One of the key ingredients in financial health that often gets overlooked is your life insurance. This asset, while not necessarily tied to the stock market, can offer significant diversification including cash accumulation for tax free retirement, accelerated payments for serious health situations, and of course, income tax free benefits to your heirs. Deciding which insurance product is right for you is a daunting task on your own, so working with a qualified consultant who will put your needs first makes this process painless and streamlined.
For those who like to do a little research when preparing to speak with a professional, let us make your job a bit easier by helping you understand the basic differences between various types of life insurance products in the market.
When looking at life insurance, you need to first identify the difference between the four major categories: 1) Term Life; 2) Universal Life; 3) Whole Life, 4) Variable Universal Life. All of these products have subcomponents that differentiate them from one another as well. Always make sure to do a cost-benefit analysis during your decision-making process. Let’s spend a moment breaking down each category.
The most basic and cost-effective form of life insurance you can purchase. This product offers a guaranteed death benefit with level premiums for a set number of years, generally 10, 15, 20, 25, or 30 years. These products are the cheapest, because you are buying a death benefit only for a set number of years. There are a few term products that offer living benefits for chronic or critical illness should you get sick during the term. During the term of years, you typically (depending on the carrier) have the right to convert to a permanent product without new underwriting. This conversion may be done for any reason, but often occurs if the insured becomes uninsurable and needs to maintain adequate coverage beyond the initial term. Note, many carriers limit the conversion product to something undesirable, so please check your conversion options before purchase. If you don’t convert to a permanent product the most likely outcome is that the policy will lapse at the end of the term. If you find yourself in a desperate situation, the carrier will allow you to continue paying an ever increasing premium each year to maintain the coverage (this premium will become largely unaffordable very, very quickly). Most often, term insurance works best for young families who want to ensure that the mortgage and kids’ education can be covered if disaster strikes and one or both parents pass away. Additionally, many business owners will use term insurance as part of their succession planning and key person strategies.
Universal Life Insurance:
If a limited term of insurance is not for you, and/or if you have retirement planning needs, then exploring permanent insurance that lasts a lifetime may make a better fit. Within the category of Universal Life, you will find Guaranteed or Current Assumption options. Additionally, the most recent and by far most popular product type of Universal Life is called Indexed Universal Life or IUL (more on this in a minute). What’s important to know about this type of insurance is that the premiums are somewhat flexible, so you can design a policy around your financial needs. If you want to start off putting more money into your policy and lessen it over time, you can. If you come into a large sum of money down the road and want to put some of it in your policy, you can. These contracts tend to offer some form of cash accumulation that works particularly well in the Indexed products mentioned above. Additionally, you have the ability to guarantee the death benefit and any other riders such as long-term care, chronic illness, or critical illness (which allow you to accelerate the death benefit during life). For this reason, IULs when designed correctly can make a favorable alternative to traditional Long Term Care plans. Many people also use Indexed Universal Life policies as a college savings strategy, since 529 Plans count against applicants for Financial Aid whereas IULs do not. Regarding Indexed Universal Life, the popularity is driven by the fact that the interest credits can rise as high as 12% or more when the markets do well, and yet will limit your risk to a floor of 0% should the markets experience a loss. Because these products are not investments, they are able to act in concert with the equities market without being directly tied to them. When it comes to Universal Life with accumulated cash value, you may either take tax free loans, partial withdrawals, or even completely surrender the policy for the full cash surrender value. All of these options make Universal Life a very attractive option. Premiums for Universal Life cost quite a bit more then term, but far less then Whole Life. Typically, Universal Life works well for those with a bit more cash flow looking to diversify their retirement strategy, build in a known Long-Term Care strategy (with fixed premiums), and of course, have a death benefit available for whenever they need it.
