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Life Insurance Basics
Life insurance has been around for thousands of years.
Even fixed annuities. It is a proven system.
It has evolved over the years.
Read more on the history of life insurance
Read more on the history of annuities
When someome takes out a life insurance policy for protection, it is a contractual
agreement to pay a lump sum upon the death of a covered family member (sometimes
a "pay out" to beneficiares is elected).
There are riders (additional features) that can pay in the event of a disabillity, critical
illness for children, waiver of premium, accident only and return of premium. Some of
these benefits can be obtained as stand alone policies.
Each carrier has underwriting guidelines (see below) to approve the various features
and terms of the policy. Not all carriers or products are available in every state. A few
states restrict certain features, especially for the severly health chanllenged clients.
However, there are products there, just not as liberal in most states. The local licensed
professionals will work with people to maximize their benefits.
The younger and healthier you are when you get a policy, the cheaper it is. The longer
you wait, or if you have health challenges, the more the premiums may be, limited in
types of policies or have difficult qualifying for any coverage.
There are 2 broad categories of life insurance:
Term and Permanent Policies
Term Insurance - Term is the cheapest per month premium for the face amount a person
may want. Life insurance under which the death benefit is payable only if the insured dies
during a specified period - ie: 10-20 -30 yrs.
It may suddenly end or have automatic renewable features to a certain age ie: 95, however,
the rates may climb each year after the fixed term period is over. The actuarial risks rise.
Some policies may be converted to a permanent policy within this time to extend.
Types of Term Insurance
Level Term - a fixed amount of coverage with premiums that are fixed over a certain
period of time, usually in 10-year increments.
Increasing/Decreasing Term - amount of insurance coverage increases or decreases
throughout the term, premium typically remain level. People's needs change through out life,
therefore most insurance companies only do level.
Renewable Term - includes a renewal provision that gives the policyowner the right to renew
the insurance coverage at the end of the specified term without submitting evidence of insurability.
Many of our policies have this feature.
Convertible Term - gives the policyholder the right to convert the term policy to a permanent policy.
Many of our policies have this feature.
Group Term - insurance available through an employer or professional association intending to provide
benefit to employees. The premiums may appear reduced as the employers participate in the plan.The
families may feel they are now protected, yet in reality, this type of protection can leave them stranded.
This should be considered " BONUS MONEY" - Why? Because it isn't guaranteed to be there when
people really need it.
Why? Rarely does the benefit pay - because most people have to die while working. In general,
many are disabled and are simply laid off.
* Company benefits may change.
* When they leave their job, the benefits will either terminate leaving the family without
coverage
* OR go up in premium like COBRA health insurance because they lose the group discount
(often yearly) or have decreased change in benefits.
People can pass away suddenly, and group life will be there for the family. Yet, when people
retire from a job,change jobs, company folds, or are let go for a variety of reasons then the
benefits rarely go with them. The few that do, the benefits are decreased or payments increase
- sometimes on an annual basis.
Imagine have a illness such as a stroke or a heart attack or a disabling accident - normally you
are laid off. Now, you are without an income and if you should pass, the coverage is not there.
So the coverage you were counting on to protect your family is not really there when you need
it most. It is ALWAYS better to own your own family policy and use group as an inexpensive
filler if desired. You don't want to plan your estate on what a "job provides". Company benefits
can always change too - remember this.
Permanent Insurance - Life insurance that provides coverage throughout the insured's lifetime
and can build cash value. Permanent life insurance premiums are generally higher per month for
the face amount yet they are serving several main purposes.
1. Provides insurance for a "lifetime" - depending on the policy, this can be from age 95 to
120 yrs old. The younger you are when you obtain the insurance, the cheaper the premiums
overall to maintain. Some policies will continue to have higher premiums and though it grows
in cash values, if you don't increase the premiums to match the cost of life insurance, the policy
could "collapse" and there isn't coverage.
EXCITING NEW DEVELOPMENT! There are a few companies that will NOT COLLAPSE! In other
words, you continue to make the premiums for a guaranteed length of time, the policy will not
collapse even though there is no cash value - further protecting the life insurance portion of the
policy!
This is HUGE NEW DEVELOPMENT in recent years!
2. Permanent policies can grow in cash value - functioning as a savings, college savings and
retirement vehicle! You can access up to a max portion for a "loan" in a lump sum and not
pay taxes. (You cannot access a 100% or it could collapse the policy and taxes on the gains
may be due). You can incorporate these policies as a part of your retirement savings programs.
You work with a life iinsurance professional who understands how to maximize these policies.
Types of Permanent Insurances
Whole life insurance - includes an element for accumulating growth (called "cash value") - usually
lower returns 3-5% than similar products, but is tax deferred therefore a CD has to yield much higher
returns to = a tax deferred product. The money has an opportunity to compound each year without
paying taxes. CD's have to pay taxes each year, losing the compounding of money earned.
