David J. Perrotto
5 Things You Didn't Know About Life Insurance
Not everyone knows what a life insurance policy is, it's an insurance contract in which an insurance company promises to pay out a monetary benefit to policy beneficiaries after the insured passes
away, as long as premium payments are paid consistently and no misrepresentations are made on the application. Based on that definition, you can tell that life insurance is a pretty straight-forward policy, but that doesn't mean it can't be used as a sophisticated financial planning instrument.
There may be some things that you don't know about life insurance that could help to fortify your financial plan against certain risks and give you access to additional cash when you need it. There are many benefits to owning a life insurance policy if you get the right one for you. With so many different companies out there, and so many different riders, and different products, it may be confusing on which one you should go with. Let’s go over 5 different areas you may want to focus on when you pick your policy.
Cash Value Loans. If you need money for almost anything; paying taxes, supplementing retirement, college savings, funding a medical treatment or paying for a vacation, you can take a loan out of your life insurance policy's cash values in order to satisfy that need. Cash value loans are tax-free, since they aren't considered gains but loans that you need to pay back, and interest is usually much lower than your credit card or HELOC. Also, once there is a sufficient cash value in the account, you may be able to get a zero-net loan, where the dividends from your policy pay the loan interest. Just remember that if you don't pay back the loans before the death benefit is paid out, it will reduce the proceeds that your heirs receive.
Accelerated Benefit Rider. If you should be diagnosed with a critical, chronic, terminal illness, you can access a percentage of the death benefits of your policy before you pass away if you have the Accelerated Benefit rider. This can help defray some medical expenses and living expenses when you are no longer able to work (Consider this, almost 70% of people over 65 will need long-term care in their life.) and can help you and your family stay comfortable financially during this difficult time (Consider it costs roughly 3,000 dollars for an assisted living facility and around 20 dollars an hour for a home aide). It is important to note that using this rider will greatly decrease the death benefit your heirs receive since it is accelerating a portion of the benefit to be received prior to the insured's death.
Decreasing Premiums/Death Benefits. Term insurance policies offer a death benefit for a limited period of time. They are often used to cover temporary, large debts like mortgages or college education because the term of the policy's benefit can be chosen for the number of years that the debt will be outstanding. But term policies are even more flexible than that. You can design yours so that the death benefit decreases over the years, much as your mortgage balance will, or you can design it to have decreasing premiums. Or you can even use a universal life policy to provide cash recovery after a set amount of years.
Variable Subaccounts. When you invest in a variable life insurance policy, there are subaccounts that you can pick from to invest your cash values in. These subaccounts are created from underlying investments like stocks, bonds, and money markets. They can vary in risk, volatility, and growth depending on how the underlying assets perform. If you become unhappy with the performance of one of your subaccounts and you wish to make adjustments, you can. Additionally, you can allocate a percentage of your cash values to multiple subaccounts. Variable subaccounts usually offer a guaranteed floor every year, while capping upside if you would like as well. An example being, an S&P Fund that gives no worse than 2% while capping any upside over 9% for the year.
Probate-free Death Benefit. Unless your assets are in a trust, your estate will need to go through probate after your death. Even if you have a will and no one who can contest it, your heirs will be forced to wait until after probate to receive your estate. Life insurance proceeds, however, do not need to go through probate unless the estate is named as the beneficiary.
The bottom line is, your life insurance policy can be as simple as you want it to be, or it can be a complex vehicle designed to complement your overall financial plan and hedge against losses, illness expenses, and probate. It's up to you and your advisor to design a policy that works the way you need it to, either as a simple death benefit or a sophisticated planning tool.
Variable universal life insurance is permanent life insurance that offers protection and an opportunity to build cash values. You will incur mortality and expense fees and sub-account expenses and you may also incur optional rider expenses, surrender charges, and policy charges. You should consider the investment objectives, risks, charges and expenses of the variable life insurance policy and its underlying investment options carefully before investing. The prospectus contains this and other important information, please read prospectus carefully before investing.
The cost and availability of life insurance depends on factors such as age, health, and type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
All product guarantees, including optional benefit riders, are based on the claims paying ability and financial strength of the issuing insurance company. The optional riders associated with variable life policies carry additional costs and have restrictions.