Whole Life Insurance and the Waiver of Premium Rider

Whole life insurance provides financial security for you and your family. Once you purchase a policy, you don’t want to lose the coverage. But if you become injured and are unable to work, and as a result cannot pay your premiums, your whole life insurance policy may be put in jeopardy. Adding a waiver of premium rider to your policy may safeguard your life insurance coverage.

A rider is an attachment to your insurance policy that changes the terms or coverage of your policy. There are many different types of riders, which can be added to your policy for an additional fee. The waiver of premium rider stipulates that while the policyholder is disabled, according to the rider or policy’s definition of disabled, the insurance company shall give up the right to collect premiums.

Understand the Insurer’s Definition of Disabled

A key to understanding the waiver of premium rider is understanding your insurer’s definition of disabled. Insurance companies typically use two different definitions:

1. Established Profession Disability. You are disabled if you cannot perform the duties required to accomplish tasks in your established profession
2. Any Profession Disability. You are disabled if you cannot perform the duties of any profession

A rider that defines disability as the inability to perform the duties of your established profession has its advantages. For example, if you are a trained mechanic and suffer back injuries that prevent you from participating in the physical labor of your job, you are disabled under the “established profession” definition. You may be able to find work that is not as physically demanding, but it’s not the occupation in which you were educated and trained–nor is it the occupation you were employed in when the injury occurred.

You should always carefully read the terms of any life insurance policy you are considering, and you should also be sure to check which disability definition your insurer uses for the waiver of premium rider.

How the Rider Works

In order for this rider to go into effect, you must be disabled for a consecutive number of months (outlined within the terms of the rider). Some insurers set this minimum at three or four months, but most set it at six months.

Once you meet the minimum time length, your life insurance company waives your premium as long as you are disabled–whether it’s a year, several years, or the rest of your life. Typically, any payments made during the waiting period are refunded.

If you do overcome your disability and are able to return to the job in which you are educated and trained, you are typically required to begin paying your premiums again. However, you should not be responsible for any past payments.

If you are interested in including the waiver of premium rider in your new whole life insurance policy, you can obtain life insurance information, advice, and competing quotes from a qualified life insurance agent.

How to Use the Rating Agencies as a Guide When Buying Life Insurance

Buying a life insurance policy is a long-term commitment, for both you and the insurance company that issues your policy.

On your part, you agree to pay your premiums for the duration of the policy, however long that may be. On its part, the insurance company agrees to pay any eligible claims during that time period.

Both parties sign a contract consenting to uphold their side of the agreement, most of which extend for many years.

Check the Insurance Carrier’s Financial Stability

 

As a client purchasing a significant product for you and your family, you should spend a good deal of time reviewing the financial stability of any insurance company before trusting or committing money to them.

Insurance is under the jurisdiction of each individual state, not the federal government, and often rules and regulations vary from state to state. While some states have funds set aside for companies that encounter financial difficulties, keep in mind that unstable organizations may not honor their commitments to clients who file claims, even if the clients have been paying premiums for several years.

Size Does Not Always Matter

Do not simply assume that any large or well-known company is financially stable. There are some highly dependable small insurance companies who are known to pay their claims in a timely and honest manner.

Rating Agencies

To help guide your decision about which company to use, check the ratings assigned by five independent agencies:

• A.M. Best
• Fitch
• Moody’s
• Standard and Poor’s
• TheStreet.com.

These five organizations review numerous companies’ claim-paying histories and abilities. They then make a judgment, based on their own standards, and assign each carrier a rating. The ratings are in the form grading letters (A, B, C, D, F).

Not only does each agency have its own way of arriving at a rating, but the value of the letter ratings differ from one organization to another. An “A” may be the highest rating from one agency, but another agency may use “AA” or “AAA” as their highest level ratings.

Comparing Companies

To best interpret each rating agency’s grades, examine each grade and its accompanying description. For example, “A” and “AAA” may both be described as “excellent” by separate rating agencies. If your insurance company’s grades meet that description at all five agencies, it is likely a dependable choice.

Remember, these grades are not ironclad guarantees. They are based only on what the agency knows at the time the ratings are assigned. Companies do get upgraded and downgraded over time.

Go Online To Compare Life Insurance Quotes

To shop around for the best life insurance policy that can effectively protect you and your family, check online and compare quotes from multiple insurance companies. Make sure you get the most appropriate and affordable policy for your needs.

