by Richard F. O’Boyle, Jr., LUTCF, MBA
Life insurance policies are contracts between individuals and insurance companies to pay a set dollar amount on the death of the individual covered by the policy. Most people first buy life insurance when they start a family and take on a large expense such as a mortgage since they don’t want to leave their spouse and kids with a stack of bills and only one income. Individuals in later life see the value of life insurance as part of their retirement and estate planning.
Obviously, life insurance proceeds can be used to pay for final expenses such as probate taxes and funeral costs. But life insurance can also provide retirees with additional options. For example, the cash values in permanent life insurance plans can be used to supplement retirement income on a tax-favored basis. A life insurance plan may allow a retiree to elect a more generous pension option, knowing that the life insurance will pay out to their surviving spouse. Finally, having a life insurance plan late in life gives the retiree the comfort in knowing that she can spend down her assets and savings and her children and grandchildren will have a financial legacy.
Types of Life Insurance
Term Life Insurance will pay your beneficiaries a set amount as long as the policy remains in effect, which is generally 5, 10, or 20 years. If you choose a longer term, the premium will be higher, all other things being equal. The rate will increase at these time increments, and ultimately become unaffordable or simple terminate.
Many term plans offer the option of converting to a permanent plan at a future date with no evidence of insurability, that is, no new medical exam. You get to keep the same rating or classification, even if your health has deteriorated, and the length of coverage can be extended.
Permanent Life Insurance, such as Whole Life or Universal Life, has a higher premium, but some money is set aside in a conservatively invested account for the medium- or long-term. The premium on the permanent plan does not increase over time. There are other variants of permanent insurance such as Variable Life (where the money is invested in stock-type accounts) or Return of Premium plans which act a lot like Universal Life plans.
Keep in mind, that once you get life insurance, the rate will increase only by the specified amount (if a term plan) or not at all (if a permanent plan). These rates are locked in even if your health deteriorates over time.
Whole Life Insurance is permanent life insurance designed to last through your life expectancy. The premium remains fixed and level as long as you own the policy. The policy’s cash value grows at a guaranteed rate and may also accumulate dividends.
Universal Life Insurance is permanent life insurance with a flexible premium and a cash value that grows based on current market interest rates. The policy owner may choose to pay higher or lower premiums depending on his own income cycles.
Term Life Insurance is temporary coverage designed to last for a specified time frame – usually five, ten or twenty years. Premiums will increase on a set schedule after the initial term expires. No cash value accumulates, although many plans offer a conversion rider that allows the owner to convert the plan into a permanent policy.
Customizing Your Policy with Life Insurance Riders
Disability Waiver of Premium: If you are unable to work due to illness or injury for six months or more, the insurance company will pay your life insurance premiums. Whole Life plans will continue to accrue all scheduled cash values and dividends; Universal Life plans will generally not accumulate additional cash values, but will remain in force during the period of disability.
Conversion: You can convert your term policy “without evidence of insurability,” e.g., without a medical exam, into one of the permanent plans offered by your insurer. The insured must pay the new premium based on their age at the time of conversion.
Accelerated Death Benefit: You may take up to 80% or 90% of the death benefit while still alive if diagnosed with a terminal illness.
Family and Child Insurance: The spouse and/or dependent children of the primary insured may be covered at a percentage of your death benefit.