whole life insurance http://www.wisebread.com/taxonomy/term/10617/all en-US Should Life Insurance Be Purchased as an Investment? http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/should-life-insurance-be-purchased-as-an-investment" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/2655701444_75871f8755_z.jpg" alt="rainbow umbrella" title="rainbow umbrella" class="imagecache imagecache-250w" width="250" height="159" /></a> </div> </div> </div> <p>Before purchasing life insurance as an investment, a potential investor should understand a few things about the types of life insurance and how they work. &nbsp;Basic life insurance can be broken down into two major categories, <strong>term insurance</strong> and <strong>whole life insurance</strong>. (See also: <a href="http://www.wisebread.com/financial-iq-test-how-healthy-is-your-life-insurance-plan" title="How Healthy is Your Life Insurance Plan?">How Healthy is Your Life Insurance Plan?</a>)</p> <p><strong>Term insurance</strong> is insurance for which one makes annual premium payments in exchange for a death benefit. This is the least expensive type of life insurance and cannot be purchased as an investment. The death benefit is all that one receives from term life insurance, provided one passes away while the policy is active.</p> <p>This type of insurance is ideal if you do not believe you will need life insurance in your later years; the older one becomes, the higher the premiums for term life insurance. The primary purpose of term life insurance is to protect those people who depend on you; as one gets older, most people accumulate <a href="http://www.wisebread.com/how-to-tell-if-youre-on-track-for-retirement" title="How to Tell if You're on Track for Retirement">retirement savings</a> and/or their children become self sufficient, decreasing the need for term life insurance.</p> <p><strong>Whole life insurance</strong>, also known as <a href="http://www.doughroller.net/insurance/life-insurance/should-you-consider-permanent-life-insurance/">permanent or cash value life insurance</a> is the second type of life insurance and can be broken down into whole life, universal life, variable life, and variable universal. In general, cash value life insurance offers protection throughout one's entire life, and also includes an investment &mdash; the cash value. Only a portion of the premium payments on a cash value life insurance policy cover the actual insurance. With the other portion of the premium, the insurance company sets up an investment known as an accumulation account which is invested in interest-bearing securities.</p> <p>The cash value reduces the amount at risk to the insurance company and thus, the insurance expense over time. The owner can access the money in the cash value through policy loans or other options which reduce the death benefit. Accordingly, premiums for such policies generally tend to be higher than those associated with term life insurance, at least in the earlier years.</p> <p>The appeal of whole life insurance as an investment stems from the tax treatment of its accumulation account. The money in the accumulation account grows tax deferred, meaning taxes are postponed on income and capital gains. Nevertheless, there are many factors that make this type of insurance an unattractive investment option:</p> <ol> <li>There are incredibly high fees and expenses associated with buying permanent life insurance. Unless one buys a no- or low-load insurance policy, the fees and expenses erode the returns so much that it is almost impossible to compete with the returns of securities such as mutual funds. These fees and expenses are so high that they can eventually outweigh the tax deferral benefits of such policies.<br /> &nbsp;</li> <li>Further, the insurance companies generally provide unrealistic policy illustrations to show potential clients what their premiums and cash value will be in the future by using unreasonable interest rate forecasts. From a purely financial sense, many insurance experts suggest buying a term life insurance policy and investing the difference in premiums between the plans on your own.<br /> &nbsp;</li> <li>Finally, with cash value life insurance, the only benefit paid to your family upon death is the face value of the policy.</li> </ol> <p>Based on this evidence, it is quite apparent that permanent or cash value life insurance is not a recommended investment. Individuals with access to other tax-deferred retirement savings opportunities, such as a 401(k) or a <a href="http://www.doughroller.net/investing/ira-online-discount-brokers/">ROTH IRA</a>, should be maximizing their contributions rather than investing in a cash value insurance policy.</p> <h3>Sources</h3> <ul> <li><a href="http://findarticles.com/p/articles/mi_m1563/is_n6_v12/ai_15508219/pg_2/?tag=content;col1">Life insurance, an investment? Despite what you hear, it's rarely a good choice</a> (BNET)</li> <li><a href="http://www.finweb.com/investing/should-you-use-life-insurance-as-an-investment.html">Should you use Life Insurance as an Investment?</a> (Financial Web)</li> <li><a href="http://www.daveramsey.com/article/the-truth-about-life-insurance/">The Truth About Life Insurance</a> (Dave Ramsey)</li> </ul> <div class="field field-type-text field-field-guestpost-blurb"> <div class="field-label">Guest Post Blurb:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <p>This is a guest post by Michael Pruser. Michael is the managing editor of the popular personal finance blog, <a href="http://www.doughroller.net/">The Dough Roller</a>, and also writes for the credit card review sites, <a href="http://creditcardoffersiq.com/">Credit Card Offers IQ</a> and <a href="http://www.prepaidcards123.com/">Prepaid Cards 123</a>.