Whole Life or Term Life Insurance? Considering the Benefits of Both

There are two basic differences between term life insurance and whole life insurance. Termlife insurance is pure life insurance coverage, with premiums paid in exchange for death benefits over a specified period of time or term. When making life insurance comparisons, this is the most affordable form of insurance.

Whole life insurance, on the other hand, combines a policy with an investment component. For that reason, whole life insurance is also known as permanent or cash-value insurance. The investments can include, but are not limited to CDs and Treasury bills.

Whole life premiums tend to be expensive because you pay for insurance coverage, as well as the investment portion of the policy. With the excess premiums (the funds that exceed the cost of life insurance) the insurance company establishes an investment known as an accumulation or cash value account. A whole life insurance policy builds value that can be borrowed against; however, any outstanding loans are deducted from the money that beneficiaries receive upon the insured’s death.

Whole Life Insurance As an Investment: Pros and Cons

Because of the investment component, many people use permanent life insurance as an investment vehicle for retirement planning. There are benefits to this type of financial plan–mainly in the tax treatment of the cash value account. The funds that accumulate in the account grow tax deferred, so that capital gains and income taxes are postponed till a later date.

However, due to the higher premiums associated with whole life insurance policies, debate swirls over whether it’s better to buy term life insurance and invest the funds saved on what a whole life policy would have cost. Money gurus often frown on whole life policies and say it’s better to purchase affordable life insurance while you are young and premiums are inexpensive, and invest the difference on your own.

Factors to Consider: Whole Life or Term Life Insurance

1. How much insurance do you need, and can you afford the higher premiums? Determine the amount of life insurance coverage you need, then compare premium costs between term and whole life policies. Buy the policy that most closely meets your needs and that you can afford
2. What are your state and federal tax brackets? Examine your tax brackets–the benefits of the deferral on the accumulation account are only as much as the amount of taxes deferred
3. Can you still buy affordable term life insurance as you age? As you age, you are categorized differently by insurance underwriters and pay higher premiums. Compare the costs of a guaranteed term life policy versus the cost of whole life

If you have a higher tax bracket and have a long time to wait until retirement, a whole life insurance policy may be a good bet for you. Consider your choices carefully when shopping for an affordable life insurance policy.

Even Your Business May Need Life Insurance

You know you need life insurance to provide your family with financial security, but did you know that you might need life insurance for the financial security of your business?

Why Small Businesses Should Consider Life Insurance

Two or three individuals jointly own many businesses–particularly small, family run businesses. If one of the owners should pass away, the heirs may either be unprepared or unwilling to take over the responsibilities of running their share of the company.

It’s also possible that most of an owner’s net worth is connected to the company. In such a situation, even if the heirs want to keep their share of the business, they may be forced to sell the shares to settle estate taxes or to divide the inheritance among several heirs.

Another possibility to consider–when one business owner passes away, the remaining owners may be faced with the less than ideal prospect of having to share control of the business with new owners.

Buy-Sell Agreements

A buy-sell agreement can provide a solution to these possibilities. An agreement is reached between all of the owners, which stipulates that should any one of them die, the remaining owner or owners have the first right to purchase the others’ shares at a preset price.

Fund the Buy-Sell Agreement with Whole Life Insurance

In order to have the funds to do this, whole life insurance policies might be purchased on the life of each owner. The other owners are named as beneficiaries.

When one owner dies, the other partners collect the policy proceeds. The insurance benefit is then used to buy the heirs’ share of the business. The heirs get their inheritance and the other owners get to keep control of the small business.

Whole Life Is the Best Way to Fund an Agreement

Because it is not known how long any one of the owners may stay with the business, you should consider a whole life policy, which is meant to provide insurance coverage for a lifetime. A term policy may be the most affordable insurance choice now, but if the term expires and the owners are still active in the business, new policies that are likely to have higher rates would then have to be purchased.

Key Person Insurance

Small businesses are also likely to have one or two individuals who are the driving force behind the company’s success. Should that key individual die, life insurance on that person can provide the funds needed to keep the business running until a replacement is found.

Just as with a buy-sell agreement, a whole life policy might be best to ensure that the business always has the funds needed to sustain it. A term policy, unlike a whole life policy, may expire before the needs of the business are met.

Going Online to Get Whole Life Insurance

If you feel your business is vulnerable to either of these situations, speak with a knowledgeable agent. You can get competing whole life insurance quotes and find the best life insurance policy that meets your needs.

