number of variable strategies.
II (a). Return of Premium (“ROP”) TERM Life (w/Cash Values)
Beginning roughly in 2005, insurance companies began offering “hybrid TERM Life insurance policies” offering either a partial or full return of premiums at the end of the originally selected “term period” (typically, a level period of years equaling 10, 20 or 30 years).
The premiums for such policies are higher than traditional TERM Life policies that do not offer any cash value accumulation or potential returns at the end of the level premium term period. Further, the Cash Value accumulations in these ROP types of policies offer little to no recovery of premiums until well into the later years of the policy when the policy is within a few years, to the very final years, of the selected period of time (i.e. 10, 20 or 30 years).
We generally do not recommend these policy types because a strong case can be made to alternatively simply buy a traditional level term plan, at a lower level cost, and invest the difference between that and the higher cost ROP plan and end up with not only more accumulated cash but with greater overall flexibility over such resources. A CASH VALUE Life plan can even accomplish this better since the cash values accumulate tax deferred and may even be recovered tax free.
IF one can determine ahead of time that the ROP will not be needed after the end of the original level term period, and one fully intends to cash out or surrender the coverage at that time (and believes that they will remain fully insurable throughout), then such a policy may work fine in that it will return premiums; however, one must not overlook that the full cost is not recovered in a simple return of paid premiums because the “time value of money” has not also been taken into consideration. In other words…had you invested the same money, over the same time frame, it would have produced before and after tax returns above and beyond just the principal itself; therefore, an added “cost” exists (the loss of any appreciation to the principal had it been invested over the same time frame).
Another consideration has to do with ROP policy “Conversion Rights”. One might decide later into the ROP policy that they indeed do want to keep life insurance and that they need a more cost effective long-term CASH VALUE policy. Since all TERM Life policies experience radically increasing rates as one ages, or alternatively at the end of any level premium period, the ability of being able to convert to a more cost effective policy, long-term, can be very important. Such rights become even more important in cases where the insured has become uninsurable, and therefore may have very few options (if any) to obtain new coverage from another otherwise more competitively priced insurer thereby requiring one to have to stay with their current insurer to obtain the type of coverage their new life circumstances may “dictate” they then need.
The “Conversion Rights” of the ROP policy must be understood up front, and very carefully, to account for such changes in life circumstances. The older the age and right to convert the better (preferably at least age 71 – 85). Under conversion any accumulated cash in an ROP TERM Life policy would be rolled over into the new CASH Value policy … so long as this is done on or before the end of the ROPs Conversion Rights age limit. Why? Because there are serious variations in ROP policies that can result in the cash value reverting to zero values at the end of the level payment time frame if the policy is not cashed out (surrendered), or if the policy is continued but under the older age higher rates of the insured at the time when the initial level term period expires. We, therefore, only recommend “ROP Policies” that preserve the accumulated values (i.e. the principal put into the contract) after and beyond the level time frame purchased, even though policies with this guarantee are slightly more expensive. Such ROP “cash preservation” Term Life policies (e.g. they do not “zero-out” accumulated cash values if not surrendered) become important in cases where, after aging and possibly becoming uninsurable, one is left with only two options; namely, either stay covered under the existing ROP plan whose premiums will step-up or increase after the level term period annually (which then locks up the cash values inside the policy at the end of the level time period and also prevents them from being either withdrawn or borrowed), or, convert the ROP plan (in time with the age restrictions of the policies Conversion Rights) into a level premium, long-term, CASH VALUE policy, and roll over the otherwise frozen or lost cash accumulations of the ROP policy into the new CASH VALUE life plan and thereby either lower the required premiums of that plan or to increase its cash values wherefrom the cash could then be either withdrawn or borrowed.
I. “TERM” – Life Insurance (YRT; or Level Premium for 5 to 40 years) – Contact Us For FREE QUOTE at: 800.482.5347
II. “CASH VALUE” – Life Insurance: – CALL US NOW FOR RATES & AVAILABLE PROGRAMS CUSTOMIZED FOR YOU — numbers and additional details are not available live on the web due to multiple variables both in plans and product features: 1.800.482.5347
III. SPECIAL Non-Medical Life Insurance Plans: Plans are still underwritten, but no medical exam is required, with answers to health questions conducted on the application papers only (a simpler and easy way for certain individuals to more cost effectively obtain Life Insurance protection). If you think this type of life insurance better meets your needs please contact us directly to discuss.
Life Settlements – Click Here for a discussion of this alternative to lapsing or otherwise letting an older TERM or Cash Value life Insurance policy terminate.
[DISCLAIMER: As with all forms of Life Insurance care must be taken regards many of the types of considerations described herein. Please contact us for suitable recommendations to fulfill your Life Insurance needs at: 1.800.482.5347].
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