</p> </div> </div> </div> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/michael-pruser">Michael Pruser</a> of <a href="http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">Did Your Parents Give You a Whole Life Insurance Policy? Here&#039;s What to Do With It.</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-times-its-okay-to-borrow-from-your-life-insurance-policy">4 Times It&#039;s Okay to Borrow From Your Life Insurance Policy</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/universal-life-insurance-and-whole-life-insurance-a-comparison">Universal Life Insurance and Whole Life Insurance: A Comparison</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-reasons-why-life-insurance-isnt-just-for-old-people">5 Reasons Why Life Insurance Isn&#039;t Just for Old People</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Insurance Investment life insurance term life insurance whole life insurance Wed, 27 Oct 2010 14:00:07 +0000 Michael Pruser 272321 at http://www.wisebread.com Universal Life Insurance and Whole Life Insurance: A Comparison http://www.wisebread.com/universal-life-insurance-and-whole-life-insurance-a-comparison <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/universal-life-insurance-and-whole-life-insurance-a-comparison" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/IMG_0857_1.JPG" alt="life insurance" title="life insurance" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p class="MsoNormal">So you think you need life insurance, or you know it is time to review the insurance coverage you currently have (which is something you do every few years, right? Right).</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">You may already have a Universal Life insurance or Whole Life insurance policy, or you may have an insurance agent or <a target="_blank" href="http://www.wisebread.com/9-signs-you-need-to-fire-your-financial-planner">financial planner</a> in front of you telling you that you need one.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Read on for a comprehensive look at both forms of insurance, with pros, cons, and example applications for each.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Universal Life (UL)</strong> and <strong>Whole Life (WL)</strong> are both forms of permanent insurance. <strong>If you are in doubt as to whether you are in the market for permanent insurance or term insurance, check out </strong><a target="_blank" href="http://www.wisebread.com/how-and-why-to-buy-life-insurance"><strong>this article</strong></a><strong> first.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><em>Please note that there is a large contingent of people who believe only in Term life Insurance. I will not argue the idea that Term Insurance is more often than not a cheaper and better life insurance product for most people. There are, however, times when permanent insurance may be a better choice. This article will help you determine if you are a good candidate for permanent insurance.</em></p> <p class="MsoNormal"><o:p><strong>&nbsp;</strong></o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>Permanent Insurance Primer &ndash; Insurance Part</strong></h3> <ul> <li>Both UL and WL policies <strong>combine a permanent life insurance component with an investment component.</strong></li> <li>The<strong> life insurance</strong> component (investment component aside) <strong>is good for life</strong>, and the price doesn&rsquo;t increase over time.</li> <li>Because of the level premiums for the insurance component, the cost of insurance will be higher than an equivalent amount of Term (temporary) insurance. Over the life of the policy though, the permanent coverage (again, aside from the investment component) <strong>ends up being cheaper overall (in comparison to the cost of renewing a Term10 policy for life).</strong></li> <li>You <strong>don&rsquo;t choose permanent insurance to have a whole heap of life insurance coverage for needs that are ultimately temporary.</strong> For example, don&rsquo;t cover off your mortgage or kids&rsquo; education with permanent insurance, since these will eventually be paid off. Instead, look at issues like estate taxes and leaving a legacy in determining the amount of insurance coverage to get.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>Permanent Insurance Primer &ndash; Investment Part</strong></h3> <ul> <li><strong>The investment component of both UL and WL grows on a tax-deferred basis</strong>. This allows for some good compounding of returns and accelerated growth over time. Permanent insurance is best bought with a <a target="_blank" href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">very long time frame</a> in mind.</li> <li><strong>There are limits to the tax-deferred growth</strong>. By purchasing &ldquo;x&rdquo; amount of life insurance, you are allowed to shelter a corresponding amount of investments from taxation. The formula for this is complicated, but the more insurance you buy, the more money you can shelter in the investment component.</li> <li><strong>Making a straight withdrawal from the investments in a UL or WL policy will subject you to taxation on all the growth.</strong> It is treated as income and taxed at marginal tax rates. The money you put in (the principal) is not taxable, since it is after-tax dollars to begin with.</li> <li><strong>If you borrow against the investment component of the policy, you can receive the investments (growth included) tax-free.</strong> You don&rsquo;t need to make loan payments as the interest is accrued to the policy. The total loan amount (including interest) is paid to the bank after you die, with the remainder of the investment component, along with the life insurance component, going to your beneficiaries. Tax-free, of course.