What is Whole Life Insurance & How Does it Work?

whole life insurance is a type of insurance that remains in place for the lifetime of the insured individual. It does not expire, never needs to be renewed, and cannot be revoked. It features a level premium, which provides both cash value and a death benefit as long as the policy remains in force.

Another important feature of whole life insurance, which term insurancelacks, is cash value. Each time you pay your premium a portion of the proceeds are used to provide you with life insurance coverage; however, the rest of your premium payment is set aside and allowed to accumulate in what is called cash value.

The cash value can remain in your policy, where it continues to grow at a guaranteed minimum interest rate. You can also take a loan against the cash value, or it can be returned to you if you must surrender your policy. But if a loan against cash value is outstanding when the insured dies, the amount of the loan is deducted from the death benefit.

When the cash value grows to a certain level, your policy may be considered “paid up” because you can use the cash value to make your premiums payments. Your whole life insurance is also considered paid up when the cash value equals the policy’s face value. Once your policy is paid up, you no longer have to make premium payments and you still maintain life insurance coverage.

Whole Life Insurance May Pay Dividends

Dividends are another benefit of whole life insurance. If your life insurance company has higher returns than anticipated or lower expenses, a portion of this money is returned to policyholders. If your policy is eligible for dividends, you can use them to purchase additional coverage, pay a portion of your premiums, or you can receive the dividends as a cash payment.

Whole Life Insurance Comes With Guarantees

Once your policy is issued, whole life insurance premiums remain level. They should not increase as you get older or if you develop medical conditions–no matter how serious.

The cash value of your policy is also guaranteed. Your policy states how much your cash value may increase over time, as well as the minimum interest that it may earn each year.

Finally, your death benefit is guaranteed to be the face value of the policy, no matter how long you live. The only exception is that the guaranteed death benefit is reduced if there are any outstanding cash value loans.

How Whole Life Differs from Other Types of Permanent Insurance

Whole life insurance is one of many types of permanent life insurance, including universal life, variable life, and variable universal life. All permanent life insurance policies share a common feature: As long as you pay your premiums your heirs are guaranteed to receive a death benefit.

Other forms of permanent life insurance may give you greater flexibility in premium payments and death benefits; however, other types of permanent insurance do not provide the assurances of a set premium, guaranteed death benefit, and guaranteed cash value.

The following are other types of permanent insurance and their features:

• Universal Life: Universal life insurance, unlike whole life, allows a range of premium payments. There is a minimum premium that must be paid, as well as a maximum allowed amount. The death benefit of a whole life policy never varies, while the death benefit of a universal life policy can decrease, or in some circumstances, increase. Universal life insurance also provides a choice of two death benefits: face value, or face value plus the accumulated cash value
• Variable Life Insurance: The difference between variable life and whole life is that variable life allows you to choose how your cash value is invested. Choices include fixed-income investments, stocks, and mutual funds. Death benefits and cash value are linked to the performance of these investments, so you bear the investment risk of the death benefit and cash value. A minimum cash value is never guaranteed, and although there is a minimum death benefit, you must pay extra premiums to fund it
• Variable Universal Life Insurance: This is the most flexible kind of permanent insurance, but it comes with the most risk. It allows you to vary your premium payments and select how you invest your premiums and cash value. Adding to its flexibility is the choice of two types of death benefits: a fixed death benefit and a variable death benefit. The variable death benefit is equal to the cash value at time of death plus face value (the death benefit stated in the policy)

Whole Life Insurance Is for Almost Anyone

A whole life policy can help provide peace of mind for you and your loved ones. While many may think whole life insurance is for parents with young children, life insurance can be useful at any age–whether you’re married or single, have children, earn a living, stay home, or even own a small business.

Replace Lost Income

A whole life insurance policy can provide beneficiaries with the cash they need to replace the income of the family breadwinner and pay off outstanding debts. While the need for coverage might be greatest when children are young, before a family has had time to accumulate savings, education expenses for children can continue far longer than you anticipate.

You should also account for the value of a stay at home parent. While caretaking parents might not earn an income, think about how costly it would be to hire someone, such as a full time nanny or housekeeper, to take over those responsibilities.

Lastly, don’t think life insurance isn’t for you if you’re single. You might want to have a whole life policy if you support your parents or other family members.

Paying Estate Taxes

You worked hard all your life, but your heirs may be faced with the prospect of having a substantial amount of their inheritance diminished by estate taxes. One solution is to have a whole life policy, which can provide cash proceeds to pay taxes and other death expenses, thereby leaving your heirs’ inheritance intact.

