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Whole life insurance is different from Universal
life...
Before you read on, know that I am
advising you to buy Universal Life as opposed to Whole Life.
Whole Life will cost you twice the amount as Universal Life
will...and if your goal is a lifetime "death benefit" and not
necessarily heavy cash value buildup, then UL is definitely the way
to go in my opinion.
Questions to ponder:
-
Should you convert your term policy (term
conversion)?
-
Is Universal Life Insurance a better option than term
insurance?
-
Do I want to spend so much money on
Whole Life when I can get guaranteed lifetime coverage for much
less in premium?
Generally, there are 3 different types of life
insurance: Term insurance, Whole Life, and Universal Life. Assuming you know the difference in types
of coverage, I will move on to the purpose of this web-page which includes
information about the subjects below. Click a subject to learn more about
it:
*A little Trivia*...Ever
wondered if your term life insurance policy was going to pay off? Have you
ever considered that if the company thought that you were going to die
within the term period (10, 15, 20 year term period), would that company
issue you a policy? The answer is no! If you are approved for a term
policy, chances are the company will never have to pay a claim - because
their underwriters and actuaries have determined that you will live longer
than the term coverage period. In the life insurance industry, we say "If
you are approved for a (10, 15, 20 year) term policy, you will live at least
as long as the policy term length"! Statistically, 2% of term policies ever
have to pay a claim within the term period. Conversely, this means that the
life insurance company has a 98% chance that they will not have to pay a
claim on your life!
This is essentially why UL is more expensive than term
coverage. Contractually speaking, a modern UL policy will cover you as
long as you live where term will only cover you for a set period of time
(usually 10, 15, 20, 25, or 30 years). UL is "universal" because it is
also flexible - you can elect to pay as much as you want to in it or as
little as you want to in any given year as long as you meet the minimum
premium requirements. Term, on the other hand is a set, fixed premium
that you are locked into and cannot waiver from. Further, UL builds
cash value that you can elect to withdraw as a loan or, depending upon how
much you have built up, take out and not have to pay back. Please
remember, though, that if you do pay less than the prescribed premium or if
you take money out for a loan that you may be putting the longevity of your
policy at risk. If you to take a loan or pay less than the "lifetime
guarantee, designated, or target" premium, make sure you pay that money back
into the policy before its too late. Universal life takes the money
that you put into it and invests it - giving you a combination of "current
interest rates", "guaranteed interest rates", and "secondary guarantees".
Modern UL plans will guarantee a lifetime of coverage - signed, in black and
white, legal and binding agreements that say that the policy will be in
force as long as you live (provided you continue to pay the prescribed
premium. This "prescribed premium" that I keep referencing is often
called the "target, designated, or lifetime guarantee" premium. The
premium for a UL policy is typically 3-5 times that of a term policy.
Consider, though, that you are building cash value, covered for as long as
you live, and able to withdraw money.
-
Whole Life - Whole life is generally twice as expensive
as Universal Life because it guarantees that the policy will endow for the
face amount at age 100; that is, the cash value in the policy at age 100 is
guaranteed to be equal to the face amount - but this costs money! If
you are simply looking for coverage for a lifetime, Whole Life is NOT the
way to go, UL is. Further, some whole life policies offer
dividends on gains; albeit small ones. Whole life covers the insured
until age 100 (not for life) at which time the insurance company gives the
insured the face amount or endowment amount. My opinion: If you are
looking for an investment, invest in the stock market, land (they're not
making anymore of it!), or other property. If you are looking to
invest in a permanent life insurance policy, you are making the wrong
decision*
*Whole life can be good in situations where you are looking for a small
"final expense" or "burial" policy because you can get as little as $2000
worth of coverage. If you do not qualify for regular insurance (that
is underwritten), then you may want to look into a "guaranteed issue whole
life" or "simplified issue whole Life". Again, though, these policies
are expensive and have limitations like waiting periods.
-
Interest Rate - With UL, you
get to enjoy interest on the money that you put into the policy. Some
of the money goes towards internal expenses like "mortality cost", staffing,
paperwork, office equipment (for the company that binds the coverage) or the
like. The money that is left over is invested, internally at the
company. If the company does well with the investments your policy
cash value gains volume. If the company does not do well with the
investments, you may perhaps not build as much cash value on a guaranteed
basis. No matter what, though, with lifetime guaranteed policies that
feature secondary guarantees you will never get any less than a policy that
covers you for life.