Whole Life Insurance:
Like Universal Life, Whole Life is designed to last one’s whole lifetime. These policies are built with a significant number of guarantees and the ability to earn dividends. These dividends can be used to purchase additional insurance which will also add to the policy’s cash value. While dividends are not always guaranteed, they are typically paid. Because of all of these fixed components, Whole Life is almost always the most expensive type of life insurance one can get. Unlike Universal Life, Whole Life has very limited flexibility and generally requires that your level premium be paid for life or set number of years in order to maintain all the guarantees. It is also less likely that Whole Life will offer riders for chronic illness or Long Term Care, although some carriers are starting to make that available. When it comes to Whole Life insurance, a person should have significant cash flow that will be available the person’s whole lifetime. Typically, these products are advisable for those with significant estate planning and wealth transfer needs. On occasion, these products also make for good retirement alternative solutions due to the tax-free nature of the loans. Beware, however, that Whole Life carriers generally charge a higher rate of interest on policy loans then Universal Life products. Also, since Whole Life is generally much more expensive than other types of permanent life insurance products, there can be an opportunity cost to using this kind of product vs. others that allow you to diversify a bit more.
Variable Universal Life Insurance
Wildly popular when the stock markets are booming, and potentially devastating when the market goes through a correction, Variable Universal Life is the most volatile product in the insurance market. While the product can be designed to last one’s lifetime and premiums are flexible as with Universal Life, the cash accumulation is directly tied to the equity markets and can go up significantly or drop like a lead balloon. The appeal with most Variable Life is that, theoretically, if the cash accumulation grows strongly enough, the insured can stop paying premiums, have a significant death benefit, and build cash savings to draw from. The risk, of course, is that if the equity markets fall, your policy could implode, leaving you with no cash and no death benefit. These products are typically made available to those who have high risk tolerance, significant cash flow, a long-time horizon, and view insurance more as speculative rather than for the purposes of protection. Note: these products may only be offered by an advisor who is both life and securities licensed. Also note, we typically advise clients against Variable Universal Life products as there are much better strategies available in the hands of a good advisor.
Wow that is a lot of information to try and take in, and we are just scratching the surface of Life Insurance. For those of you who are visual learners, let us sum up everything just discussed in the below chart:
Choosing the right policy to protect your family, your business, and your legacy is no small matter. You don’t take your physical and mental wellness lightly, and you shouldn’t neglect your financial wellness either. Hopefully this overview has helped provide you with a foundational understanding of how and when different types of life insurance can offer value. Now that you have become a little more familiar with the subject, let our expert consultants at Quantum Insurance Services help with designing and implementing the perfect insurance plan to meet your needs.
Quantum was one of the first to utilize life insurance to provide Long Term Care benefits. Contact us to discuss your needs and develop a personalized strategy for your life and LTC needs.]]>
Quantum leads the industry in providing sound advice on utilizing life insurance strategically with your overall portfolio. Contact us today to see how we can help.]]>
6 Reasons People Don’t Buy Life Insurance (and Why They’re Wrong)
Now I realize of course that it isn’t always that simple. Sometimes we have health challenges, or in the case of permanent insurance there may be some additional requirements that extend the application process slightly, but come on, fifteen minutes to submit my $500,000 twenty year term policy, which by the way will cost me $30 per month! There is just no excuse for not spending that time to protect your family.
So I know what you are thinking, it only took me fifteen minutes because I am an agent, and I know what I am doing. Yes that is true on both accounts, which is why you should work with an experienced agent. More importantly it is because I was prepared and ready to buy. Nobody was selling me this policy. I think that sentence is the key element to the entire life insurance purchase, so let me say it again. I was prepared and ready to buy. As an agent I can unfortunately share too many stories of clients who thought they were ready to purchase insurance only to realize that it just wasn’t as important at that exact moment as they thought. Sadly I also have far too many stories to share of people who thought they were ready to purchase insurance, decided they were not and then unexpectantly tragedy struck and their family was left with nothing but heartache and despair.
I am not trying to lecture you about the responsibility of protecting your loved ones, but am asking you to think about a day when you are no longer around, and how hard that could be both emotionally and financially on those you love. Isn’t your family worth fifteen minutes, $30 per month, and a tiny bit of preparedness?
By David Eisenberg – firstname.lastname@example.org]]>
1. Any time you plan to see a doctor, look up whether he or she is in-network on your plan. You can do this by calling the # on the back of your insurance card or going online through your carrier’s provider finder & doing a search. Do NOT ask your doctor if he or she ‘takes’ your insurance. They will say ‘yes’ and this is misleading. See #2 for why.