Leaving a Legacy

Your children may be grown, but the proceeds of a whole life insurance policy can help them, your grandchildren, or other family members get a head start in life. You might also want to leave behind enough money to help a family member with special needs. Alternately, if you have supported a favorite charity or your alma mater for many years, bequeathing the proceeds of a whole life policy can provide a lasting legacy and assist those who are less fortunate.

Small Businesses Can Also Benefit from Whole Life Insurance

Frequently small businesses depend on one or two “key” people. If a key person should suddenly die, the business might suffer greatly until a suitable replacement is found. Key person insurance, funded by a whole life policy, can be used to provide the money needed to keep a business going while a search is conducted.

Many small businesses are owned by two or three individuals. Should one business partner pass away, the others may have to share control of the business with the deceased owner’s heirs, who may not want to be in the business. A buy-sell agreement, funded by a whole life insurance policy may solve that problem.

Whole Life Insurance for Peace of Mind

To find out how to secure your family’s financial future with whole life insurance, compare whole life insurance rates from a variety of life insurance companies. Then select the policy that best suits your needs.

Whole life insurance is a type of insurance that remains in place for the lifetime of the insured individual. It does not expire, never needs to be renewed, and cannot be revoked. It features a level premium, which provides both cash value and a death benefit as long as the policy remains in force.

Joint Life and Survivorship Life Insurance Policies May Be the Best Bet for Couples and Business Associates

Joint and survivor term and whole life insurance policies are excellent estate-planning tools. These insurance policies typically cover the lives of two people–most often a married couple or business partners.

A well-structured joint or survivor life insurance policy can protect your net worth for your heirs, or guarantee payment of debt for business partners. Additionally, these insurance policies are usually less expensive than having two or more individual life insurance policies.

Joint Life Insurance Basics

In a joint, or first-to-die term or whole life insurance policy, coverage usually includes spouses or two or more business partners. This type of insurance policy pays the benefit when the first person dies, providing the surviving policyholder with funds to pay the mortgage, care for children, or to pay any outstanding business loans. Comparing insurance quotes for joint life insurance policies is as easy as following the link and entering your zip code.

Survivorship Life Insurance Basics

In a survivorship life insurance policy, benefits are not paid until the the survivor, or second-to-die, be it a spouse or business associate, passes away.

This type of life insurance policy often works best for couples with sizable assets. Survivorship insurance can ensure that the largest part of an estate is left to heirs by helping to pay for estate taxes, or to pay off business debt.

Advantages and Disadvantages of Joint and Survivorship Life Insurance Policies

Joint and survivor policies have several advantages:

• A joint or survivor term or whole life insurance policy typically has a lower premium than two separate policies
• Underwriting requirements are usually less stringent, especially if one party has a record of good health. This may make it easier to insure a spouse or business associate who might have poor health
• Joint life or survivor life insurance can be written as a term policy or as a whole life policy, the latter builds cash value like any other whole life policy

Although joint and survivor policies have several beneficial qualities, these life insurance policies also have a few drawbacks:

• Once written, joint and survivor life insurance policies are not very flexible. Premiums and the face value of the policy typically can’t be changed
• Oftentimes, the younger person in the policy pays more than he or she would for an individual life insurance policy because premiums are calculated on the average age of both insured parties

Which Policy Is Best for You?

Financial planners often recommend a joint life insurance policy in business settings. These policies can be cheaper than two separate policies. Also, should the principal in the business pass away, the partner or associate is assured funds to continue operating the business.

For estate planning purposes, if the funds from the estate aren’t needed immediately by the heirs, a survivorship policy may be a sound choice.

To compare insurance quotes from a wide range of insurance companies and find the policy that works best for your needs, simply follow the highlighted link and enter your zip code.

What to Do with a Lapsed Whole Life Insurance Policy

Sometimes policyholders of whole life insurance are forced to make hard financial decisions when it comes to making premium payments on their policies. In hard financial times, you might be forced to choose between a premium payment or groceries.

Others stop paying premiums because they no longer need the insurance. In cases where you stop making payments on a life insurance policy, the policy lapses.

Whatever your reason is for allowing whole life insurance to lapse, the policy may still hold value for you.