-
Guaranteed Interest Rate
- Usually around 3-4% lately; this is the "worst case scenario" for your
policy. If the company's investments do not do as well this is the
worst that could happen. This is one side of the contract whereby the
company contractually states what will happen in the future with your
policy. If buying a UL contract, make sure that the longevity of the
policy is based upon this guaranteed interest rate; if not, your policy may
be relying upon the current interest rate.
-
Current Interest Rate
- This is a "best case scenario" for your policy. This side of the
policy is a "what if" scenario. Current interest rates are usually
illustrated as being higher than the guaranteed interest rate. The
current interest rate is for those policy owners who are more daring and
willing to put their faith in the insurance company. Often times,
people will look at the current interest rate when buying a policy.
This could be dangerous because the company reserves the right to lower (or
raise) this current rate at any time. What does this mean for you?
This means that your money could grow with the raising of the rate or it
could not grow.
-
Assumed Interest Rate
- This is the same thing as the "current interest rate". In the
insurance business, there are 2-3 different terms for everything to make the
agents look smart :)
-
Guarantee - A guarantee is a
guarantee. If your policy contractually states that it is guaranteed
to cover you for as long as you live whether by illustrating that fact
numerically or in the verbage of the policy than it is guaranteed.
-
Secondary Guarantee -
This is a responsibility that the insurance company takes on to ensure that,
no matter what happens your UL policy will be in force as long as you live
(as long as you purchased a lapse protection, lifetime guaranteed product).
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Lifetime Guarantee - A
lifetime guaranteed UL policy contractually states that you will be covered
as long as you live. Policy "illustrations" usually show the face
amount (death benefit) as covering the insured up to age 120.
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Limited Pay - With Universal
Life, you can pay the policy up in as little or as many years as you'd like
and still be covered for life. For instance, if you are now 55 years
of age and you will be retiring at 65, you may want to look into getting a
"paid-up policy" whereby you will pay for the next 10 years and at age 65
have a policy that is paid for (and will cover you for life). Modern
policies offer limited pay provisions whereby you do not lose that
"secondary guarantee" or "lifetime lapse protection". Opting for a
limited pay policy is going to be more expensive, though, because you are
squeezing a lifetime of premiums into a shortened number of years...but it
can be worth it if you add up a lifetime of premiums!
-
Paid Up Policy - This is the
same as a limited pay policy (see above). You can pay 1 year, 4 years,
16 years, 40 years or whatever you like. The point is that at some
point in your time on earth your policy will become an asset - you will no
longer have payments on it and it will be "in force" for as long as you
live.
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Lump Sum - With UL, you can "dump
in" money in the form of a "lump sum". This lump sum of money can be
used as a "single pay" or it can be used to increase the strength of the
policy either in cash value or in longevity of coverage. Lump sums
usually come from other (underperforming, old) UL or Whole Life
policies...you may want to consider taking some money out of underperforming
investments and putting that "lump sum" into a Universal Life Policy if your
main goal is "wealth preservation" or Life coverage.
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Cash Value - How much "cash
value" you have in a UL policy depends upon the amount of excess cash that
is in the policy not needed to cover mortality expenses or the company's
overhead. You have "guaranteed cash value" and you have "current or
assumed cash value" (both explained above). You can elect to withdraw
your cash value or you can leave it in the policy to propel the policy's
longevity; this is your choice. Again, remember though, that if you
pull ANY of your cash out of your policy it may lapse in the future; you may
lose the "secondary guarantee" or the "lifetime protection".
-
Modified Endowment Contract (MEC)
- Basically stated "don't put too much money into a permanent life insurance
policy or you will create a MEC". The government decided, back in the
late '80s to limit the amount of money that one could put into a permanent
(namely UL) policy. This limitation came as a result of too many
policies lapsing - they lapsed because the agent sold the policy on a
current or assumed interest rate basis. Back at that time, current
interest rates were overly inflated at 8,10,12%! The assumption was
that the policy would last a long time - based on these current interest
rates. Well they didn't, they lapsed! SO, at this point in time,
modern policy illustrations alert the agent (and you) that you are putting
too much money into the policy, it is gaining too much cash value, and you
are creating a MEC. What happens? Well if you go to pull money
out of a MEC policy, you will pay the tax man dearly. My opinion:
don't try to over-fund a life insurance policy. Go for coverage of
your LIFE.
