Business Life Insurance
- Funding buy/sell agreements
- Coverage on key employees
- Executive bonus plans (Section 162)
- Non-qualified deferred compensation
- Golden handcuffs
Personal Life Insurance
- Final expenses
- Estate taxes
- Pay off bills
- Fund education expenses
- Replace lost income
- Maintain lifestyle for surviving family members
Types of Life Insurance
- Level-term insurance (10-, 15-, 20-, or 30-year)
- Universal life
- Interest-sensitive whole life
- Second-to-die life
- Joint life
- Estate plans
- Burial plans
- Child life insurance plans
Understanding Life Insurance...
The concept of life insurance is really very simple. You pay a premium
to an insurance company for a specified amount of insurance for a
specified period of time. If you die during that specified time period,
your beneficiary receives a check for the amount stated in that policy.
That's it! Then why has the concept of life insurance become so complicated?
Studies show that most Americans believe in the value of life insurance
and feel they should own more than they do. On average, focus group
participants estimated their life insurance needs to be three- to
five-times their income, but most had failed to purchase adequate
amounts of coverage. The two primary reasons cited by consumers for
failing to buy adequate life insurance were that they didn't understand
the products and they didn't trust the insurance industry.
In addition, consumers indicated that they perceive life insurance
to be unaffordable. In general, this was attributable to a misunderstanding
of the various products available.
All life insurance policies agree to pay a certain amount of money
if you die. However, all policies are not the same. There
are two basic types of life insurance: Term Life Insurance and Permanent
No matter how fancy the policy title or sales presentation might
be, all life insurance policies fall into one of those two categories.
Also, don't confuse them with Limited Benefit Accidental Death policies
that solicit your business through credit cards, credit unions, and
the like. The policy exclusions are usually so sever that they rarely
- if ever - pay out any benefits. The premiums are usually very low
for large amounts of perceived coverage, but they are a pure
waste of money for the consumer.
Term Life Insurance
Term insurance is pure death protection for a "term" of
one or more years. Death benefits will be paid only if you die within
that specified term of years. Term insurance generally provides the
largest immediate death protection for relative to the premium amount.
Terms can be purchased in 1-, 5-, 10-, 15-, 20-, or 30-year increments,
and premiums will generally stay level for the duration of the term.
Term insurance is usually used to fund temporary insurance
needs and is often utilized by businesses that want to either fund
buy/sell agreements or secure a bank loan. Individuals also use term
life insurance for needs such as home mortgages or young families.
Certain permanent needs are funded with term insurance
for budget reasons, until such time that the budget allows the purchase
of a permanent policy. There is a wide range of premiums charged
for the exact same coverage, so it does pay to shop the market. And
'shopping the market' is what we at GIASM do
Permanent Life Insurance
You will find many different names for permanent life insurance
policies. They include whole life, interest-sensitive whole life,
universal life, endowments, first-to-die, second-to-die, and variable
universal life. What they have in common is that they will all
give you death protection for your entire life. Premiums are usually
several times higher than what you would initially pay for the same
amount of term insurance. However, premiums for permanent policies
usually stay level, even as you age. Ideally, you would fund permanent
insurance needs with a permanent life policy. These needs might include
items such as final expenses, loss of income, or estate liquidation
fees or taxes.
The major difference between term and permanent life insurance is
the cash value component of a permanent life policy. This also causes
more confusion among consumers than any other aspect of the policy.
Every permanent life insurance policy has a cost of insurance. The
insurance is never free, but sometimes the cost is very well-hidden
from the consumer. Universal life and variable universal life policies
illustrate the cost of insurance and the policy fees on the annual
statements provided to policyholders. A portion of the annual premiums
you pay will go towards the cost of insurance. It stands to reason
that a lower cost of insurance is beneficial to the consumer by allowing
a greater portion of the premium to go into the cash account.
Most permanent life insurance policies have two death benefit options: level
death benefit and increasing death benefit. The death
benefit is the combination of the accumulated cash value plus an
amount of life insurance. If the stated death benefit of a life
policy is $100,000 and the accumulated cash value was $15,000,
then the actual life insurance amount would be $85,000. The cost
of insurance would be based on the $85,000, not on the stated death
benefit of $100,000. If a policy has the level death benefit option
and the death benefit is $100,000, then as the cash value increases
the actual amount of life insurance decreases in order to keep
the death benefit level. As the amount of life insurance decreases,
the cost of insurance also decreases. Therefore, it is beneficial
to the consumer that the cash value increase as fast as possible.
If a policy has an increasing death benefit option, the amount of
life insurance would remain constant and the death benefit would
increase as the cash value of the policy increases. Since the actual
amount of life insurance would remain constant, the cost of insurance
would increase as the policyholder gets older, therefore eating up
more of the premium dollars and allowing less money to accumulate
in the cash account.
Every policy has a policy fee. It is in the consumer's best interest
to know what the policy fee is. The lower the fee, the better for
The cash value is the internal cash account inside a permanent life
insurance policy. The policyholder owns the funds, can withdraw or
borrow the money from the policy, and in variable universal life
policies the consumer can actually direct the cash value into various
sub-accounts that invest in stocks, bonds, government securities,
or money markets. Most permanent life policies direct the consumer's
cash account into an interest-bearing account. Over the past 10 years,
most of these policies have under-performed their projections, and
actual accumulations have been less than expected for the consumer.
Variable universal life policies are the exception, having performed
as projected, due mainly to strong returns in the stock market. Permanent
life insurance policies also have some favorable tax treatments of
the cash values when correctly implemented, including the tax-free
withdrawal of funds. In addition, a strong build-up of the cash value
can allow the consumer to stop paying premiums and just let the earnings
in the cash account to pay for the life insurance mortality charges.
Permanent life insurance policies require that you hold them for
a relatively long period of time before you can withdraw or borrow
from the cash value. Large surrender charges in the early years of
a policy prohibit the consumer from accessing the cash. The surrender
charges diminish over a period of five to twenty years, depending
on the policy. A shorter surrender period is better for the consumer.
You should not buy a permanent life policy unless you have the intention
of holding it for a long period of time.
Contact us if you would like more information
on this topic or if you would like to discuss your insurance needs
and objectives with one of our brokers.