Confused by all the commercials advertising life insurance? One says its for their kids’ college; the next one says they can’t be turned down for medical reasons; the next one says they have the lowest prices… It’s enough to make you turn the channel and want to forget you ever asked!
The objective of this article is to cut through the clutter and let you know what’s out there and when to use it. So let’s get started:
1. Life Insurance for College (or whatever) Funding. The “college funding” policy referred to in that very annoying Gerber TV ad (my wife and I can’t hit the “mute” button fast enough whenever it comes on) is nothing more than a simple whole life policy. Whole Life policies accumulate cash value on a very conservative (read: slow) basis. Since the policy “endows,” which means that the cash value should be equal to the face amount by the time the hopeful parents need it, the premiums will be very high. Also, life insurance has been marketed as a college-funding vehicle for decades so this idea is definitely not “different.”
2. Can’t be Turned Down for Medical Reasons. This is nothing more than Simplified Issue (SI) Whole Life Insurance. Since SI accepts basically everybody into its plan, the premium will be far higher than that of an individually-underwritten life insurance policy. If you are relatively healthy, you’d be better off going with a No-Lapse Guarantee Universal Life policy where the premiums will almost certainly be lower. Yes, you have to get a physical (called a paramed exam) but that’s nothing compared to the money you’ll be burning on an over-priced life insurance policy! Should we alert Alex Trebek?
3. Lowest Prices. This is the “holy grail” of the life insurance industry: get the most for the least. I am certainly not arguing with the concept (hence my website) but remember: there are trade offs with everything. If you want alot of life insurance for just a little money, then term insurance is for you. This is sometimes referred to as “pure insurance” as it only provides life insurance and nothing else such as cash value or lifetime guarantees. Also, the low premium generally expires after a certain period of time. For example, if you buy a twenty-year term policy, the premiums will remain the same for twenty years and then skyrocket to the tune of five to fifteen times what you were paying. The idea of term insurance, therefore, is to cover a temporary need such as a mortgage, the kid’s college or any other large debt.
This is one of the most important tools to help you determine if your “permanent” life insurance policy is, in fact, permanent. When you first bought your permanent life insurance policy, which could be Universal Life, Variable Life or Whole Life Insurance, you were given a life insurance “illustration.” Your illustration, among other things, projects how long your policy is going to last. While your life insurance illustration must meet certain regulatory requirements, it also is limited by the linear nature of the returns it projects for your policy. In layman’s terms, neither the carrier or anyone else has any way of knowing what the returns are going to be on your premiums dollars. Therefore, it projects whatever it’s making now (called the “Current Rate”) out to infinity. This has obvious flaws. The bottom line is that, unless you have a No-Lapse Guarantee life insurance policy, no one can know if your policy is going to be around when your family needs it.
The best way to determine how your policy is doing is to run an “in-force” life insurance illustration. If you have a Variable Universal Life Insurance policy, make sure your agent runs the illustration at a low rate of return, say, at 4%. This will prevent him or her from manipulating the results. For any other type of policy, your in-force illustration will be run at the Current Rate.
For best results, have one run every year or two. That way, you’ll keep on top of it and will be less likely to get a nasty surprise in the form of a “Lapse Notice.” For more info, please go to: http://www.thriftytermquote.com/
Life insurance comes in many varieties and forms that are designed to fit your specific needs and, ultimately, help you protect your family. First, the basics: Term life insurance is “pure insurance.” It does not accumulate cash value (see our previous discussion on “Cash Value” for more info) and only lasts for a specific period of time. Let’s go over a few of the varieties:
1. Annual, Renewable Term Life Insurance. This type of term life insurance is characterized by low initial premiums that increase each and every year. This may work in the beginning but, over time, the premiums become so high that you’ll wind up dropping the policy.
2. Level Term Life Insurance. This tends to be the most efficient type of policy as both the premiums and the death benefit remain the same over the term of the policy. You can get polices that last for 5, 10, 15, 20, 25 and even 30 years.
3. Decreasing Term Life Insurance. This is typically sold to cover a large loan like a mortgage. This is not a fan-favorite simply because the premiums stay the same as your coverage goes down (as, presumably, your loan balance goes down too). Essentially, you’re paying the same for less and less. Not particularly economical.