Understanding Permanent Life Insurance

Questions & Answers on Life Insurance The Life Insurance Toolbook Presents: Q: What Are the Basic Types of Life Insurance? Part 2 Permanent Life Insurance Created by the author of Questions & Answers on Life Insurance , The Life Insurance Toolbook, Tony Steuer, CLU, LA .

It’s your money – monitor it, understand it, and know what you are getting for it.
All life insurance policies promise to pay an agreed sum of money to a beneficiary (or beneficiaries) upon the death of the insured person, as long as the policy is in-force (i.e. premiums were paid on time). But, all life insurance policies are not the same.

Consumers who take a little time to research life insurance will increase their understanding and be better equipped to purchase a policy that meets their needs and their budget.
A little research can make a big difference.

The policy you choose should meet your unique needs.
To determine how much life insurance you need and which type of policy best serves your needs, answer the following 6 questions:
1. The amount of yearly income that would need to be replaced if the insured died;
This is typically between 60% to 80% of the insured person’s yearly income. Consider any lifestyle changes, and include current expenses such as mortgage/rent, groceries, clothing, utility bills, travel, transportation, childcare, etc.

Your unique needs, continued:
2. The length of time that this income would need to be replaced;
Multiply the length of time with the amount of annual income needed from No. 1.
3. Administrator and tax expenses;
This can be approximately six months or 50% of the higher wage earner’s annual salary, and helps to pay for final expenses such as advisor fees, filing estate taxes, etc.

4. Funeral expenses;
The average cost is $10,000.
5. College expenses for surviving children;
The average costs (2009-2010)
*For one year of public: $60,850,
*For one year of private: $182,540.
6. Mortgages, loans, and debts;
It may make sense to pay off these debts, depending upon the survivor’s income.

Now, consider the assets and other income available to help with expenses.
As your other assets grow, such as savings and retirement plans, your need for life insurance decreases.
For tools to help you plan, visit
www.lifeinsurancetoolbook.com

Term Insurance: The Basics
Term insurance is purchased for a specific number of years.
The premiums are lower than those for permanent insurance . (Some companies are now offering guaranteed level premiums for extended periods, from 10 to 30 years.)
The policy expires without any value at the end of the term.
Most term policies cannot be renewed after age 75.
It is temporary coverage intended to meet a short-term need.

Permanent Insurance: The Basics
Permanent insurance provides coverage for the rest of your life - Coverage may stay in place to age 95 or greater.
The benefits are different for each type of policy, however every policy has has a face amount that will be paid upon the death of the insured, or upon the policy’s maturity date.
The benefits range with each policy, and can help to pay estate taxes, pay off a mortgage, pay for college expenses for surviving children, etc.

Premium payments usually (but not always) remain the same each year.
The premiums are usually much higher than those for term insurance.
Premiums can stay level, and made more affordable when purchased early .
Premiums can be discontinued later, under certain circumstances.

The policy develops a cash value that is tax deferred . (Also called the cash surrender value.)
A long-term commitment is needed from the buyer, since little or no cash value accumulates in the first few years (in most cases.)
Access to the cash value is given through loans and withdrawals. Taking cash out will affect your policy, so understand the fees and interest that will be charged .

Premiums are higher than they would be for a term insurance policy that has equal benefits, but will add up to less than the cumulative amount you would pay for renewing a term policy into an advanced age.
You can save on your premiums if you pay yearly or semi-annually. See the APR calculator at: www. lifeinsurancetoolbook .com .

Permanent + Term
Combining the Two
Some companies offer a combination of term and permanent insurance using a r i der , or by giving you the ability to change types of insurance as time passes.

How Expenses Are Deducted
Expense charges (EXP)
are deducted from your premiums. These charges are affected by how well, or efficient, the company operates. These include underwriting expenses, overhead, and commissions. Find out what these are for the policy you are considering, and compare companies.
Mortality charges (COI - cost of insurance) are deducted from your account balance. These charges are based on actuarial assumptions and these are adjusted periodically. Ask what to expect for the policy you are considering, and compare companies.

How Expenses Are Deducted
Loans or withdrawals can be taken out after you have accumulated cash value.
A loan or withdrawal can affect the long-term performance of your policy.
Borrowing from a policy can lead to its eventual lapse if the loan is not repaid.
Fees and interest will usually be applied too, so make sure you understand the total affect this will have on your policy.
See Questions 106 – 109 in the book.

+ Adding Value - Deducting Expenses
“ Water goes in” -- You pay premiums into your account, and the company adds interest (according to your policy’s rate).
The insurance company turns on the spigot, deducting the COI and EXP monthly, leaving the remainder value .
Subtract the policy’s surrender fees and that is your surrender value .
If there is not enough “water” left in the barrel, the policy will end (or lapse).

Types of Permanent Insurance
Below are some common types of permanent life insurance. Keep in mind, there are many variations of each type .
Endowment
Whole Life (also called Ordinary and Straight)
Limited Pay
Adjustable Life
Adaptable Life
Universal Life
Joint (or Survivorship) Life
Variable Life
Variable Universal Life
Equity Indexed Universal Life

Is It Time To Review Your Policy?
As time passes and your life changes, review your policy and make sure it is still working for you.

Answers to Your Questions
For more answers to
your questions about
life insurance:
www.lifeinsurancetoolbook.com
For training, speaking,
and consulting services, contact
Tony Steuer at:
[email_address]

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Understanding Permanent Life Insurance

by Tony Steuer on Feb 16, 2011

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Understanding Permanent Life Insurance — Presentation Transcript