Life insurance is a contract between an insured and an insurance company. Traditionally, life insurance was designed to cover the expenses and loss of income upon the death of an insured. If the insured dies while the contract is in force, the insurance company pays the face value (death benefit), free of income tax to the beneficiary. The next 50 years will see the largest transfer of wealth, to the next generation, in the history of the world. Since Social Security provides for only about 15 percent of the necessary income for the average person’s retirement, the burden is placed on the individual. Insurance, of course, is the only logical method of providing the income for this phase of life that, hopefully, comes to everyone. Life insurance is designed to spread the cost of the financial loss, resulting from death, from an individual to a group. People purchase insurance to protect their homes, their cars, their valuables, and in some cases even their money. It would naturally follow therefore, that they would also purchase insurance to cover their most valuable possession... their lives.

Today, individual life insurance represents the greatest amount of in-force insurance business in the United States. There are three general types of life insurance: whole life, term life, and universal life, which is in reality a form of whole life. The term "ordinary life," while not completely correct, is often used to describe individual insurance. Insurance is a device for spreading the risk of financial loss over a large number of people. The purchase of insurance allows a person to share risk with a group, thus reducing the potential for the individual to suffer disastrous financial consequences. This sharing is done automatically by the insurance company which collects small amounts of money (premiums) from a large number of people. By the use of statistics, insurance companies predict the amount of loss that must be covered annually and reserve an amount necessary to cover those predicted losses. The sharing of risk and the pooling of funds among a large number of similar risks allows an insurance company to make protection available to most individuals at an affordable cost to each.

Life insurance is available in several different forms. There is Term Life, Universal Life, and Whole Life. It is easy to be confused as to the best application for a particular short term or long term need. There are different schools of thought when it comes to life insurance. Some feel Whole Life and Universal Life are excellent investment mechanisms. Others will say that Whole Life and Universal Life (with cash value) are a poor choice for investing in the future, but rather to buy Term Insurance and invest the difference. What the main factors are is, what your immediate needs are, what your future needs are, how disciplined you are with your finances, and what other types of future retirement vehicles you may already have in place.

  • What is your goal and what is the intention of the life insurance?
  • How much money are you willing to allocate for the intentions you have?
  • Do you understand the pros and cons between the different forms of life insurance?
     

Term Life Insurance
Provides coverage at a fixed rate of payments for a limited period of time (generally 10-30 years). After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.

Term life insurance is a pure death benefit and its primary use is to provide coverage for financial responsibilities such as debt, dependent care, college education for dependents, funeral costs, and mortgages, for the insured. (i.e.-Parents could buy a policy that expires after their children graduate from college to ensure that the full education is paid for (in case anything happened to the parents). Or, the main breadwinner in a house could buy a term policy that matches the length of his or her home's mortgage to protect his spouse.


Universal Life Insurance
Universal Life (UL), is a more flexible version of Whole Life Insurance. Like Whole Life, UL features a savings element that grows on a tax-deferred basis. A portion of your premiums are invested by the insurance company in bonds, mortgages and money market funds. The return on the investments is credited to your policy tax-deferred. A guaranteed minimum interest rate applied to the policy (usually around 4%) means that, no matter how the investments perform, the insurance company guarantees a certain minimum return on your money. If the insurance company does well with its investments, the interest rate return on the accumulated cash value will increase.

Features of Universal Life Insurance

Flexible Premiums
After you pay an initial premium, universal life insurance provides flexibility in paying your premiums. For example, if the portion of invested premiums is growing, you can pay future premiums from this buildup in value. Of course, the investment performance determines how much, if any, flexibility you have to modify your premiums. With universal life insurance, you invest a part of your premiums in a money market account or similar investment that earns a stable, positive rate of return. Insurance companies also offer universal life insurance with a guaranteed minimum rate of return.

Cash Value
The portion of invested premiums accumulates a cash value. This cash value is held in an accumulation fund. You can withdraw the cash value from a universal life insurance policy. You can also claim it as an asset when you apply for a loan. Any withdrawals from the accumulation fund are deducted from the policy's cash value. While the invested premiums of a universal life insurance policy are generally restricted to safe, low-yielding investments, a variable universal life insurance policy lets you invest a portion of premiums in riskier investments such as stocks and bonds. Variable universal life is a hybrid. It combines features of universal life and variable life insurance.

Death Benefit
With universal life insurance, your beneficiary receives a death benefit when you die. Your beneficiary generally does not owe federal income taxes on the death benefit. Death benefits are also free from probate costs and can be protected from creditors in case of bankruptcy. Because of these features, universal life insurance is often used in estate planning.

Universal Life allows you to choose from two death benefit options.

Option 1
Would pay the death benefit out of the policy's cash value; the more cash value you build up means the company is on the hook for less insurance (costs less).

Option 2
Would pay the face amount stated in the contract, plus any cash values you accumulated over the years (costs more).