2. Learn the difference between someone ‘taking’ your insurance and someone being ‘in-network’. Benefits today are only good if you stay in-network. Out-of-network there is no limit to what a service will cost, and insurance will typically cover 20% at best. When someone says they ‘take’ your insurance, it means they accept it on an out-of-network basis. This = getting screwed. If someone is truly in-network on your plan, they will know it, and they will tell you they are in-network or ‘contracted with’ your specific carrier.
3. Make sure to update your insurance info with your providers any time you receive new ID cards. This includes at the pharmacy.
4. Don’t use CVS for pharmacy services. They make mistakes and overcharge consistently. Riteaid and Walgreens are good.
5. These days we say ‘go big or go Bronze’ when it comes to choosing an insurance plan. Silver plans are generally an unhappy middle ground for individual insurance. A Gold or Platinum plan will deliver excellent benefits and cost only slightly more. If you can’t afford Gold, go Bronze and use it as catastrophic coverage.
6. Learn to love HSAs. An HSA-compatible plan has a high deductible (usually Bronze level) and specifically allows one to benefit from up to a $6650/year Health Savings Account contribution that is both tax-free going in, and tax-free coming out. The HSA funds can be used on any medical out-of-pocket expenses. HSA funds are NOT ‘use it or lose it’, as is the case with FSAs (Flexible Spending Accounts). HSA funds roll over each year, and when a person turns 65, HSA funds can even be used towards non-medical expenses. For some clients, these plans make great tax sense.
7. Know that one can only obtain individual insurance during Open Enrollment, which is now in the winter each year, unless one has a Qualifying Event by losing group insurance or moving to a new state, and signing up within 60 days of that event.
8. Know your local Urgent Care facility and avoid the ER unless absolutely necessary.]]>
Answer by Jennifer Burnham-Grubbs:
Usually at least somewhat. The ‘fancy’, more cosmetic stuff that a dermatologist does won’t get covered. Purely medical issues, however, will get treated just like any other malady. So for example, removing a pre-cancerous mole, treating rosacea or other skin diseases should all get covered according to your office copay and/or deductible/coinsurance. Botox, anti-aging products or other beauty treatments won’t get covered at all.
Answer by Jennifer Burnham-Grubbs:
On health insurance, obesity no longer results in higher premiums generally speaking, because preexisting conditions don’t count against you under the Affordable Care Act. For groups with 100+ employees, if there are a lot of medical issues of any kind (not just obesity-related), the group as a whole can get higher premiums, so conceivably if obesity and/or smoking cause a group to have more claims it could still impact rates.
But in life insurance, obesity and smoking BOTH definitely increase premiums. Having a BMI higher than you should, even by 40–50 pounds, can cause one to get Preferred instead of Super Preferred rates even if one’s health is otherwise perfect. Someone who is morbidly obese could even end up paying higher rates than a smoker, or nearly so, especially if he/she has other medical issues which is often the case.
That said, smoker premiums usually are around 2-3 times higher than non-smoker premiums so one has to be extremely overweight to get life insurance rates that are higher than smoker rates. This is of course assuming there are no other health factors and it’s just apples-to-apples comparisons.
Also, by smoker I assume you mean nicotine/cigarette smokers, not marijuana smokers. Certain carriers don’t treat marijuana smoking the same way they treat cigarette smoking. Believe it or not, they treat marijuana smoking more favorably than cigarette smoking sometimes!
Answer by Jennifer Burnham-Grubbs:
If your employer is paying at least some portion of the costs for your coverage, you should at the very least put yourself on the plan through work. Many employers pay a large % of the costs for the employee, but 0% of the costs for dependents, so take the health benefit from work and put your dependents on individual plans from the market.
As far as individual plans go, if you are in California, I recommend Kaiser or Blue Cross for the best overall value. Kaiser is a sure bet, if it’s available in your state. Individual plans (other than Kaiser) can have very limited networks, so it sometimes proves difficult to find doctors or even key hospitals who will work with your plan.
Answer by Jennifer Burnham-Grubbs:
Define “old” – that can mean different things to different people.
If you’re under age 65, you can get good coverage through GeoBlue that will cover you both in the US and abroad:
GeoBlue also has a product that works with Medicare, if you’re over age 65. Feel free to reach out if you need guidance.