Whole Life Insurance coverage Basics

If you are shopping around for life insurance, you commence with two huge inquiries: How much insurance coverage do I need to have? And what kind of policy ought to I get?

When you have calculated your short- and long-term obligations, it's time to choose what form of policy is proper for you personally: term life or entire life insurance coverage.

Term life insurance coverage supplies coverage for any specified period of time, for instance ten, 15 or 20 years; premiums go up over time unless you acquire a "level term" policy, which guarantees that premiums remain exactly the same. It is probable that you just could outlive the term of your policy, in which case your policy expires and you'd need to shop for one more policy when you wish to still have coverage.

With a entire life policy (also known as permanent insurance), you don't need to be concerned about possibly outliving your policy term due to the fact your contract provides you coverage for your entire life, provided that the premiums are paid. Having a whole life policy, as opposed to term life, you also develop up "cash value" inside the policy that you can tap in the future.

Premiums are substantially higher for permanent insurance than term life as a result of charges and fees (see sidebar) that you never spend with term life.

Cash worth is usually a important selling point for whole life: It really is an account within your policy that builds up over time, tax-deferred, fueled by a portion of your premiums and interest paid by the insurance corporation. The truth is, the whole life contract is designed for you to make the most of that funds in the future. After you die, your beneficiaries acquire the death advantage, not the money worth, using the exception of some universal life policies.

Entire life insurance coverage policies make up money worth slowly at first but then pick up the pace after several years, when your earnings begin to grow faster than your "mortality" cost (the cost of insuring you). Should you would like entire life insurance explained in more detail, your life insurance agent need to be able to show you a few types of policy illustrations.

Complete life could be an attractive option for any of these reasons:

Others are relying on you for long-term financial support. You're worried about outliving a term life policy and being unable to obtain further insurance coverage resulting from age or deteriorating health. You want to make up money value in addition to protecting your beneficiaries. You want to create an estate for the beneficiaries after your death. Your beneficiaries need to have the advantage to pay estate taxes on other assets.

"Whole life insurance coverage is suited for anybody who loves somebody," says Scott Berlin, senior vice president in charge of the Individual Life Department at New York Life Insurance coverage Co. "Whole life does two things for you: protects your family and allows you to save for the future."

Berlin says complete life's advantages are which you never must worry about outliving your policy (as is possible with term life) and there is the "forced savings" component of the cash value account, which grows tax-deferred. Once your money worth is built up, you could access it for anything - retirement, your child's college tuition or the vacation you've always wanted. Whole life policies are also eligible to earn dividends (depending on the company and not guaranteed) which can be used in a variety of ways, for instance providing paid-up additional life insurance, which increases both the life insurance coverage advantage and policy money worth.

"Buying term is like renting your insurance," says Berlin. "You do not construct up any residual value. Complete life is like owning a home - you build up equity."

Berlin cautions against buying term life insurance coverage just for the reason that of the premium difference.

"When you happen to be 35 you think that 20 years is usually a long time, but life doesn't always work out like you think," he says. "People who buy permanent insurance understand the worth of what they're providing to their family."

In case you choose that a entire life policy is right for you personally but feel you are currently unable to afford the premiums for the face value you desire, Berlin recommends buying as substantially complete life as you are able to afford and filling inside the rest of one's face amount with term life. Later, you are able to convert your term life policy to complete life.

For the wealthy with large estates, putting a complete life policy into a trust is really a way to spend estate taxes when they die.

A smorgasbord of choices

If the features of entire life insurance fit the bill for you, there are multiple varieties depending on your needs and your tolerance for financial risk.

