Life Insurance Has Been The Most Reliable, Easy to Understand Financial Product From the Very Beginning
Life Insurance comes in many forms, including Term Life, Universal Life, Indexed Universal Life, Guaranteed Universal Life, and Whole Life. Getting life insurance doesn’t have to be a long, drawn out process. In fact, it is one of the easiest products to understand if one takes the time to gain the appropriate knowledge. Many things go through the mind of the person making the conscious decision to take care of the people they leave behind. With already so much to think about, one has to figure out why there are so many carriers, agencies, and agents out there.
Given the myriad of options, the difficulty in decision making is understandable. Unfortunately, a lot of people are woefully under or uninsured. Worse yet, a lot of people have policies that aren’t being funded correctly and could potentially end in ruin. It’s always good practice to shop your options, even if already insured, to make sure that you are getting the best bang for your buck, and more importantly, that you are adequately insured.
There are generally four things people want to know about life insurance, including: How much is it going to cost? What companies are available? How long does it take to get insured? What kind of insurance is out there and what is the best for me?
1. How Much Will It Cost?
How much it will cost is always the same answer; whatever fits into your budget. Life insurance is one of the few products with flexibility when it comes to price. The price is hinged upon how much you want. If you want $5000 in coverage, an amount that can cover a small funeral and cremation, it’s going to be much cheaper than $10,000 worth of coverage, which would buy you the traditional funeral and burial. The death benefit price depends on your state of residence, your health status, the carrier you choose, and the type of insurance you buy. It’s always smart to strike a balance with something you could reasonably afford and a solid product that does exactly what you want it to do.
2. What Companies Are Available?
The second item on this list, which companies are available, is a funny one. Obviously, I’m not here to promote my competitors, but the truth is, we don’t have competitors. We are not “captive” like Allstate or Farmers agents, captive being the term for an agency or agents that can only sell one insurance carrier’s products. We are independent, which means we can sell just about every carrier in existence. There are some carriers we don’t have and won’t sell.
I don’t sell AARP or Globe life, because I don’t think those are good deals for most people, which I’ll go into detail about in the section below titled “not all life insurance is created equal.” I don’t sell Farmers or State farm, because they require an agent to be captive, and they don’t have the best prices anyway. What we do have is an assortment of some of the best priced and best valued carriers on the market to meet any client’s needs, regardless of their health status, age, etc.
Not All Life Insurance is Created Equal
One might think that all life insurance is the same, but the truth is, there are a lot of scams out there. Many life insurance carriers have products that go up every 5 years in price, they end at a specific age, like 80, 85, 90, etc., and are overpriced to begin with. I wouldn’t be doing my job if I didn’t tell you about those companies and to steer clear of them. A couple of quick examples are AARP and Globe, who have term policies that they promote to unsuspecting seniors who think it’s a permanent plan, but they in fact end at age 80 and 85 respectively. Because they are the cheapest on the market, it is easy to miss the fine print. The point is, don’t buy the first thing that shows up on your doorstep or in your mailbox.
Also, you get what you pay for most of the time, and if it sounds to good to be true, it probably is. Don’t get me wrong. Term insurance isn’t all that bad. As a matter of fact, it is the perfect insurance plan to protect against temporary needs. If you have a mortgage and kids dependent on you, all hell would break loose if you were to die and didn’t leave any savings or a benefit to them. Term insurance is perfect for that scenario, as it would allow the beneficiaries to pay off the house and survive a few years until they get back on their feet. Term insurance, however, is not at all a good plan to be used for final expenses, because if the plan ends before you die, well, then it’s useless. One must use permanent life insurance to cover their burial.
3. How Long Does It Take to Get Insured?
Getting insured can take anywhere from a few days to a few months depending on the policy type and what the insurance carrier will require. Sometimes if a carrier can’t approve you based on the information provided, they order a physician’s statement, which is a statement from your primary care doctor about your overall health. Count on waiting an extra month or so if this happens. Generally, if you have a clean bill of health, you are approved within a couple of weeks. If it’s a final expense policy, it’s usually a few days to a couple of weeks. If you have a lot of health conditions, it generally takes a bit longer.
You Don’t Need The Cash Today
Most carriers allow a post-dated check in the length of 30 – 45 days before ever drafting your account. So, it’s Ok if you don’t have the money now, you can always do the application, see if you get approved, and wait the allotted time before your account is drafted for the payment.
30 Day Free Look Period.
From the day you receive your policy, after it’s been approved and everything, you generally have a 30 day money back guarantee free look period. So if you decide you don’t like what you bought, you can get a full refund during this time. Exceptions apply, so be sure to mention this to your insurance agent if it is a concern to see exactly what your free look period entails.