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>WHOLE LIFE</strong></h3> <p class="MsoNormal">Whole Life insurance is very difficult to get a full grasp on. There are a myriad of options and sub-options that can be selected, depending on your age and health, what you want the insurance for, your cash flow, intended premium payments, and the insurance company in question. It is best to consult with a knowledgeable insurance broker who can shop across the market for you if you want (or have) WL insurance.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Here are the basics:</strong></p> <ul> <li><strong>You pay set premiums for a pre-determined amount of time (like 20 years).</strong> These premium amounts are rarely flexible, especially in the initial years of the policy, when most of the premium goes to the life insurance component with very little going into the investment component.</li> <li><strong>Each year, the insurance company pays out &ldquo;dividends&rdquo;,</strong> which are allocated to either your investment component or to purchase further insurance. The more insurance and investments you have, the higher your dividends will be.</li> <li><strong>The dividend options vary widely across policies and insurance companies.</strong> You can choose for the dividends to purchase extra term insurance, extra permanent insurance, or have it go directly into the investment component. Combinations thereof also apply.</li> <li>Eventually <strong>once the dividend payments are large enough, you can choose to have them pay for the cost of the insurance.</strong> This is how you can have a permanent insurance product like WL and not have to pay premiums at all after 20 or so years.</li> <li><strong>You have little to no say in how the investment component is invested.</strong> You cannot, for example, choose to put it in US Equities or International Bonds. You will be provided with projections as to how the investment component will grow over time. Most of it is interest-based growth. (All dividends and growth are tax-free as long as they remain in the policy).</li> <li><strong>The larger your investment component, the larger your dividend payments are.</strong> So as time goes by and your investments grow, your dividend payments will also grow. This is why WL is best purchased with a long time frame in mind; <strong>it doesn&rsquo;t become really viable until it has been in effect for many years, at which point it can grow fantastically.</strong></li> <li>After time you can use options like dividend offset, premium holiday, and policy loans to stop paying life insurance premiums out of pocket, and access some of the money in the investment component if you wish.</li> <li><strong>When you die, the full amount of the investment component plus the insurance component is paid to your beneficiaries &ndash; tax free.</strong></li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>UNIVERSAL LIFE</strong></h3> <p class="MsoNormal"><strong>Universal Life Insurance a newer, more flexible version of Whole Life.</strong> It is also considerably easier to understand, and is generally preferred to Whole Life for these reasons.</p> <ul> <li>Although you would get a UL policy with the intention of paying a set amount of premiums for a pre-determined amount of time, these <strong>payments are very flexible</strong>. You must maintain the cost of the life insurance, and then you can contribute as much or as little as you wish to the investment component (subject to certain upper limits for tax-free sheltering).</li> <li><strong>You can choose how the investment component is invested</strong>, within the insurance company&rsquo;s available options. Insurance companies will often pair up with investment firms to offer <a target="_blank" href="http://www.wisebread.com/mutual-funds-for-wise-bloggers">mutual fund </a>types of investments specifically for UL policies. So although you cannot choose specific stocks or individual bonds, you can invest in certain <a target="_blank" href="http://www.wisebread.com/asset-allocation-for-all-markets">asset classes</a> according to your investment profile and desired performance.</li> <li>Once there is an accumulated balance in the investment component, <strong>you can choose to have the life insurance premiums paid from the investments</strong> so you do not have to pay further premiums out of pocket after time.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>WHY CHOOSE UNIVERSAL LIFE?</strong></h3> <p class="MsoNormal">As an investment, <strong>Universal Life is best used for people who have large (but undetermined) amounts of money they wish to invest with an eye to shelter the growth from taxation.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #1:</strong></p> <p class="MsoNormal">An ideal candidate for Universal Life as an investment could be a <strong>single or couple in their 50s, whose income is high and expenses are low</strong> (ie: the mortgage is paid off, and the kids are out of school). This couple could choose to invest $10,000 per year, for the next 5-10 years, for example. This would be an easy reach for this candidate, since they are used to allocating much more than that towards housing and children &ndash; expenses they no longer bear.</p> <ul> <li>The money will be allocated partially to &ldquo;x&rdquo; amount of permanent insurance, which will be a legacy for their kids, or will be earmarked to pay for estate taxes on death. (The policy would likely be structured to buy the minimum amount of life insurance required to shelter the maximum amount of their intended premiums in the investment component).