Lapsed Whole Life Insurance Policy Options

Here are some options to consider if your whole life insurance policy lapses:

• Make a late payment: In most cases, you have a 30 or 31 day grace period to make up for a missed payment, so even if you are late, you can keep the policy in force by catching up. According to the American Council of Life Insurers (ACLI), if a policyholder dies within the grace period, beneficiaries still receive the benefits left after the overdue payment is deducted. But if the insured person dies after the grace period, beneficiaries do not receive the death benefit.
• Reinstate the lapsed policy: ACLI says that most policies can be reinstated within five years of lapsing, as long as past premiums are paid up and any loans you have against the policy have been satisfied. However, you may have to prove your insurability again. ACLI says the process of reinstatement is usually cheaper than purchasing a new policy.

Alternatives to Lapsing

Before giving up on your policy and walking away, ask your life insurance company about the “surrender value” of your policy. The longer you’ve held it, the higher the cash surrender value will be. In some cases there is a surrender charge that is deducted from the value. Still, it’s better to get something rather than nothing.

If you’ve built up enough cash value, you can ask your insurer to consider the policy “paid up” at a level supported by your cash value (which will be smaller than the original face value). You then no longer have to make premium payments and you’ll have a death benefit to pass on.

You can also sell your whole life insurance policy in a transaction known as a life settlement. Instead of allowing a policy to lapse or withdrawing the cash value, an increasing number of policyholders are selling their unwanted life insurance policies to investors. Investors take over the payments, are named the beneficiaries, and collect death benefits when policyholders pass away. Life settlements are typically conducted by institutional investors that want a higher return than can be found in the bond market.

What to Know About Selling Your Policy

If you are thinking about selling your whole life insurance policy as a life settlement, here are some things you should be aware of:

• This option is typically available to policyholders who are at least 65 and have life expectancies of 12 years or less.
• The amount you can get for your whole life insurance policy depends on your life expectancy, the face value of the policy, and how much investors will have to pay to keep the policy in force. Most policies acquired by investors are worth at least $250,000, although some are worth less.
• The broker’s commission comes out of your proceeds, so shop around to investigate rates.
• Although life insurance proceeds are tax-free to beneficiaries, you may have to pay taxes on any life settlement that exceeds the amount you’ve paid in premiums.
• How much is your policy worth to an investor? It varies, but a rule of thumb is that it is worth three times the amount you’d get from cashing in the policy.

Before allowing your whole life insurance policy to lapse, or deciding to sell it or cash it in, consider your initial reasons for obtaining the policy. Are your beneficiaries financially protected in the event of your death?

Also, keep in mind that insurance companies pay attention to your habits, so if you have a history of lapsing life insurance policies, you’ll generally have trouble buying a new policy in the future.

 

How to Examine a Whole Life Insurance Policy Illustration

When you’re shopping for a whole life insurance policy, your agent prepares what’s called a life insurance illustration.

A whole life insurance illustration is a complex table of numbers showing the hypothetical benefits for every year your policy is in force. The illustration is put together by the insurance company’s actuaries and attempts to predict the return on your investment. The illustration is based on a wide range of factors: How well the company’s investments may perform, the company’s projected expenses, and assumptions about your lifespan.

Although the whole life insurance illustration includes guaranteed minimum cash values and guaranteed death benefits, many of the projections in an illustration are speculative. For that reason, many consumer advocates, and even insurance company representatives, caution customers to take illustrations with a grain of salt.

Term Life Illustrations

Term insurance provides life insurance coverage for a set period of time. As a result, a term life insurance illustration is fairly simple. It shows current and maximum premiums for each year, total premiums paid up to that year, and each year’s death benefit. Term life insurance illustrations run about three pages.

Whole Life Insurance Illustrations

A whole life policy includes a death benefit as well as a savings component called cash value. Because whole life insurance is a more complicated life policy than term life, the illustration is more complex and runs up to 10 pages.

Aside from the guaranteed payouts listed, the projections in a whole life insurance illustration are not likely to be what you get in your policy — your cash value account may perform better, or not as well — as the illustration forecasts. The illustration is trying to project dozens of years into the future, which is difficult to accurately predict.

“Policy illustrations work well to educate clients on how policies work, but they are not an adequate tool for comparing the cost of policies from different insurers,” Glenn Stevick wrote recently for the National Association of Insurance and Financial Advisors Web site. “Illustrations do not create accurate projections of future performance for comparison purposes because of the differences in assumptions between insurers and the problems of estimating future performance of the company and the economy.”

