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Financial Planning Life Insurance Retirement Savings

Financial Planning Basics: Permanent Life Insurance

Financial Planning Basics: Permanent Life Insurance

By Scot Whiskeyman

Nothing lasts forever, but what if you could own something that at least lasted for a lifetime?

Last month, we covered term life insurance, and discussed the difference between your coverage through work and owning your own individual policy. We mentioned that it’s important to consider buying a term policy from a company with a good mix of life insurance products, and that offers you the option to convert your policy to a permanent one.

This week, we’re going to pick up where we left off, and discuss the different types of permanent insurance and its upsides and downsides.

The Permanent Insurance Universe

There are four major types of permanent life insurance: whole life insurance, guaranteed universal life insurance, indexed universal life insurance, and variable universal life insurance. While not exhaustive, this is the list of permanent insurance products that impact most of our clients, so it’s what we’re going to focus on.

Whole Life Insurance

Whole Life Insurance is the original permanent life insurance – well, actually, it’s the original life insurance, period. Designed to provide a death benefit that will last forever, whole life insurance builds cash value over a lifetime, can pay eventually pay for itself, and even help cover the costs of long-term care.

Choose Whole Life Insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Automated (and effectively mandatory) savings
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • To avoid the risks that come with investing in the market

How it works:

  • Sometimes referred to as “the Cadillac” of life insurance policies due to its features
  • Builds cash value that can be used throughout your lifetime, or in retirement
  • A “non-correlated” asset, meaning the performance insider is not linked to the stock market
  • Can often pay for itself after enough cash has been accumulated
  • Can provide tax-free income in retirement

Universal Life Insurance

What exactly does the “universal” in Universal Life Insurance mean?

To be honest with you I have no idea.

But I can tell you universal life policies have been around since the early 1980’s, and have changed a lot since then – for the benefit of the policyholder.

When they were introduced, interest rates – and inflation – were at all time highs. Major insurance carriers took advantage of this by creating a new product: one that was similar to whole life in that it built cash values, but different in that its interest rates were variable and paid no dividends.

The results? Catastrophe.

Policies collapsed once interest rates fell from double digits. Agents and insurance companies did not project the historically low interest environment of the late 2000’s. Thus, the cash value couldn’t even keep up with internal costs, causing policies to collapse.

Today’s Universal Life policies really share nothing more than a name with their predecessors. Rather than being dependent on interest rates, new policies function with performance linked elsewhere.

There are three major types of of Universal Life policies used today:

Guaranteed Universal Life Insurance (“GUL”)

  • Resembles term insurance in that it doesn’t build cash value
  • Resembles whole life insurance in that it is often guaranteed until your mid-90’s or beyond
  • Great for individuals 55+ with a permanent need for coverage, but who don’t want to pay the much higher cost of whole life insurance
  • “No-lapse” guarantee – the policy will last forever as long as you pay your premiums on time

Indexed Universal Life Insurance (“IUL”)

Choose Indexed Universal Life Insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Automated (and effectively mandatory) savings
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • More opportunity for cash value growth than you’d get in whole life insurance

Variable Universal Life Insurance (“VUL”)

You might consider variable universal life insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Premium flexibility – you want to be able to use policy cash values to pay for the premiums
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • The maximum opportunity for cash value growth in a tax-favored vehicle

Criticism of Permanent Life Insurance

You won’t hear many financial pundits say favorable things about permanent life insurance.

The common criticisms are that it’s expensive, and the cash value build up – at least inside of whole life insurance – would perform better if invested elsewhere, specifically a stock market index like the S&P 500.

Here’s my response to that criticism: first, financial security is expensive.

The powerful things whole life can do for you that term cannot more than warrant the premium.

Second, who was it that decided to compare whole life insurance to the stock market – or even call it an investment- in the first place?

“Buy term and invest the difference” makes a lot of assumptions (and it’s wrong to make assumptions in financial planning!).

First, it assumes that anyone who wants whole life insurance would also be comfortable being 100% in stocks. As you can see from the chart above, whole life offers lower growth potential, but it offers more guarantees.

Second, if you have permanent life insurance, you have to pay for it, or you’ll either lapse your policy or have to reduce your death benefit.

What’s at stake if I decide to turn off that automatic investment plan? Whole life insurance encourages one of the most important financial behaviors anyone can possess – disciplined saving.

Finally, the idea that one needs to either select term insurance or whole life insurance is a false dichotomy. Few individuals will be able to cover their entire insurance need with whole life insurance, because it would be cost prohibitive. However, there’s nothing wrong with having a foundation a permanent insurance – perhaps that’s guaranteed to be paid-up at retirement – so that when your term insurance is gone, you’re not left unprotected.

Why Someone Might Need Permanent Insurance Later

It’s common for people to think that beginning in retirement and beyond, life insurance isn’t necessary. Their rationale is that once they’ve retired, they’ll have accumulated wealth and have guaranteed income sources, and that they no longer have children who depend on their income. However, it’s important to understand that while the scope of your needs might change in retirement, the need isn’t altogether gone.

Many people aren’t aware that if both they and their spouse are collecting social security, the smaller of the two benefits disappears at the first death. This might not be a big deal if the smaller benefit is a negligible amount, but what if it makes up half of a retiree’s income?

