The Insurance Revolution

Changes are rocking the life insurance industry!  Unless you have researched dozens of companies recently, you may be unaware of the tremendous upsurge in competition between the insurance giants.  If your policies are over three years old you may be spending hundreds of unnecessary dollars by paying premiums on uncompetitve policies. 

Today there are nearly 2,000 insurance companies in America.  Most offer term life insurance.  But not all are competitive. 

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Here at Estate Planning Specialists, you can instantly search amongst the top "A" or better rated life companies' plans.  With just a few clicks you create your personalized custom quote and research the top term life plans in America.  Why pay hundreds or even thousands of dollars more per year than you have to for your insurance coverage?  Simply complete the form below and see how you can enjoy big savings.

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By Todd Phillips

Whole life is the most standard type of permanent insurance.  As it is rightly called, “whole life” provides permanent protection for your entire life; from the date you purchase it until you die.  The premium payments in whole life are fixed, meaning they will not change over the life of the policy.  It has a guaranteed cash value and death benefit, and includes a minimum guaranteed interest rate to hold the entire product together.

Price

Generally speaking, whole life is the most expensive form of life insurance because you have to pay for the right to have guaranteed premiums and death benefit for life.  While some forms of Universal Life also provide guaranteed death benefits and premiums, Whole life can also guarantee cash value accumulation based in the form of dividends.

Out Of Vogue

Because of higher cost for whole life, less flexibility, and low interest rates on the cash accumulation, whole life policies have fallen out of vogue since the 1980’s.  In fact, they’ve become so unpopular that many agents and insurance brokerage firms no longer carry whole life in their boutique of products.  If you currently have a whole life insurance policy, you might want to evaluate your plan to a newer Universal Life plan that may be more cost effective.

I should add that there are some newer forms of hybrid Whole Life and Index Universal Life which include built in Chronic Illness Riders  that we think are very attractive.  A few insurers have created single premium (one-time payment) plans with significant guarantees and 100% liquidity available on your premium.  These new Single Premium Whole Life plans have provisions that will pay out your life insurance benefits to you while you living if you become chronically ill and cannot perform 2 of the 6 ADLs.   In addition, unlike most Whole Life plans, these new hybrid plans come with several investment strategies – typically linked to a stock Index -- giving you choice on how your interest is credited on your cash values in the account.  (See ABC Plans O.W.P.)

Who Should Buy Whole Life?

You should buy whole life insurance if you want lifetime insurance with guaranteed premiums and death benefit and do not want to worry about interest rate or market fluctuations.

Non-Par vs Par Whole Life

Companies known as mutual companies have no owners other than the policy owners.  Mutual companies pay dividends to their policy owners.  A policy that receives dividends is said to be “participating”.  These dividends are considered the return of excess premium.  Most policy reserves are based on conservative interest rate, usually 3.5% per year.  Since the companies can generally earn more, they return a portion of the excess in the form of dividends.  The cumulative dividends are treated as an income tax-free return until they exceed the cumulative premiums paid.

Non-Participating Whole life is slightly different than participating whole life because they do not pay dividends on the excess cash.  Instead, they are usually “interest sensitive” and the excess goes into the cash accumulation.  You can expect the price for non-participating whole life to range midway between universal life and participating whole life.

How They Calculate The Premium

In most cases, insurance actuaries determine that the premium and reserve requirements are based on an assumed life expectancy of age 100.  Since it is presumed that people die at age 100, the actuaries calculate the premiums, taking into consideration the guaranteed minimum interest rate in order to make the reserves equal the death benefit at age 100.  Those reaching age 100 are paid the face amount of the policy because they survived the maximum period set by the actuaries.  For this reason a whole life policy may be viewed as an endowment maturing at age 100.

Term Life Insurance provides the most coverage for the lowest initial cost. The coverage is so great because the benefit is paid only if the insured dies within the designated term of the policy.

Term Life Insurance plays a vital role in proper financial planning. The most common reasons to buy Term are as follows:

• You have a temporary need which lends itself to a temporary solution, i.e., raising children, education, paying off a mortgage, a business buy/sell agreement.
• You have a permanent need for protection (such as liquidity for the purpose of paying estate taxes), but since term is initially less expensive, it fits better into your current budget. You might want to purchase a term policy with the intention of converting to permanent protection later.

The most common form of Term Life Insurance today is "Guaranteed Level." With Level Term Insurance, your protection and premiums remain constant throughout the term period. After your selected term expires, your premiums will sky rocket immensely if you keep your coverage. For planning purposes, you should not intend to keep your Term policy after term period.