James Hunt of the Consumer Federation of America and an expert on policy illustrations, says illustrations reflect the complexity of whole life insurance policies. Hunt says that if consumers are unable to spend the time to understand whole life insurance illustrations, term life insurance may be a better option for them.

What to Look for in a Whole Life Insurance Illustration

Whole life insurance illustrations can be misleading because many figures are not “guaranteed,” but they do have value. Here’s what to look for:

• Cash Value. You should examine the projected cash value in the first few years of the policy. Hunt says that if your premium payments in the first few years of a whole life insurance policy far exceed the cash surrender value — the money paid to the policyholder if the policy is voluntarily terminated before its maturity — then too much of your money might be going to commissions and other up-front costs. “If you paid $3,000 in premiums the first three years and the cash value of your policy is only $400 after three years, term insurance might be a better deal for you,” he said.
• Surrender Fees. Surrender charges are levied against a policyholder for termination of the insurance policy and withdrawal of funds within it. The amounts vary, so Hunt recommends you review them carefully.
• Guaranteed Cash Value. The guaranteed cash value of a whole life insurance policy is separate from the predictions of what the savings component, or cash value, of your investment may return. Many consider the guaranteed values to be an important tool for evaluating a whole life insurance policy, but Hunt says that’s a good way to become confused. “Keep your eye on the early surrender charges,” he said, “Agents are prone to say, ‘Don’t look at surrender charges,’ but this is because companies want enough time to recoup their high sales costs.”
• Premiums. How much does the whole life insurance policy cost you each month, and is it something you can afford?

Meaningless or Misleading Illustration Features

Here are elements of an illustration that many experts say aren’t helpful when making a decision on the best policy to purchase:

• Interest Adjusted Net Cost Indexes. These “box scores,” for a whole life insurance policy illustration, take into account the premiums paid and the time value of money. Some experts say they are useful in comparing different policy illustrations. However, Hunt believes they are meaningless.
• Dividend Rates. Dividend rates at the start of a whole life insurance policy may be termed “guaranteed,” but the rate is only guaranteed for three to 12 months.
• Large Variations in Premiums. A lower premium for the same death benefit as another policy with a higher cost may look like you’re getting more for your money. But that appearance may be based on unrealistic projections by the actuaries who put the illustration together. To get an accurate comparison between whole life policies, make sure you are comparing policies that have the same interest rate — and be sure the rate is realistic.

How to Find the Best Deal

Here are several steps you should take before purchasing a whole life insurance, universal life, or variable universal life policy based on a complex illustration:

1. Have a consultant review the policy’s illustration and evaluate it for you. For instance, theConsumer Federation of America’s “Rate of Return” service estimates the “true” investment returns on any cash value life insurance policy. The service compares the whole life insurance policy to lower-premium term insurance, combined with investing the premium savings to an alternative investment. The cost is $80 for the first illustration and $60 for each additional illustration (when submitted at the same time).
2. Have the policy “reverse engineered” by an expert who is able to review a company’s data, examine the assumptions made in the illustration, and recommend the best companies and products. These experts are usually paid a flat fee, and say they help reduce commissions by an amount much higher than the expert’s fee, which may save you money
3. Shop around for term life insurance. Term life insurers are highly competitive and online quotes allow you to easily compare prices.
4. Compare cash value policies to what’s available at TIAA-CREF, a Fortune 100 financial services company that is the leading retirement system for people who work in the academic, research, medical, and cultural fields. Although it charges some sales fees, TIAA-CREF sells commission-free life insurance, and according to Hunt, “virtually all your money stays in the policy the first year.”
5. When comparing whole life insurance illustrations, ask each company for projections based on an interest rate that is 2 points lower than current projections. The policy that looks best at the lowest rate is probably the more conservative company, and might make a better choice for you

Take Time for Reflection before Committing to Life Insurance

Before purchasing life insurance, here are several questions to ask to yourself or your agent:

• Am I prepared to hold on to the investment? Nearly half of all whole life insurance policies are surrendered after 10 years. How will my investment look after 10 years, and are there other investments that would have a better return in that timeframe?
• Does the classification used for the illustration accurately reflect who I am? For instance, does the illustration provide projections for a 40-year-old male nonsmoker?
• What happens if I miss a premium payment?
• What if I become disabled? Does my insurance company offer riders to cover me if I become disabled?

Remember, it’s best to use a whole life policy illustration as a way to understand how your investment may work in a hypothetical way. The numbers you see in your illustration are not necessarily something you can take to the bank.