</li> <li>The rest of the premiums will go into the investment component, which will be invested as per their instructions and will grow on a tax-deferred basis. Please note that if the investment of choice is a market-based investment, it can decline in value like any other market-based investment.</li> <li>In retirement, when the parents would like to supplement their retirement income (tax-free, of course), they can arrange for policy loans, borrowing against the investment value. The money is paid out without taxation (since loans aren&rsquo;t taxable), interest is accrued to the policy, and when they die the loan amount plus interest is paid to the bank out of the investment component, and the remainder of the investments plus the insurance is paid to the beneficiaries (tax free).</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #2:</strong></p> <p class="MsoNormal"><strong>A professional single or couple in their 30s or 40s with some disposable income</strong> can use a UL policy for long-term tax-deferred growth.</p> <ul> <li>Unlike Candidate #1, this candidate would invest a much smaller amount of money each year for a longer period of time. Most of the premiums would pay for the insurance component, with any extra money going towards the investment component.</li> <li>These payments would likely last through most of the candidate&rsquo;s working career.</li> <li>By the time they reach retirement, a nice nest egg would be set up in the investment component, which has compounded tax-free. Like Candidate #1, they can then use these investments to offset the cost of the insurance, as well as to supplement their retirement income in the form of policy loans.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>WHY CHOOSE WHOLE LIFE?</strong></h3> <p class="MsoNormal">With less flexibility around the choice of investments and annual premium amounts, <strong>Whole Life is ideal for somebody who knows they can pay and maintain a set premium amount for many years</strong>. Somebody who cites themselves as lacking discipline to invest might choose WL because of this inflexibility (thus using it as a forced savings plan of sorts).</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #1:</strong></p> <p class="MsoNormal">Although there is a good argument for UL even in this case, <strong>one of the most common uses for WL is when parents </strong><a target="_blank" href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it"><strong>purchase it for their children</strong></a><strong>.</strong></p> <ul> <li>Mom and Dad purchase a WL policy on the life of their child while still a baby, and the cost of insurance is teensy.</li> <li>The moderate premiums (eg: $30-$50/month) are easy to swallow, and maintained for the next 20-30 years.</li> <li>When the child is old enough, the policy becomes theirs. Ideally by this point there are few if any premiums for the child to carry on paying, as the annual dividends can more than cover off the insurance premiums, with the remainder continuing to be invested and growing tax-free.</li> <li>The child can use the investment component as a retirement nest egg, for a major purchase, or simply keep it all as paid-up (and ever-growing) life insurance.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #2:</strong></p> <p class="MsoNormal">Not dissimilar to Ideal Candidate #2 for UL, <strong>a young professional with a reliable long-standing disposable income and a need for basic life insurance</strong> may choose WL as their insurance investment. Because of the stricter premium structure, <strong>somebody without much discipline looking for a forced savings plan might see WL as being a good idea.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><em><strong>Truly though, Whole Life is an antiquated and confusing type of permanent life insurance, and there is little reason to choose it over Universal Life. With an easy to understand structure and more flexibility all around, Universal Life is generally the permanent life insurance product of choice.</strong></em></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/universal-life-insurance-and-whole-life-insurance-a-comparison">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-and-why-to-buy-life-insurance">How (and Why) to Buy Life Insurance</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-life-insurance-term-or-permanent">Choosing Life Insurance: Term or Permanent?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment">Should Life Insurance Be Purchased as an Investment?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-things-your-credit-report-does-not-include">7 Things Your Credit Report Does NOT Include</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-your-bad-credit-can-impact-your-kids">How Your Bad Credit Can Impact Your Kids</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance permanent insurance term life insurance universal life insurance whole life insurance Wed, 15 Apr 2009 05:26:35 +0000 Nora Dunn 3048 at http://www.wisebread.com How (and Why) to Buy Life Insurance http://www.wisebread.com/how-and-why-to-buy-life-insurance <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-and-why-to-buy-life-insurance" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/life insurance pic.JPG" alt="life insurance" title="life insurance" class="imagecache imagecache-250w" width="250" height="333" /></a> </div> </div> </div> <p class="MsoNormal">Buying Life Insurance seems to be one of those &ldquo;I&rsquo;ve finally grown up, I guess I need life insurance&rdquo; sorts of decisions you make. It often comes into play when you buy a house, get married, or have children.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">As it should.