Ordinary whole life insurance: Premiums are level as long as you live and your policy builds money value. The initial annual cost will be a lot higher than the identical amount of term life insurance coverage, but as you get older that gap closes. Limited payment complete life insurance: This policy lets you spend premiums for only a specific period, like 20 years or until age 65, but insures you for your entire life. Thus, premium payments will be higher than if payments were spread out through your lifetime. Single premium complete life insurance: This policy is paid up after one substantial initial payment. Universal life (UL) insurance coverage: This policy lets you vary your premium payments and adjust your death benefit as beneficiaries' needs change. You have to be aware of how much is in your account and whether you need to have to make payments in order to keep the policy in force. There are also UL policies that can provide level premiums, as well as UL policies with a planned premium option and guaranteed death benefit for life. These policies may offer lower premiums in exchange for a slow accumulation of money value, if any. Variable universal life (VUL) insurance coverage: Here your money worth and death advantage are tied to a particular investment account. Your money worth and death advantage increase if the underlying investments do well, or they may shrink considerably under poor investment performance. Read the prospectus for VUL carefully and never acquire a policy that you simply don't understand. There may be an extra premium required to guarantee a death benefit amount. Survivorship life insurance coverage, also known as second-to-die life insurance coverage: This kind of whole life policy insures two lives as once (typically a husband and wife) and pays out upon the death of the second individual. This is good for people who have to have to provide for beneficiaries only after both have passed away. It is also less expensive than insuring two lives under separate policies. Participating or non-participating complete life insurance: Any form of entire life policy listed above could be "participating" or "non-participating." You have a participating policy if your life insurance coverage organization pays dividends to policyholders when it has a good financial year. Dividends are not guaranteed and they will vary year to year when they are paid, but should you have a participating policy you may take your dividends as cash, use them to spend your premiums or use them to purchase additional insurance coverage to increase your policy's face value. Dividends are not taxable as long as they don't exceed the premiums you have paid in.

The life insurance illustration

If you're considering a policy in which premiums and death benefits fluctuate depending on investments or interest rates, you need to acquire a life insurance coverage illustration from your agent. This is usually a picture of what could happen with your policy. Or again, maybe not.

The illustration ought to show you what the insurance corporation will guarantee (such as any guaranteed interest rates or death benefits) and what will be left open to market conditions. You'll be asked to sign a form stating you understand that some parts of the illustration are not guaranteed.

Being paid up

One happy stage of entire life insurance coverage is when the policy's dividend values and anticipated future dividends are sufficient to cover your future premiums and you no longer require to make premium payments out of pocket. This is called a Premium Offset Proposal, or "POP" arrangement. "POP" means that your money value is now large enough that it can be used by the insurer to pay your premiums for the rest of one's life. You are able to nonetheless withdraw your cash worth, but you'll need to resume premium payments to keep the policy in force or settle for any reduced benefit that the remaining cash worth can support.

You can also choose a "limited pay" policy, for which your premiums are calculated for a set number of years or a certain age, like 65.

New York Life has introduced "New York Life Custom Whole Life", a life insurance policy that lets you choose your own guaranteed paid-up date. (You must pay premiums for at least five years and cannot spend premiums past age 75 for this policy.) So, say you want to retire in 12 years and you want your policy to be guaranteed paid-up at that time. New York Life will calculate the premium necessary to have your policy fully paid-up in 12 years so that you simply won't have to worry about paying life insurance premiums during your retirement. If your want for the full life insurance advantage is reduced during your retirement, it is possible to also begin withdrawing or borrowing from your money value to supplement your retirement income.

Planning for all situations

Life insurance companies offer a number of riders that can be tacked on to entire life policies. (All riders may not be offered by all companies, and many insurers offer other specialized riders not listed here, so check with your agent.)

Accidental death advantage rider: Pays an additional benefit in case you die in an accident. Disability income rider: Supplies regular income from the insurance coverage firm for those who become totally and permanently disabled. Level terms rider: Adds a fixed amount of term insurance coverage to the entire life policy to get a specified period. Living benefits rider, also known as accelerated death advantage: Pays an portion of one's death advantage during your lifetime in case you are diagnosed having a terminal illness and have a specificed life expectancy (such as 12 months). You could add this rider after buying the policy. Long term care (LTC) rider: Pays for LTC expenses in case you meet certain criteria. Policy purchase option: Gives you the contractual correct to purchase additional insurance coverage without evidence of insurability. For example, you may have to have additional life insurance coverage after the birth of a child. Waiver of premium rider: Waives premiums in the event you become disabled or unemployed. (Terms vary by insurer.)