Universal life insurance - known & characterized by its flexible premiums, flexible face amounts,
and unbundled pricing factors. Generally you can add to these policies to a max amount to prevent'
a *modified endowment tax. Interests rates typically run 3-5%.
Fixed Indexed Universal Life - Great for helping to build college funds & retirement planning.
Typically can have greater gains than a whole life or universal life policies. It's cash value is tied
to the performance of current crediting rate of financial index such as the S&P or Dow, yet provides
the safety guarantees that if it falls, the clients won't lose money or go below zeros.
However, if it has the word "variable" - this is a securities product and may offer limited if any safety'
features. If anyone has Lost money in a life insurance or annuity policy, it is because it was probably
handled by a money manager etc. Edward Jones, financial planner etc that works in securities & the
policy contained little if any safety features. It wasn't in the traditional fixed life insurance world.
It does make a HUGE difference on whether you can truly count on it or not.
Variable whole life insurance - a securities product: a form of whole life insurance under which
the death benefit and the cash value of the policy fluctuate according to the investment performance
of separate account investment options. Most variable life insurance policies guarantee that the death
benefit will not fall below a specified minimum. Yet, the policy could possibly collapse if the market falls,
it loses its cash value.
Variable universal or equity indexed life insurance - a securities product: a form of permanent
life insurance that combines the premium and death benefit flexibility of universal life insurance with the
investment flexibility and risk of variable life insurance. Also called flexible premium variable life insurance
and universal life.
Last survivor universal life insurance (also known as "survivorship" or "second-to-die" life insurance) -
permanent life insurance that covers two persons and provides for payment of the death benefit proceeds
only when both insured’s have died. It is generally designed to pay estate taxes.
Permanent products can be represented by life insurance agents or securities representatives such as
financial planners, money managers such as Edward Jones etc.
Why go with a life insurance professional for a permanent life insurance product?
Several Reasons:
#1 Life professionals specialize in protection and safe retirement products. It's what they do. They can
maximize the benefits and features.
#2 Safe traditional life insurance products are features you find in sophisticated estate planning because
of its safety, tax deferred features.
#3 Securities products can leave your money at risk. This is okay for money you can afford to lose, but
if you are counting on your life insurance and / or retirement products to provide for you and you
need it to be there, then variable vehicles are not the right product for the majority of your money.
#4 Securities representatives generally represent varible products which have little to any true safety
features. If the market drops, the representatives don't call - they say "hang it there it will come
back" but it could take years if it ever does. Life insurance professionals can relax in the comfort
knowing the money is safe in down markets and your life insurance policy will be there.
#5 There is less costs involved. There are often consultative and large administrative associated with
most of the securities products.
#6 The economy and world economics are volatile right now. Social Security, Medicare and more are
in a crisis. Wouldn't rather know what you are going to have and keep more of it that be subject
to risk?
Again, security products can have it's place for some people for a portion of their portfolio where they
have money they can afford to lose. Yet, many of the wealthy programs rely on safe products that are
tax deffered with predictable features.
Warren Buffet said, " Rule #1: Don't lose your money. Rule #2: Don't forget Rule #1" Sound advice -
especially in these tough times and world economics.
Medical "Fully Underwritten Exams" vs Simplified Issue Policies -
the Pros and Cons
Medically underwritten: It is more complex and takes longer to be approved than most simplified
issue policies, if approved, you can get larger amounts of life insurance premiums. Simplified issues
have a max amount they approve without going through a medical exam. Depending on the size of
the policy, financial statements may be needed (ex. $1,000,000 or more). The reason s they are
going to be paying large sums to the family. The carriers are going to want to make sure you can
afford your premiums and if it is in line with income / lifestyle.
The premiums can be cheaper IF you medically qualify: meaning if you doctor records, medical exam,
blood, urine, height / weight, lifestyle (reckless driving or high risk professions) qualify.
What kind of exam will I go through? Depends on your age, your health, and the amount of insurance.
The insurance companies will pay for a medical exam through a 3rd party company such as Exam One
or Portamedic to take blood, urine, mouth swab, EKG etc. The exam companies have a grid and know
how much of an exam is needed. This is determined by the life carriers for face amount, age, & product
being underwritten.
Typically, an average of 38% of policies underwritten go through to issue pay - Why?
Several Reasons:
#1 Surprises in Medical Exam: When clients have a medical exam that often includes taking blood,
urine, height / weight, blood pressure and other vital signs, there can be surprises that affect
the premiums. It can expose them to being rated or denied. This can be a surprise and a
disappointment. Even young people can be subject to issues they are unaware of.