Millionaires Are Making A Comeback

The Chicago-based Spectrem Group recently reported a 16% increase in the number of American millionaire households for 2009.

If you’re in the millionaires’ club, you’ve worked hard to achieve that status. Undoubtedly, you want your loved ones’ financial needs to be met in the event of your death. You may be building a family business and intending to transfer ownership to the next generation. Estate planning now can ensure that those goals are fulfilled.

Replacing Your Income

Investing in a life insurance policy can help your family maintain their standard of living by replacing your income. Consider the cost of maintaining your home, providing an education for your children, as well as other financial obligations.

Passing on the Business

According Advisor Today, “Only about 30% of family-owned businesses survive to the next generation, and only half of those that make it to the second generation, make it to the third generation.”

Family-business owners, including farmers who are sometimes millionaires, are often asset rich but cash poor. Life insurance can supply the needed cash to allow for the intended succession of your business. Otherwise, the IRS, lawyers, or co-owners may take over your business at the expense of your intended heirs.

Paying Estate Taxes

Life insurance may also help your heirs pay estate taxes. In 2001, Congress passed a law raising exemptions on estate taxes yearly, culminating with an estate tax hiatus in 2010. However, the tax exemption disappears in 2011, and is set to return at a whopping rate of 55% with an exemption level of slightly more than $1 million.

In addition to federal taxes, many states levy estate taxes as well. In fact, 18 states recently increased their estate taxes, according to Kiplinger Personal Finance.

Planning Is the Key

There are many strategies for passing on wealth to heirs. It’s wise to seek help from a tax professional, financial planner, a professional insurance agent, or other professional estate planner, to investigate the best strategies for preserving your estate.

Whether you want to replace income or pass on your estate to your heirs, the best life insurance policy for your needs can provide the funds to carry out your estate goals.

Return of Premium Life Insurance

Are you interested in a term life insurance policy but don’t like the idea of outliving the term length after paying premiums for years and years? Return of Premium life insurance gives you back all of the money you paid in, so long as you live beyond the expiration of its term. For example, if you purchase a 30-year policy and you pay premiums every year for 30 years, and you are still alive in year 31, you will will receive back all of your premiums, plus interest, tax-free.

Return of Premium Life Insurance vs. Traditional Term Insurance

The major difference between Return of Premium and regular term life insurance is, of course, that you get your money returned should you outlive your policy. Another difference is cost. Term life policies are the least expensive form of life insurance you can purchase. Return of Premium policies generally cost between 25% and 50% more than term life.

Return of Premium Life Insurance vs. Whole Life Insurance

The major difference between Return of Premium and whole life plans is what you get should you drop the plan before the expiration of its term. With whole life policies–the most expensive form of life insurance–if you drop your coverage before expiration, you get most of your premiums returned, minus administration fees. With a Return of Premium policy, if you drop the plan before its expiration, you will get only a small percentage of the money you have paid in. On average, what you get back ranges from 10% to 35%, depending on how long you have kept the coverage.

With all three policies, should you die while you are covered, your beneficiaries are paid the face value of your policy.

A Hypothetical Illustration

As an example, let’s say you are interested in a policy with a face value of $250,000 and a term of 30 years. And let’s say that the annual premium is $2,000 for a term policy, $2,600 for a Return of Premium policy (the cost of our theoretical term policy plus 30%), and $3,500 for a whole life policy. Should you die during years 1 through 30, term life would have been the best choice, followed by Return of Premium, and then whole life.

However, if you are alive in year 31, a term policy will have been the poorest choice financially: you will have paid $60,000 with nothing to show for it at the end. With a Return of Premium policy, you will have amassed $78,000 plus interest.

Compare Insurance Policies: Weigh Affordability and Coverage

There is no one “right” choice when buying life insurance; it all depends on your outlook, needs, and risk factors. Probably the best way to understand the options is to get quotes for each kind of policy. For each insurance company you speak with, get a quote for term life, whole life, and Return of Premium insurance policies that would result in the same benefit amount. Then create some “what if” scenarios with a calculator or spreadsheet to compare.

If you determine that Return of Premium is the best choice for you, request rate quotes from multiple carriers to be sure you are getting the best deal. Most companies can give you an estimate within 24 hours.

Lorraine Watkins

Lorraine Watkins is a freelance writer and a regular contributor to business and education websites. She holds an M.A. in English from California State University, East Bay.

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