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">But getting life insurance simply because you think you might need it, without really understanding how much to get or the options you have is a mistake &ndash; one that could cost you now in overbearing and unnecessary premiums, or one that will cost you (or your loved ones) later, when you realize that there wasn&rsquo;t enough to cover your needs.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Here is a basic guide to get you started:</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h2>Term or Permanent?<span style=""><br /> </span></h2> <p class="MsoNormal">Think of Term Life Insurance as &ldquo;temporary&rdquo; insurance &ndash; cheap and cheerful. <b>It is good for a defined Term, the most common term being 10 years.</b> At the end of the term, it automatically renews, but at significantly higher rates. <i>If you were to instead cancel and apply for a new insurance policy at the end of your 10 year term, you could get it at much lower rates than if you renewed</i> &ndash; assuming nothing happened to you medically to affect your ability to qualify. Either way, Term insurance will stop renewing around the age of 65.</p> <p class="MsoNormal">Permanent Insurance (which takes the form of Whole Life and Universal Life), by contrast, is permanent. It stays with you (as long as the premiums keep getting paid) until you die, no matter how old you are. Some policies will pay out the insured amount if you reach the age of 100 (I guess they figure you deserve to have some fun with the insurance money yourself if you live that long). <b>Permanent Insurance is also much more expensive (at up to eight times the cost), for a few reasons including the addition of investment or dividend components to the policy</b>, along with the assumption of medical risk that the insurance company takes on board in providing a life-long quote.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h2>Reasons to Buy Term Insurance</h2> <p class="MsoNormal">Since Term Insurance is for temporary needs, <b>use it for amounts of money that would be needed now if you died, but that won&rsquo;t be issues later</b>. For example, your <strong>mortgage</strong> will eventually be paid off, and the kids will in due course grow up and their <strong>education</strong> will be paid for, and the need to provide <strong>income until retirement</strong> to a non-working (or lower income) spouse will be lessened. These are perfect examples of initially large needs for insurance that will deplete over time, making them ideal for Term coverage.</p> <p class="MsoNormal">In fact, you may need $500,000 of term insurance now to cover off your mortgage and anticipated educational needs for the kids, but in 10 years&rsquo; time when your policy expires, your mortgage will be smaller, and maybe your kids will be through college. <strong>You may still need some term insurance, but can get away with a smaller policy, saving money in the meantime.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h2>Reasons to Buy Permanent Insurance</h2> <p class="MsoNormal">Permanent Life Insurance (such as Whole Life or Universal Life), is for permanent needs. While this may seem simplistic, it is a fact that tends to escape many. Truth be told, permanent insurance needs are few and far between for many families. <b>It is ideally used to cover off things like anticipated <a target="_blank" href="http://www.wisebread.com/estate-planning-why-me">estate taxes</a> which might be crippling, or leaving a legacy for children or <a target="_blank" href="http://www.wisebread.com/charitable-giving-give-in-order-to-receive">charity</a></b>.</p> <p class="MsoNormal">There is also a forced savings investment component to permanent insurance that adds a tax-free benefit: After paying for a permanent insurance policy for a period of time, there will be a cash component to it that has grown and compounded tax-free. If, in retirement for example, you want access to this cash component, you can either make a withdrawal (or cancel the policy and get the cash), or you can borrow against this amount. <b>Withdrawing or canceling the policy will involve paying tax on the growth of your investments, which can be cumbersome. But loans are tax-free; so if you borrow against the policy, you can gain tax-free access to money that has grown tax-free. </b>You won&rsquo;t have to make loan payments, because the insurance company will accrue the interest owing to the policy, which will continue to grow over time (since you didn&rsquo;t actually make a withdrawal &ndash; you just borrowed against it), and when you die the loan will be paid back in full and any money left over is paid to your beneficiaries. Although there is a slight risk of the insurance company unexpectedly calling in this loan, you can decide if it is an acceptable risk.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h2>How Much Insurance to Buy</h2> <p class="MsoNormal">This is where things get complicated.</p> <ul> <li>What is your statement of current and projected assets and liabilities?</li> <li>What is your earning capacity in relation to your spouse&rsquo;s?</li> <li>What standard of living do you like to maintain?</li> <li>How many kids to you have, and what is your policy on paying for their college education?</li> <li>What is your current cash flow?</li> <li>What is your anticipated income over the life of your career?</li> </ul> <p class="MsoNormal">These, and many other questions need to be answered before you can determine the proper amount of insurance for yourself. Some experts will guide you to multiply your gross annual income by six, but I find this to be simplistic and callous for such a serious purchase.