Many UL policies today offer a no-lapse guarantee: as long as you pay the minimum designated premium, the policy will stay in force to age 100 or 120. Paying the minimum guaranteed premium is rarely sufficient to build up significant cash values.

Who might benefit from a universal life policy?
Since a universal life policy is an investment vehicle coupled with a life insurance policy, only people who feel they need life insurance into their 70's would benefit from a universal life policy. This would give the savings portion enough time to possibly accumulate into an investment. Most persons will not need life insurance that late in life, and in the case life insurance is not needed that late, it may be more beneficial to purchase a term life insurance policy and plan a proper retirement investment savings account such as a 401K or annuity.


What Are Accelerated Benefits?

This life insurance policy accelerates death benefits to cover any one of a number of potential catastrophic events under one insurance contract. Accelerated benefits allow a portion of the death benefit to be paid upon the happening of certain qualifying events. The amount to be accelerated for each of the qualifying events is stipulated in the policy.

The Risks
Throughout the life stages one may experience unwelcome, uncontrollable events, such as, stroke, cancer, heart attacks, and death. These events cannot always be controlled, predicted, or prevented but there is now a method to control the financial effect on one’s life.

What if you:
• Suffered a critical or chronic illness prior to retirement and needed additional funds to help with medical expenses, the cost of everyday living expenses, and replacement of income?
• Were diagnosed with a terminal illness that required huge expenditures for medicine, doctor bills, and personal care?
• Suffered a heart attack and was one of the more than one million survivors each year, but was unable to work and earn income?
• Retired and lived to age 85 but ran out of money at age 80? What if there were one insurance policy that could cover all of these what ifs?

Depending upon the policy, a predetermined amount of death benefit or accumulated benefits can be accelerated to cover:
Lump Sum Death Benefits
The death benefit, either full or the amount remaining after accelerated benefits have been paid, is always available if retirement income has not been selected. Like traditional life insurance, the death benefit is paid income tax free to the beneficiary. If the beneficiary elects to take the payment over a 10-year period, the death benefit is increased by 10 percent.
Terminal Illness

This benefit allows the insured to receive a portion of the policy’s death benefit upon the diagnosis of a terminal illness. The definition of terminal illness may vary from policy to policy, but it usually is when the life expectancy is 12 months or less. The amount to be accelerated may also vary, but 50 percent is normal. Terminal illness normally must be certified by a doctor before benefits are paid.
Critical Illness
A portion of the death benefit, as described in the policy, will be accelerated and may be in the form of a lump sum or monthly payments. Critical illnesses that are normally covered in the policies are: cancer, stroke, paralysis, ALS, renal failure, blindness, and heart attack. As with chronic illness, benefits will be paid upon certification by a doctor and are usually based on a percentage of the death benefit.
Chronic Illness
The inability to perform two or more of the "activities of daily living." These are normally: eating, bathing, dressing, continence, toileting, and transferring. The new life insurance policies will normally accelerate a portion of the death benefit to cover the costs of care when an insured is diagnosed with a chronic illness–much like the payments from a long term care policy.
Disability Benefits
If an insured becomes disabled before age 65, a portion of the death benefit, as described in the policy, may be paid in monthly payments. In some cases, the policy will pay as long as the insured remains disabled, in other cases until age 65. Funds are available to replace lost income in addition to other disability income the insured may be receiving.
Death of a Spouse or Child
Benefits may be accelerated in the event of the death of a spouse or child. These funds are available to help defray the expenses or to be used in any way the insured chooses.
Retirement Benefits
Some of the policy forms offer tax-deferred cash accumulation and preferred settlement values to fund retirement. At age 65, or after a specified number of policy years, the preferred settlement value for retirement may be increased by as much as 300 percent. At retirement, an insured may elect to receive the policy value as retirement income and may select payouts for life only, life with period certain, or joint and survivor. Once retirement payouts are elected, accelerated benefits and death benefits no longer are available.

How much of the death benefit is accelerated?
The amount to be paid for the various events varies with insurance policies.
How does acceleration of benefits affect the death benefit?
In virtually all cases, the death benefit is reduced by the amount of the accelerated benefit.
Are accelerated benefits taxable?
Under the current interpretation of the Internal Revenue Code most accelerated death benefits are income tax free.
What is the benefit of accelerated benefits?
Accelerated benefits allow a number of conditions to be covered under one insurance policy, with one premium payment which is usually much less than covering the various risks separately.


The major shortcoming of the "traditional" life insurance is that it does not provide benefits for critical or chronic illness, for disability or for retirement.

It can easily be seen how a policy with accelerated benefits can act as a major financial planning tool. It is efficient in that it provides a pool of money that can be used in case of a financial catastrophe caused by illness, disability, care needed for chronic illness, terminal illness, critical illness, retirement, and premature death. It is efficient in that it provides a tool for the financial planner to cover a number of risks with one insurance policy and one premium that pays for critical illness, chronic care, disability, retirement benefits, and death benefits when and if needed. The advantage of a policy with accelerated benefits is that it allows a family to "financially survive what they may physically survive."