-
1035 Exchange - This is a
seamless, legal transaction whereby you can take the cash value of an
annuity or life insurance contract (or any account that has gained interest)
and transfer it into a permanent life insurance plan. This is
beneficial because you don't want to have to pay taxes on that money when
you take it out. The money simply transfers from account to account
without creating a taxable occurrence.
-
Conversion - You can convert
your "term insurance policy" to a permanent policy by filling out what is
usually a 1 page conversion form and signing an illustration (or proposal)
of what will be your new policy. This proposal for insurance has a
page showing the current interest rate projection, the guaranteed interest
rate projection, the length of guaranteed coverage, and other legal
verbiage. Conversions are especially beneficial if you have a current
term policy and you do not want to go through underwriting. You may
have had cancer, stroke, heart attack, or any number of occurrences that now
make you uninsurable. With a conversion to a permanent plan, you are
converted at the rating class (preferred?) that you were given at the time
that you bought the term policy. Policy conversions are a simple way
to lengthen the amount of time your life is covered without going through
the red tape of underwriting.
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Term Conversion - This is
what I am describing in the above information on "conversion". A "term
conversion" is done by taking your current term policy and "converting" it,
seamlessly, to a permanent plan such as a UL or whole life.
-
Lapse Protection - A
policy that does not have enough cash value or premiums can lapse or cease
to exist. If a policy lapses, you will have to go through underwriting
again and buy a new policy. If you are in bad health at the time that
your policy lapses, you risk either being declined for a new policy or being
rated (or charged) higher due to the increased risk that the insurance
company is taking on in you. As long as you pay the prescribed premium
your policy will not lapse. Secondary guarantees prevent lapsing -
this is called "lapse protection".
-
Dump-In - A "dump in" is a term
used to describe a sum of money (usually in the thousands of dollars) that
is "dumped in" to a permanent policy in the first year of coverage.
When using the term dump in, one is usually referring to a more liquid type
of money like cash in a bank account (as opposed to a 1035 exchange whereby
the money to be dumped in is in another policy or tied up in an annuity).
-
Secondary Guarantee - A secondary guarantee is the
company's way of saying "if you pay at least this much money into this
policy, we will guarantee that no matter what happens (even if interest
rates don't go our way) we will guarantee that your policy stays in force
for as long as you live. "secondary guarantees" are usually
contractual, binding statements that allow UL to be sold on a guaranteed
basis.
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Endowment Contract -
Usually referred to as whole life, an "endowment contract" refers to a life
insurance policy that is guaranteed to have as much cash value in it at age
100 as it does face amount (or death benefit). This costs you more
money, though, to "endow" so be careful what you buy - if you want lifetime
coverage for a death benefit to your beneficiaries go for a Universal Life
plan. If you want to pay even more for a policy and guarantee that
there will be so much cash value at age 100, you may want to look at a Whole
life, endowment contract.
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Single Pay - With just about
any modern permanent plan (UL or WL) one can opt for a "single premium".
The premium will be much much more, of course, than an ongoing premium for
life or, say, a 15 pay, but it will be over and done with and you can sit
back and forget about it for the rest of your life. The single pay
money that you put into a policy gains cash value, current and guaranteed
interest (remember that the current interest is not a guaranteed value, only
a projection of what might be). At any rate, a single pay may be the
way to go depending upon your financial situation.
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Convert Term Insurance Policy
- Converting a term insurance policy can be a simple way to prolong your
life insurance coverage for as little or as long as you want without having
to go through the regular underwriting process. If you have a term
policy and you want to convert it to a permanent policy (I would highly
recommend Universal Life) give me a call and I will discuss the plusses and
minuses with you. I charge nothing for advice and would be glad to
handle your case whether its a term conversion or simply the purchase of a
new life insurance policy.
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