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h2>How to Buy Insurance</h2> <p class="MsoNormal">You can easily get online quotes from a variety of reputable sources, and you can even lodge some applications online, making buying insurance easy and time-efficient. BUT &ndash; a lot of undue risk lies with you; risk you won&rsquo;t be aware of until it&rsquo;s too late and you realize after that fact that you made ill and uneducated insurance decisions. You may not have properly understood the slight differences in jargon when comparing two apparently identical quotes from different companies. Or (as a lesser of the evils of ignorance), you may end up over-paying for a kind of insurance you don&rsquo;t need (or for too much insurance), costing you the ability to <a target="_blank" href="http://www.wisebread.com/six-steps-to-eliminating-your-debt-painlessly">pay off your debts</a> or invest more money.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Moral of the story: <b>don&rsquo;t try to buy insurance on your own</b>. It&rsquo;s not worth it. It will ultimately end up costing you more in time, money, and possibly the ultimate financial security of your family.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Instead, consider using the services of an insurance broker or <a target="_blank" href="http://www.wisebread.com/9-signs-you-need-to-fire-your-financial-planner">financial planner</a>. <b>Most brokers and planners will have access to bulk discounted rates from a variety of insurance companies </b>&ndash; rates that you may not be privy to if you purchase it directly. They can also shop across the market for the product and rate that is best for you and your circumstances, and <b>they understand how to equalize each insurance company&rsquo;s unique jargon</b>. Some insurance companies give preferential rates to males in their 40s (for example), but you would be hard-pressed to figure these idiosyncrasies out on your own.</p> <p class="MsoNormal">But more importantly, <b>a proper broker or financial planner will take the time to figure out exactly what type of insurance and what amount will be best for you</b>. They will determine the answers to all the questions posed above and more, and after talking with you and learning about your ideals and values, will recommend an insurance policy that is customized to your needs.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">I could go on for pages and pages about how to determine and calculate your Life Insurance needs, but it still would not suffice. And anybody who tells you otherwise is short-changing you on one side or the other: <b>you&rsquo;ll either end up short-changing your cash flow to pay for insurance you don&rsquo;t need, or you&rsquo;ll end up short-changing your beneficiaries by leaving them high and dry when they are most in need</b>.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Do not take the selection and purchase of Life Insurance lightly. Find an expert <em>who you trust</em> and let them help you. You will end up saving money in the end, believe me.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/how-and-why-to-buy-life-insurance">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/universal-life-insurance-and-whole-life-insurance-a-comparison">Universal Life Insurance and Whole Life Insurance: A Comparison</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/are-you-putting-off-these-9-adult-money-moves">Are You Putting Off These 9 Adult Money Moves?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">Did Your Parents Give You a Whole Life Insurance Policy? Here&#039;s What to Do With It.</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-critical-money-mistakes-people-make-in-their-40s">7 Critical Money Mistakes People Make in Their 40s</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-personal-finance-resolutions-anyone-can-master">8 Personal Finance Resolutions Anyone Can Master</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance financial planner insurance broker life insurance Term 10 term insurance universal life insurance whole life insurance Wed, 08 Apr 2009 06:19:00 +0000 Nora Dunn 3020 at http://www.wisebread.com Did Your Parents Give You a Whole Life Insurance Policy? Here's What to Do With It. http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/2102788536_fdede7072d_z.jpg" alt="family" title="family" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>For many of us 30-somethings (and some of us both younger and older), our parents took out whole life insurance policies for us when we were kids. When we became income-earners and were deemed responsible enough, a ceremonious transfer of papers occurred, where we were told gravely that this policy is to be kept paid up, as it will be worth a lot of money. Sometime.</p> <p>What is this insurance all about? Why will it be worth a lot of money? Should I just cancel it and <a href="http://www.wisebread.com/selling-your-life-insurance-policy-for-cold-hard-cash">take the cash</a>? Or is there something else I don&rsquo;t know?</p> <p>If you have any of these questions, read on. You may discover that your whole life insurance policy is worth much more than you thought. (See also: <a href="http://www.wisebread.com/is-getting-life-insurance-for-your-children-prudent-or-prudish">Is Getting Life Insurance for Your Children Prudent or Prudish?</a>)</p> <h3>What is Whole Life Insurance?</h3> <p>Whole Life is a type of <strong>permanent insurance</strong>. It combines a basic life insurance component with a cash (or dividend, or investment) component. Even though it is a permanent policy though, most are structured so that you only have to make premium payments for a temporary time (in the case of the policy your parents got you when you were still crawling, probably something like 20 or 30 years).