Watch out for:

The hard sell: An unscrupulous insurance coverage agent may push complete life insurance when term insurance is sufficient for the needs; the whole life insurance coverage sale could provide him a larger commission. Churning: If your agent suggests your current policy needs to be replaced, be wary. "Churning" is when an agent convinces you to surrender an old policy and acquire a new one due to the fact he makes a new commission off you. You thought you were paid up: You may have signed papers allowing your cash value to be used to purchase a different policy. Term vs. perm: A comparison service

You have probably heard the advice "buy term and invest the difference." And to make that work you must have the financial discipline to actually invest that difference every year. And in case you did, how much would you come out ahead, or would you?

The Consumer Federation of America (CFA) offers a Rate of Return (ROR) service that gives you with a report comparing the estimated "real" investment returns on a money worth policy versus a term policy together with the premium difference invested in a savings vehicle. The service is manned by James Hunt of the CFA, a life insurance coverage actuary and a former insurance coverage commissioner of Vermont.

An analysis can be run for policies you are considering or already own. The cost is $70 for the first illustration and $50 for each additional illustration submitted at the exact same time. The cost for variable life policies you have already bought (unless inside the free look period) and for survivorship life (also referred to as second-to-die) is $80/$50.

Maximizing your cash value policy

Hunt, who has analyzed life insurance coverage policies for almost 25 years, says that simply because of the high charges associated with entire life, you want to look for ways to maximize your premium dollar inside the policy. He suggests these strategies:

Decline all riders (except term riders on your own life and waiver of premium disability riders) for the reason that they'll eat into your cash worth potential. If you look at the illustration, make sure your first year's money surrender worth is a significant portion of the first year's premium outlay. (A good number would be 50 percent or higher.) Consider buying direct rather than through a fully commissioned agent. Examples of direct sellers are Ameritus and TIAA. Returns on these "low-load" policies are generally higher than returns on comparable policies purchased through agents.

For those who are looking at cash worth life insurance to possibly supplement retirement income, Hunt advises that you just may be better off by buying term life and maximizing other tax-advantaged retirement plans first, for instance your 401(k), 403(b), IRA or Roth IRA.

Wanting out

Perhaps you committed to a entire life policy many years ago and no longer want or need it. In the event you simply stop paying the premiums, this will "lapse" your policy and you'll need to chalk it up to an expensive mistake. If you have held the policy extended enough to make up cash value, your insurance company will start using the money value to cover premiums until the money worth runs out.

Instead of lapsing your policy, inform your insurance corporation which you want to surrender the policy. You'll then acquire the current money surrender worth, minus any loans against cash worth you took out and unpaid premiums. You may also be hit using a surrender charge for getting out of a UL or VUL policy. Surrender charges can amount to 100 percent (or more) of the first year's premium and usually get started to grade off more than 10 to 15 years, according to Hunt. With some policies it may take 20 years before surrender charges disappear.

Or, for those who have enough cash value, it is possible to ask the insurer to consider the policy "paid up" at a lower death benefit.

Lapse and surrender rates for life insurance show that indeed there are many folks who end up with buyers' regret. Statistics from LIMRA International, a financial services industry research group, show that by policy year five, 69 percent of entire life policies are still in force; that drops to 50 percent in year 13 and 39.6 percent in year 20.

No matter your reasons for considering whole life insurance, rule No. 1 is to never obtain a policy you don't understand.

Amy Danise can be a staff writer for Insure.com. Visit Insure.com for a comprehensive array of comparative auto, life and health quotes, including a vast library of originally authored insurance articles and decision-making tools that are not available from any other single source. Insure.com is dedicated to providing impartial insurance information to consumers. Visitors can obtain instant quotes from more than 200 leading insurers, achieve maximum savings and have the freedom to get from any enterprise shown.

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