4. What Kind of Insurance Is Out There and Which One Should I Get?
The ones you should familiarize yourself with are Term life insurance and permanent life insurance. These are valuable plans and can be used in different situations. The one you should get is based on your own person life and goals.
Two Types of Life Insurance; Temporary and Permanent.
As you probably know, there’s temporary life insurance, known as term life, and there’s permanent life insurance. Term is very cheap, and it’s set up to provide your family with enough money to keep up their lifestyle if you pass away. The thinking is that 20 or so years from now, your financial obligations won’t be as large because your kids will be grown and independent, your spouse will have savings and social security, and the house will be paid off.
If you want to leave your kids a legacy, and you opt not to convert your term plan to whole life, hopefully you’ll die before you use your retirement savings. Now that’s just the thing, if you outlive your retirement, and many people do because of medical bills and what have you, you’ll be tasked with scrambling for life insurance at an age where it’s very hard to qualify for, and forget about leaving a legacy. Even a very small whole life policy or term conversion to whole life would have been great in this situation, because it would grow over time, it would be paid-up eventually, and would provide money for retirement, your funeral, and even some cash for beneficiaries to do with what they want.
What is Term Life Insurance and Who Should Buy It?
Term life insurance is just as it sounds. It will last for a term. There are different terms out there, such as 10, 15, 20, and 30 year term plans. Why does it last for a term? Because it is to cover a temporary financial need. Something that won’t last forever, like a mortgage, or kids that are still dependent on your income. Those are the main examples. People don’t want to pass away and leave their expensive mortgage or bills to their loved ones, because they might not be able to afford it, especially if the person taking out the insurance is the only one bringing in income or paying most of the bills.
Why not just buy whole life to protect this need? Because whole life is much more expensive than term life for the same coverage. Whole life insurance is more like a retirement account, like 401ks and IRAs, and the price should be compared to that market. I digress, one could easily get 500k worth of term coverage for under $100 a month, whereas whole life could be upwards of $1000 a month for that death benefit amount. Most people simply can’t afford that, if they are looking at it as an expense for a death benefit. However, if permanent life insurance is a part of an investment strategy where thousand dollar contributions are the norm, it suddenly doesn’t seem that high. Of course, this only applies if you are in the accumulation stage of life where you are saving for retirement.
The people that are best off buying term life are those who can qualify for it first of all. After a certain age, it’s hard to get term. Generally it’s for people that are in the stage of life where they are the breadwinners with a lot of bills and debt, who have kids, a mortgage, and all hell would break loose if they were to suddenly pass away. Term life is great for that situation.
It doesn’t have to be one plan vs the other. Many people opt for a life insurance plan they can afford for the cash value, retirement, and living benefits, and then make up the rest of the death benefit need with term life insurance.
Buy Term, Invest The Difference.
What this phrase means is that when you buy term, the savings you get from not buying a whole life insurance plan instead, can be used to invest in mutual funds or other low risk investments that can build up a nice nest egg over time. The only issue with this phrase is it completely ignores the fact that Whole life insurance is not just a payment like term. With whole life, you get a cash value account that grows tax deferred over time. This cash account should be considered when putting together a long term financial plan and comparing and contrasting the cheapest options. So maybe one should buy term, and invest the rest into permanent life insurance like whole life or Indexed Universal Life, especially if they want to leave a large legacy to their kids.
Permanent Life Insurance
Permanent life insurance has a cash account that grows tax deferred and allows for tax free withdrawals whenever you want. That cash value grows at a fairly decent rate, depending on the kind of permanent life insurance you have, but either way, beats cd and bond rates regularly. The cash value isn’t low risk, it’s no risk. It can only ever go up, never down. So in volatile years of the market where it goes up and down, you could lose a lot of value in your 401k, Roth IRA, or whatever other retirement plan you have, while your life insurance plan will continue growing in value.
This cash value can be used to pay for college without effecting efc for financial aid unlike 529 plans, save up for a tax free retirement, or do whatever you please with it. Not only that, if you ever become disabled, you don’t have to pay your premiums and the plan stays in effect. So in effect, the insurance company is making retirement contributions for you until you get well. What other retirement plan allows for that? Some plans even allow you to supplement your long term care needs as you get older. This is done by giving you a portion of the death benefit to pay for assisted living. Oh, and you get a death benefit that grows overtime, but you knew that already.
What is Whole Life Insurance And Who Should Buy It?