</p> <p>Each year from the time the policy is born, the insurance company pays out <strong>dividends</strong>. And like any dividend, these dividends represent a share of the insurance company&rsquo;s profits. Those dividends are squared away into the cash component of the policy, and allowed to compound in growth by earning more dividends and interest income yet. <strong>The larger your cash value, the larger the annual dividends will be</strong>. So it stands to reason that as long as the policy&rsquo;s projected dividends pay out, there could be a lot of cash in there when you reach retirement age. Heck &ndash; even in your thirties, you could be receiving policy statements showing you thousands of dollars in the <strong>&ldquo;cash surrender value&rdquo;</strong>. By the time you reach retirement, it could be close to $100,000.</p> <p><em>(I must also note that in the 1980s, there were a series of policies sold by unscrupulous insurance agents who promised dividend payouts that were unrealistic. This sparked a whole life insurance scandal and a small fall-out in the industry. Today, whole life insurance policies are still very much viable products, as projections are more closely monitored so that policies are not sold with unrealistic expectations).</em></p> <h3>Why do premium payments stop?</h3> <p>Your policy is probably structured so that you won&rsquo;t have to pay premiums after a while. Maybe the premiums stopped before you even inherited the policy from your parents. But the life insurance part is still there, and the investments keep growing. How is this?</p> <p>The premiums are stopped under the <strong>&ldquo;premium offset&rdquo;</strong> option. Once the cash value is big enough, the dividends and interest income it earns each year is more than sufficient to cover off the life insurance premiums, with some left over to still be invested in the cash value. One the policy reaches this state of maturity, you can opt to offset your premium so you don&rsquo;t have to fork over your own cash any more. <em>This does, of course, make the cash value grow a little more slowly</em>.</p> <h3>Why did my parents get me a whole life insurance policy?</h3> <p>Your parents may have bought you this policy for a few reasons.</p> <ul> <li><strong>They are guaranteeing your insurability</strong>. If, during your upbringing, you contract an illness that affects your ability to get life insurance for the rest of your life, your parents will already have jumped the gun by getting you this policy. (Cash value aside, let&rsquo;s not forget that a whack of cash is paid out in the form of life insurance when you die).<br /> &nbsp;</li> <li>The cost of <strong>whole life insurance for a child is cheap, and never increases</strong>.<br /> &nbsp;</li> <li>The cash value is intended to be a <strong>nest egg for you</strong>.</li> </ul> <h3>I need cash now. Do I cancel the policy?</h3> <p>No! First of all, you parents could very well have you drawn and quartered if you cancel the policy before it reaches &ldquo;maturity&rdquo; &ndash; which in their eyes means a hefty cash value, probably projected to happen when you reach retirement.</p> <p>If you need cash now, there are a few ways to accomplish this while still keeping the policy alive. The best way is through doing a <strong>policy loan</strong>, which we&rsquo;ll describe shortly.</p> <h3>I really can&rsquo;t afford the premiums right now. Do I cancel the policy?</h3> <p>No! If you are sinking under the weight of still paying premiums, again you may be tempted to cancel the policy, with the promise of not only a reprise from monthly payments, but also a wad of cash being handed to you. Again, I urge you to consider other options, discussed below.</p> <h3>What happens when I cancel a whole life insurance policy?</h3> <p>Okay, <strong>here&rsquo;s why you don&rsquo;t cancel your policy</strong>:</p> <ul> <li>Your <strong>life insurance coverage stops</strong>. For good. You can&rsquo;t change your mind and get it back. Getting new insurance at your age will cost exponentially more &ndash; and that&rsquo;s if you are healthy and fit. If you have an illness that affects your insurability, you could be outright rejected.<br /> &nbsp;</li> <li>You are over the curve of payments. By the time your parents give you the policy, <strong>most of the hard work is done</strong>. All the policy really needs now is time, for the cash value to grow and compound &ndash; tax-free I might add. If you throw in the towel now, all your parents&rsquo; hard-earned payments towards your future are wasted.<br /> &nbsp;</li> <li>You&rsquo;ll get the cash surrender value paid out to you. This is the beautiful carrot, which dangles in front of you each time you receive a statement, and are hard-up on cash. But this <strong>cash value paid out to you is also fully taxable</strong>. If the insurance company doesn&rsquo;t withhold tax off the top (and even if they do), expect to end up paying extra when you file your taxes.</li> </ul> <h3>Okay, I won&rsquo;t cancel my policy. But can I make withdrawals from the cash part?</h3> <p>No! (Well, yes, but really &ndash; you shouldn&rsquo;t). For the same reason that you will get a tax bite from canceling your policy, <strong>making a direct withdrawal from the cash portion is costly in the form of tax</strong>. And since you are already earning an income through work, you will be taxed at your marginal rates, which could be high. Just&hellip;don&rsquo;t go there.</p> <h3>How do I stop paying premiums now?</h3> <p>If you are hard-up for cash and want to know your options, call the insurance company, asking about a <strong>&ldquo;premium holiday&rdquo; or &ldquo;premium offset&rdquo; option</strong>. They will run the numbers on your policy as it stands today, and if there is enough money in the cash value and annual dividend payments to pay the premiums for you, they can arrange to do so.