WHAT TYPES OF POLICIES ARE AVAILABLE?
Gone are the days of simply choosing between term and whole life. There are no fewer than four major categories
with many variations and combinations of each:
Term Insurance
This type of insurance provides pure death protection, for a specified period of time, for a
specific premium. It has no cash value and is initially less expensive than other policies for the
same amount of protection.
Some types of term coverage remain level with increasing premium.
Others have a level premium with gradually decreasing benefits.
Term insurance may be purchased in a separate policy or as a rider (supplement) to one of the
other forms of policies - frequently at a discount.
Whole life
This type of insurance provides protection that can be kept for as long as you live. Premiums are
fixed. As the policy ages, its "cash value" increases on a tax-deferred basis. If you cancel your
policy, you receive the cash value that has accumulated. While you continue to own the policy,
you can borrow against the cash value at a favorable rate.
Universal life
This type of insurance adds savings flexibility to the whole life concept of permanent protection.
In general, a policyholder must pay a certain minimum premium (for death protection) but can
increase the premium, almost at will, in order to increase the savings aspect of the policy. The
cash value will increase based on current interest rates and the amount of premium going
toward the savings or investment portion.
Variable life
This type of insurance combines flexible investment opportunities with insurance protection.
Owners have the opportunity to obtain higher cash values and death benefits by their
investment results. Owners can choose between a variety of fixed income or equity alternatives
and make changes in the future at no cost.
Variable Universal Life
Combines all of the administrative flexibility of universal life and the investment flexibility of
variable life.
WHAT TYPE OF POLICY IS RIGHT FOR ME?
Term insurance is best suited to solve a temporary need. For example, you can use the death
benefits to provide enough funds for a college education or to pay off the mortgage on your
house. Because it is death-only protection, it is less expensive and therefore, more attractive if
you are relatively young.
Whole life insurance is best suited for older individuals with a permanent need. For example,
whole life can be used to provide funds for paying estate taxes or buying a partner’s business
interest if your partner dies before you.
Universal life is for those who want to maintain flexibility concerning both premiums and death
benefits. It is also well suited for those who want to build up cash values conservatively.
Variable life is used by those who want to maximize their ability to use insurance as a taxdeferred investment vehicle.
HOW MUCH LIFE INSURANCE DO I NEED?
A commonly quoted rule-of-thumb is that life insurance should equal at least six times your
annual after-tax income. However, the real answer depends on your needs and your unique
family, business and financial circumstances.
Most people buy life insurance for the following purposes:
Ongoing needs for support, as a replacement for the deceased’s paycheck
Immediate cash needs for such expenses as taxes, debts, burial, and estate settlement costs
and taxes
Future financial needs such as college costs and retirement income
To determine the amount of insurance you should have, it is necessary to list all of your financial
needs and then perform the calculations. This is where your professional advisor can be of
assistance.
LIFE INSURANCE AND YOUR ESTATE PLAN
Many estates, composed primarily of assets such as closely held business interests, real estate or
collectibles, are cash poor. If your heirs need cash, these assets can be hard to sell. For that
matter, you may not want these assets sold.
Insurance can provide the necessary liquidity for your assets. Therefore, even when the value of
an estate is substantial, insurance is often purchased simply to avoid the unnecessary sale of
assets to pay taxes and other expenses. The biggest purchasers of life insurance are wealthy
persons. What good is a substantial estate if it is badly eroded by taxes?
CONSIDER AN IRREVOCABLE LIFE INSURANCE TRUST
Life insurance is typically owned by the person whose life is insured. That person usually pays the
premiums and controls the designation of the beneficiary. However, there’s a potential problem
if you own life insurance policies at death: the proceeds will be included in your estate, possibly
creating hundreds of thousands of dollars of unnecessary taxes. While there are no income taxes
on the proceeds, the estate taxes start at 18% and increase to 55%.
Instead, you can create an irrevocable life insurance trust. The trust owns the policies and pays
the premiums. When you die, the proceeds pass into the trust and are not included in your
estate. The trust can be structured to provide benefits to your surviving spouse and/or other
beneficiaries.
A properly structured trust could save you more than 50% in estate taxes on any insurance
proceeds. Thus, having a $1 million life insurance policy owned by an irrevocable insurance trust
could reduce estate taxes by more than $500,000. Setting up these trusts can be complicated be sure to get professional advice beforehand - but it is certainly worth checking out.
SECOND-TO-DIE LIFE INSURANCE
The main reason some couples carry life insurance is to pay estate taxes. Because a properly
structured estate plan can defer all estate taxes when the first spouse dies, estate liquidity
insurance is not needed until the second spouse dies.
Second-to-die insurance pays off only when the second spouse dies. Because it is based on the
mortality of two lives instead of one, premiums are usually significantly lower than on a standard
policy.
COMBINING POLICIES
Policies may be combined to reduce costs and suit other customer’s needs. One popular
feature is the addition of an inexpensive term rider to cover the insured’s children. Another
technique is to have both spouses insured by the same policy, thereby reducing the policy
administrative costs.
Types of coverage may also be combined. For example, suppose a person wanted to have the
flexibility of variable life insurance with its ability to increase or reduce the premiums and to shift
the investments around within the accounts offered by the insurer. Also, imagine that the
amount of coverage required dictated the use of term insurance. Both objectives can be
achieved by adding a term rider to a variable life policy. The term premium would be low, and
the coverage could be converted. This approach also works with traditional whole life and
universal interest sensitive policies.
LIFE INSURANCE POLICY CHARACTERISTICS
TERM POLICIES
Protection for a limited time - generally to 70
Low initial premium, but rising with each renewal
Level Death Benefit, unless a reducing benefit plan
No cash values will accumulate
WHOLE LIFE INSURANCE POLICIES
Protection continues to age 100, thus the permanent name
Premium does not increase; may even reduce or cease
Level or increasing death benefit
Cash values accumulate on a tax-free basis
UNIVERSAL LIFE INSURANCE POLICIES
Protection continues to age 100
Premium amount is flexible, may reduce, and could increase
Death benefit is flexible, can be reduced if desired
Cash value growth reflects the interest rate environment
Policy owner may alter structure to suit future needs
VARIABLE LIFE INSURANCE POLICIES
Protection continues to age 100
Premiums can be fixed, but are generally flexible
Death benefit is flexible, can be reduced if desired
Cash value growth reflects equity (stock) environment
Policy owner may alter structure to suit future needs
Policy owner may shift investments for diversification
VARIABLE UNIVERSAL LIFE (VUL)
Protection continues to age 100 or 104
Premium amount is flexible, may reduce or increase
Death benefit is flexible and may be reduced
Cash value growth reflects equity (stock) accounts or may be fixed accounts
Investment allocations may be altered
Investment deposit allocations may be altered
Policy owner may alter structure of policy to fit future need
Premium deposits may be withdrawn on a tax free basis
Loans may be taken based on policy values, subject to limitations and then current interest
charges and credits
PARTICIPATING INSURANCE POLICIES
Policies are written by mutual (and a few stock) companies in such a fashion as to permit the
gains from investments, mortality and operating efficiencies to be passed on to the policy
owner.