Whole life is just as it sounds. It’s insurance that will last your whole life. Whole life is the only plan that one should use to cover their funeral, but it also has uses outside of that. Generally, whole life insurance is more expensive than term, but if you buy the right amount, it’s just as affordable. It also comes with a cash savings account that builds up over time that can be used to take out a loan against tax free, or cash it out.
It is important to do something with the cash value before you pass, because it won’t be a part of the death benefit. (Make sure to talk about scenarios where one should leave a certain amount of cash value in the account in case of emergencies that cause late payments. ) I’ve crunched the numbers before, and the cash value that accumulates sort of makes up for the more expensive payment. The cash value will grow at a rate of around 5-6 percent, so it’s not really expensive, it’s more akin to an investment.
Participating whole life insurance plans pay out dividends.
So, what this means is, if the insurance companies financial holdings perform well (and they always have), they pay out dividends to their policy holders that can be used to lower their payments, buy paid up insurance, which means your payment won’t go up, or receive it as a check. The best use of these dividends in my opinion is to purchase paid-up additions, which can automatically be set up in your policy when we decide how to use dividends at the time of consultation. Paid up additions help grow your policy’s cash value as well as the death benefit. These dividends are not guaranteed and only available in participating whole life plans. So far, reputable insurance companies have paid out dividends every year.
Perfect for a risk free, guaranteed growth, tax free retirement
If taking out more than a final expense amount, it’s more expensive than term as far as the monthly payment goes, but with the cash value accumulation, over time, it might even be on par with or cheaper than term life if you manage the money correctly. It’s also great to fill out a retirement plan. It comes with great living benefits that can help pay for health issues as well as make contributions to your account and pay you an income in the event of disability.
Perfect to Cover Just a Burial
if it’s just covering a funeral, it is quite affordable. This is the insurance type that fits most seniors’ budgets and covers their final expense. Most of the time, it is bought in between $5000 and $25,000 amounts, which is more than enough to cover a cremation, traditional funeral, and possibly leave some money behind for beneficiaries.
Perfect For Those With a High Net Worth and Estate Taxes
If you have a big enough net worth that makes you qualify for the estate tax (over 5 mil), a whole life insurance plan can be used to pay off those taxes. It is much cheaper and more convenient than shelling out the cash from your estate. Make sure you put this life insurance in an irrevocable trust so that your death benefit doesn’t add to your taxable estate, even though the death benefit itself isn’t taxed.
Universal Life Insurance
Universal life insurance is another form of permanent life insurance, similar to whole life, but with some key differences. Universal life insurance is the solution to those that want a cheaper form of permanent life insurance and don’t care much about the cash account. The cash account in universal life insurance plans is used to make the payment cheaper. The way it works is that a portion is taken from the cash account each month to pay policy expenses, including the cost of insurance.
When you make a payment, the insurance company takes that and puts it in a low-risk investment account. Based on their prediction of gains, they set a fixed interest rate (usually 4%) for your policy’s cash value for growth. The premium you pay goes into the cash account of the policy and then then policy fees and expenses are taken out of it. The cost of insurance goes up every year because of aging, so it is important to pay close to the max premium if you want these policies to last beyond age 80 or so. Speaking of max premium, you have a choice to make minimum, target, or maximum payments. It’s advised to make the maximum payment so that you cash value can pay policy expenses.
If the cost of insurance supersedes cash value accumulation, your cash value will start depleting, and if it reaches zero, your policy will end. Many universal life insurance plans were set up in the 80’s when interest rates were historically high, and the insurance carriers set high interest rates on policies that they had to cut down as interest rates came down. Essentially, they made guarantees that the policy would last at a certain cash value growth, so some people made minimum payments or even maximum payments, and their policies ended because they didn’t have enough cash value to pay the cost of insurance. Insurance companies have learned their lesson from this and plans are more secure now.
Who should buy Universal Life Insurance?
Those that want more flexibility in their permanent life insurance plans. However, this is not the most secure plan if not funded to the max.
Guaranteed Universal Life Insurance to The Rescue.
Often referred to as permanent-term, Guaranteed universal life insurance is the same as regular universal life insurance, with the exception being that your policy is guaranteed for life, as long as you make your payment. The only caveat being that the cash account is completely unavailable. It all goes towards paying the cost of insurance, to guarantee the policy will stay in effect at level payments.
This is the perfect policy for those that just want the cheapest permanent life insurance, with no cares for a cash accumulating account. One thing to keep in mind with this kind of policy is the fact that you must make every payment on time or face a potential end to your policy. Most carriers give a grace period of about 30 days after a missed payment to keep the policy in force. If a payment isn’t made within that grace period, it could lapse.