</p> <p>It is ideal to ensure that your cash value is large enough that it won&rsquo;t erode with ongoing premium payments, since that would mean eventually you will have to start paying premiums again, and that the compound growth of the cash value will be severely affected. It is quite counterproductive, but possible; depending on your situation, you will know if it is necessary.</p> <h3>How do I access the cash part without the tax bite or canceling the policy?</h3> <p>Ah, here is the fun part. You need money, but your parents will kill you if you cancel the policy. Or let&rsquo;s say you&rsquo;ve been a good child, paid all the premiums, let the policy grow to maturity, and now you are ready to do something with it. If you play your cards right, <strong>you can access the cash value &ndash; which has grown and compounded tax-free &ndash; without paying a dime in tax when you pull it out</strong>. Let&rsquo;s repeat: You just invested money tax free, and pulled it out&hellip;tax free. This is why some whole life (or permanent) policies are worth their weight in gold.</p> <p>Your ticket to such a loophole comes in the form of a <strong>&ldquo;policy loan&rdquo;</strong>. You aren&rsquo;t actually making a withdrawal from the policy; instead <strong>you are borrowing against the cash value</strong>. The insurance company will usually arrange this for you, and at favorable interest rates too.</p> <p>Let&rsquo;s say you have a cash surrender value of $30,000. In order for the loan to work, they cannot lend you the entire amount though. They will lend you an amount large enough so there is enough money left in the policy such that the cash plus annual dividends can cover your loan payments (or at least the interest owing on the loan, if you can get an interest-only payment option) over the projected time of the loan. In some cases, the bank will simply accrue the interest payments to the loan amount itself, using your policy as collateral; allowing your cash value to continue to grow as if nothing happened. To do this though, the insurance company needs to be conservative enough to allow for interest rate increases so your policy doesn&rsquo;t lapse over the term of the loan if prime rate goes up.</p> <p>So they will lend you, say, $20,000 (for argument&rsquo;s sake. <em>Factors that go into calculation include your age, the size and terms of the policy, and the performance of the cash value to date.</em> The older you are, the more money you will get as a percentage of the total cash value).</p> <p><strong>When you die, the insurance company (or bank) gets the money owed to them from the loan (plus interest, if it wasn&rsquo;t paid with annual dividends), and the rest of the cash plus the insurance component is paid to your beneficiaries.</strong></p> <p>This policy loan strategy works well as a way to <strong>supplement retirement income in a tax-free fashion</strong>. Instead of taking out a lump sum loan, you can opt for annual loans to supplement your retirement income. Or you can pull out the lump sum and invest it elsewhere, if your income and tax situation allows for it. If you can hang in there until retirement, this whole life policy that your parents bought can be a great investment for you; a big help and an alternate nest egg.</p> <p><em>Note of caution: Although the policy loan strategy is a viable one, it is not without risks. The bank could call the loan at any time &ndash; a risk with pretty much any loan. If such an event could financially cripple you, then you may wish to reconsider the amount of the loan, or whether it is worthwhile to take the loan out at all. Although it is a remote risk, it is worth mentioning.</em></p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <p>&nbsp;</p> <div align="center"><a href="//www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fdid-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FDid%20Your%20Parents%20Give%20You%20a%20Whole%20Life%20Insurance%20Policy-%20Heres%20What%20to%20Do%20With%20It..jpg&amp;description=Did%20Your%20Parents%20Give%20You%20a%20Whole%20Life%20Insurance%20Policy%3F%20Heres%20What%20to%20Do%20With%20It." data-pin-do="buttonPin" data-pin-config="above" data-pin-color="red" data-pin-height="28"><img src="//assets.pinterest.com/images/pidgets/pinit_fg_en_rect_red_28.png" alt="" /></a> </p> <!-- Please call pinit.js only once per page --><!-- Please call pinit.js only once per page --><script type="text/javascript" async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <div align="center">&nbsp;</div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/Did%20Your%20Parents%20Give%20You%20a%20Whole%20Life%20Insurance%20Policy-%20Heres%20What%20to%20Do%20With%20It..jpg" alt="Did Your Parents Give You a Whole Life Insurance Policy? Heres What to Do With It." width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment">Should Life Insurance Be Purchased as an Investment?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio">One Simple Trick to Get the Best Tax Benefit From Your Retirement Portfolio</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-carried-interest-may-affect-our-taxes">How &quot;Carried Interest&quot; May Affect Our Taxes</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-and-why-to-buy-life-insurance">How (and Why) to Buy Life Insurance</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Taxes cash value insurance for children life insurance premium holiday premium offset whole life insurance Fri, 27 Mar 2009 00:41:53 +0000 Nora Dunn 2981 at http://www.wisebread.com