Clients may not be watching their diet prior to the exam either, therefore their blood pressure,
cholesterol’s or hemoglobin A1C (diabetic test) may be elevated to the point of needing treatment.
Some clients suffer from “white coat syndrome” where their blood pressure goes up in the site of
needles or medical professionals. It may be up due to stress, jobs, being in a hurry…none-the-less,
results are the same.
Take your medicine prior to the parameds coming – be under control when they get there.
#2 Med exam - attending physician statements - or motor vehicle reports (DUI's , wreckless drivings)
etc may effect approval or find they aren't as healthy as they think they are. These reports get
posted on the MIB where other carriers can see them. Doctors reports are notorious having to
reveal presumptions to qualify for tests etc vs actual diagnosis. Clients can get a report from the
doctor on an appeal to clarify they truly don't have the issue the carriers are presuming according
to the records.
You are playing Russian Roulette with the families protection when you go medically underwritten.
It is important to be truthful, but recommend not looking for trouble either. The only real reason
someone does a medically underwritten is the clients want face amounts higher than most non-med
exams will provide or agents are rate shopping - often times trying to entice the clients to do business
with them & dealing with issues on the back end.
Non Medical Exams: Typically an average of 85% go through on Non Med if you are writing the
right product. They may be somewhat more expensive depending on carrier or product but again,
how many go through on life that are rated up to extreme premiums or denied? Happens all the time.
Many clients often do not want to go through the xam either, often having "white coat" syndrome.
They know when they see a doctor, their blood pressure goes up or their sugar might be off that day.
The life companies will check the medical information bureau (MIB) & prescription drug programs to
see what has been prescribed over the past # of years. This tells them a lot. They are paying large
sums of money to a family etc, and have to make money on the whole. As people age & / or have
health conditions, it will effect pricing of the product.
Don't get caught up in the rate game. The main goal is to get approved for the best product with
the lowest price ou can qualify for…if there is a chance or you have a medical history of health
issues, simplified issue / non – med exams will often be your best choice for the lowest price.
Again, getting rated are increased premiums.
We work to keep the main goal in mind – and that is protecting the family. We will have your best
interest at heart, so we will listen and guide you to maximize your choices.
Again, the mission is to protect families.
The concepts contained herein are not intended to serve as advice & training and may have legal, tax and
accounting implications. Consult your Attorney and CPA for advice. For more information on this subject,
and professional guidance in selecting the right kind and amount of insurance coverage, contact your
insurance professional.
This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the
transaction(s) or matter(s) addressed by this material. Our agency, its distributors and their respective representatives
do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular
circumstances from an independent tax advisor.
What is the difference? Typically products sold by securities representatives are investments where they can gain and lose
money in their portfolio. Generally, there are additional fees associated with their products such as administrative and consultative
fees.
Life insurance professionals cannot sell a securities product – the products represented are savings vehicles where there are gains
and never can lose the clients money. Generally, there are no consultative fees. If there is an administrative fee, it is small and
built into the pricing of the life insurance premium itself and not additional large charges.
How can I tell the difference?
The word: Variable implies it is a securities product sold by financial planners & money managers ie: Edward Jones.
If anyone ever lost money in a life insurance or annuity product - it is because it was variable and not a traditional life insurance
product or annuity as sold by life insurance agents.
Why do securities representatives rarely sell the traditional life insurance products or explain the difference. Honestly, we have run into many of them that didn't
know the difference. They represent products they have been raised with in the securities world and their products may be all they know.
They may want to provide the opportunity for greater growth appealing to the clients need for greed, yet expose them to chances of loss –
even in conservative portfolios. Many of them feel they understand the life products, yet many are surprised when they come to truly learn
about them in full.
This is not to say their products may not have merit – yet if you can’t afford to lose the money you have worked hard for, the securities
is not where you want the majority of your money to be.
People are running out of that world because of losses. Upwards to 85% of money that is set aside is handled by money managers. Life insurance products are one of the oldest, safest ways to grow your money whether it is in traditional whole life, universal life or traditional fixed or fixed indexed annuities.
What are the differences between these products?
Types of Permanent Insurance
Traditional Whole Life - remains in force during the insured's entire lifetime, provided premiums are paid as specified in the policy.
WhoSingle -premium whole life insurance - whole life insurance purchased with a single, lump-sum premium.
How are rates determined?
Life insurance companies base their products & pricing on actuarial data. Determining the sex, age, health condition, medicines etc, they can generally determine their risk associated with payout of the policy. Each of the companies have different medical conditions that bother them more than others. This can vary per carrier quite a bit. Also, tobacco use, especially in combination with disease issues such as diabetes can cause people to completely be denied with many of the carriers.
Newsflash
North and South America ... Females have an average life expectancy of 79.5 years, up 0.1 years. Women can still expect to live longer than men on average, |