A regular universal life insurance policy might have enough cash in the cash value account to pay for those late payments, but would then put policy in danger of not having enough cash to pay the cost of insurance and policy fees, which would lead to higher monthly payments. A whole life policy on the other hand is probably the most secure, as it would generally have a lot of cash accumulated and so the policy isn’t in much danger of lapsing due to missed payments. Also, in whole life policies, if you pay your premium, even if the cash value reaches zero, the policy will still be in effect. In GULs, you don’t have cash value. In ULs, if the cash value reaches zero, the policy ends.
It’s generally easy to make payments on time, but you have to plan for unforeseen life happenings, like being hospitalized for months, or losing mental facilities and having your finances taken over by family members that don’t know all of your payment arrangements. Most carriers offer automatic payments to sort of mitigate these issues, but there’s no telling what could happen if the aforementioned examples occur.
Who Should Buy Guaranteed Universal Life Insurance?
Those that want the cheapest permanent life insurance available. Of course, this means there’s no cash value.
The Modified Endowment Contract
A max funded policy means the maximum payment for a given death benefit without turning it into a Modified endowment contract (MEC). The Modified endowment contract came into place in 1988 when the IRS decided that too many companies were using life insurance policies as a tax shelter. Before 1988, one could buy a small death benefit whole life plan, say for a $25000 death benefit, and keep their cost of insurance expenses to a minimum, and deposit whatever amount into the policy they pleased.
Whether it was $10,000 or $100 million, they could take advantage of tax deferred growth and tax free distributions and very low cost of insurance. So, the irs came up with the MEC, that states if you purchase a life insurance policy, you have to pass the 7 pay test, which means you can’t pay so much into the policy to make it paid up (No more payments due) insurance in a 7 year period, without turning it into an MEC.
This test keeps repeating every 7 years. All insurance carriers have software that prevents MECs automatically, though MECs can be useful if you never intend to use the cash value, as the death benefit is still tax free.
Estate Taxes
You pay estate taxes if you have an estate valued at over 5,000,000 (It’s official—for 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015.)
That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes.( forbes) A note on this: the death benefit in life insurance is not taxable, but it is added to your taxable estate, so it is wise to put that life insurance in an irrevocable trust so that it is not a part of your taxable estate.
Who Should Buy a Modified Endowment Contract?
The MEC is mostly appropriate for those that want to purchase a single premium lump sum life insurance policy for a tax free death benefit to be given to heirs or to pay off estate taxes, while keeping their cost of insurance to a minimum. Side note: If your estate qualifies for taxes (over 5 million) you need to put the life insurance policy in an irrevocable trust so that the proceeds aren’t apart of your taxable estate. The death benefit itself is still tax free, of course.
Is Life Insurance a Scam?
Some people don’t believe in life insurance because they feel it isn’t worth what you pay. Now, in some cases, one might not really need life insurance. For instance, if someone has a lot of money in a trust account for their family members, life insurance isn’t necessary, although it is still a good idea to fund a trust with life insurance since $1 buys $5 of life insurance. Those are the small minority of cases however, and the rest of us, i.e. the 99 percent still need life insurance to cover our burial. Why is that? Because even if we have the savings now ($10,000 minimum), what happens if we outlive those savings?
Besides just outliving your savings, aren’t those savings set aside for other things? What happens if your car breaks down, or you need a new washer machine, or any number of things that can happen? You’d dip into that savings account and it would then be useless to covering the burial. But even if you never dipped into it, if you have that savings in an individual account with no other members having control over it, it could get tied up in probate court, which could take months before they distribute the money.
Even worse, if you have any debt when you die, and most people do, a large portion of your savings will go into the hands of your creditors, and your family might not get any of it. Life insurance on the other hand, is protected from creditors. Same with a Trust account if it can be proven it wasn’t created to avoid creditors upon death. As you can see, life insurance is a necessity for the vast majority of people.
To Conclude
Life insurance is a beautiful financial product that should be utilized in every person’s retirement portfolio. We all need to protect our families, and cover our funerals. We also benefit from it while we are still alive if we want guaranteed, tax deferred growth and tax free withdrawals, or become disabled and need our accounts to be funded and a monthly income to boot. The benefits are endless, and for the price, it’s a steal. Death is certain, so life insurance is a no-brainer. If you want a free quote and to speak with a life insurance professional, navigate to our free quote page and get started.
Blue Crush Insurance