Most Term periods are for 5-10-15-20 or 30-years; however, recently 5 year term policies have become virtually extinct. A newer term option offered by a few insurers is to dial down your term period to the exact time period you need such as 28 years.

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Term Life premiums have gone down a lot since the early 70’s when coverage for a 35 year old was over $4 per 1,000 while today that same coverage can be bought for just $.33 per 1,000 assuming a 10 year $500,000. Thanks to technological advancements, insurers have been able to increase their efficiencies over the years. Term rates hit all-time lows in 2009, but have recently started to increase due to heightened insurer reserve requirements resulting from the 2008-2009 financial crisis.

By Todd Phillips

The interest paid on standard universal life products is determined by the board of directors of the company based on the company's interest earnings, and is influenced by their level of expertise and competition in the field.  While this may be comforting to some, many insured investors think the investing of the cash values is better off in their own hands.  Thus, the creation of the variable line of products: variable life, variable universal life and variable single-premium life.

History

Variable life was introduced in the Netherlands in the 1950s by DeWaerdye, LTD.  By the 1960s, it’s popularity had spread into the United Kingdom.  From there, British influence led to the introduction of a combination life insurance/equity investment contract in Canada.

The extended bull market, and low interest rates of the late 1990’s helped fuel variable life sales substantially.  By 2001 LIMRA studies showed that Variable Universal Life was the fastest growing segment of the insurance market, representing approximately 44% of all new insurance sold.

As expected the 2000-2002 recession slowed sales in all variable products as investors fled due to poor market returns, and sought the shelter of guaranteed products such as fixed and indexed universal as well as standard whole life insurance.

Today the stock market remains as volatile as ever.  To stay competitive and combat volatility, Insurers now offer Variable Universal Life with “Guaranteed No Lapse” provisions similar to those found in Universal Life contacts.  Expect the No Lapse feature to come at increased mortality costs or restricted fund allocations.

How It Works

The concept remains the same as universal life:  there is a minimum premium requirement which goes to the costs of insurance and the balance goes into your chosen mix of side funds.  The primary difference from universal life is you control the investments, choosing between several (between 20 to 100) investment sub-funds ranging from most investment sectors from money market to Gold to Emerging International to Corporate Bonds. You are able to mix and match investment and change from fund to fund tax free with no transaction fee, usually you are limited to 12 times major allocation changes per year; however, we do have some which can be traded daily.

The company will charge around 2-3 percent for asset management fees, mortality costs and administration.  For example, if your investments return 20 percent gross, your net return could be around 17 percent.

Tax-Deferred Growth

Each tax season mutual fund owners pay what is called a distribution tax.  The tax you must pay a tax on the capital gaines both long and short term for the stocks sold within the mutual fund.  You also must pay income tax on any dividends received from the fund.  Such a tax can eat away up to 5% of your realized return each year.  By moving your investment dollars from a taxable mutual fund into a variable life product, you can invest in the same types of mutual fund vehicles but the money grows tax-deferred; no capital gain or distribution tax is due.

Tax-Free Income

As with all permanent insurance policies, you can withdraw the money income tax free.

Makes For A Great Gift

Another great way to take advantage of variable life policies is to use them as gifts to children or grandchildren. By purchasing a variable life policy for a grandchild, the grandparents not only lock in that child’s insurability, they also provide the child with a growing fund that can be used for various purposes during their life (e.g. college, marriage, and home purchase).

If the premium amount paid each year is within the $13,000 per year per donor/doneee (IRS limit for gifts), it becomes a tax-free gift from the grandparent under a UGMA/UTMA.

Who Should Buy Variable Universal Life

VUL is not for everyone, but it can make an attractive addition to your portfolio if you have a suitable risk tolerance and want the control of making your own investment decisions with your insurance policy.

You should purchase variable universal life if you:

• Want life insurance that will last a lifetime as long as you keep sufficient cash in the policy.
• Want to give loved ones a benefit that is not taxed (as with all insurance products.)
• Like to know where the money is going – (full disclosure)Like the flexibility of being able to change policy features such as death benefit and premium payments
• Want to take advantage of the tax-deferred growth.
• Want to be able to withdraw money tax-free.
• Want control of your investments within the policy (pick from numerous investment portfolios).
• Want to take an active role in your investment (can change allocation e.g. from growth to value or bonds to hard assets).
• Are willing to take on more risk for the potential of higher market returns.
• Don’t mind paying a little extra to have the options and flexibility of variable universal life.  (You would need to earn roughly 2% gross annually more on your investments with a variable policy to breakeven with a universal policy).