Though less common, pensions have the same problem – the benefit is often reduced or even eliminated upon the first death. What will you have to sacrifice to live on that kind of reduced income?

If you’d thought about whole life insurance 30 years ago, you’d be relieved. Unfortunately, many people haven’t, which puts them in the unenviable situation of applying for insurance later in life, which dramatically increases the cost.

It’s also important to remember that life insurance death benefits are almost always tax free.

For those in states that have inheritance taxes (including Pennsylvania), this suddenly makes permanent life insurance much more attractive, especially after you consider income taxes beneficiaries will have to pay on inherited retirement accounts, court costs, and the time-consuming and expensive probate process.

The Bottom Line

Permanent life insurance has a place in everyone’s financial picture. The key to financial success is to think big and start with a small action.

Getting permanent insurance into place, or reviewing what you already have, could be that first step.

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Financial Planning Life Insurance

Financial Planning Basics: Term Life Insurance

Financial Planning Basics: Term Life Insurance

By Scot Whiskeyman

Despite the fact that life insurance awareness month officially starts in September, it is still an important topic, all year long.

With such a great deal of misunderstanding about how term life insurance works, we thought we’d go high level and talk term insurance basics this week to keep you informed.

Why Term Life Insurance?

It’s no mystery that the biggest asset a young earner has is there potential for income. However, it’s also no secret that many young earners are saddled with copious amounts of student loan debt, which puts a squeeze on their monthly budget. This is where term insurance comes into play. Whether an individual has dependents or not, buying term insurance while healthy means it will be as cheap as it will ever get.

Why Term Life Insurance? Because it’s:

  • Affordable
  • Provides lump sum of cash that can replace your income, cover the mortgage and other debts, or help pay for college for kids

Now let’s talk about the different types of term life insurance and what to know about each of them. We’ll give you our take on each type of insurance after each breakdown.

Group Term Life Insurance:

What to know:

  • Pricing is age-banded – it increases in price as you get older
  • The coverage typically lasts as long as you are with your employer
  • The employer can cancel the coverage on a non-discriminatory basis, meaning they can’t cancel just yours, but they can cancel the insurance coverage altogether
  • Your coverage is typically not portable, though it is sometimes convertible to a permanent type of policy after you leave your job

Our take:

I hear it all the time: I have life insurance through work! I’m good, right? Maybe. Having some life insurance coverage is better than having none at all – but I often advise clients to get what they can, but not to depend on it. Why? In the event that they retire, get disabled, or change jobs, their term insurance policy is probably staying behind.

Sample of MetLife's group term insurance rates. Notice that the cost of coverage (quarterly) increases in 5 year increments
Sample of MetLife’s group term insurance rates. Notice that the cost of coverage (quarterly) increases in 5 year increments.

Annual Renewable Term Life Insurance:

What to know:

  • Pricing increases every policy anniversary. Thus it is extremely cheap when you are young, but tends to go up when you get older.
  • Good through a certain age – often age 95
  • Cannot be canceled by anyone but you
  • Can often be converted to permanent policy after you buy it

Our take:

The biggest lure of annual renewable term policies are its price. When it comes to owning an individual term insurance policy, annual renewable term policies are often the most inexpensive way to go in the beginning. However, with a price that increases every year, they may not be the best type of policy to own over a long period of time.

Rates per $1,000 of an Annual Renewable Term policy issued on a 22 year old. The insurance company in this example is Lion Life. The rates increase every year as the policyholder ages.
Rates per $1,000 of an Annual Renewable Term policy issued on a 22 year old. The insurance company in this example is Lion Life.

Level Premium Term Life Insurance:

What to know:

  • Pricing is level for the number of years stated in the policy. 10, 15, 20 and 30 year policies are common
  • Good through a certain age – often age 95 – but the price increases dramatically after the level premium period
  • Cannot be canceled by anyone but you
  • Can often be converted to a permanent policy after you buy it

Our take:

Level premium term insurance is cheap today and level for as long as you own the policy. It’s for this reason we’re a big fan of level premium term insurance and favor it over annual renewable term insurance.

This 20-year term policy has a level cost for 20 years. Notice how the premium jumps up dramatically in the 21st year. Issued by Penn Mutual. This 20-year term policy has a level cost for 20 years. Notice how the premium jumps up dramatically in the 21st year. This illustration is for Penn Mutual’s 20-Year Level Term product.

What Else Should I Consider?

You’re likely healthier today than you ever will be again, so consider buying a term policy with conversion privileges. This allows you to change the policy, either in part or entirely (your choice) to a policy that will last forever.

  • Consider the strength of the insurance carrier. Check out our post on strength ratings of insurance companies to get a better idea of what’s good and what’s not.
  • Consider the insurance company’s history. Have they been around for 15 years or 150 years? History says a lot about a company’s commitment to its policyholders.
  • Consider the company’s product mix. If you think you’d like to lock in your health rating to convert to a permanent policy later, there’s no point in buying a policy from a company that doesn’t have a permanent product to begin with.

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Financial Planning Life Insurance

Talking About Death: Not Morbid, But Practical

Talking About Death: Not Morbid, But Practical

By Scot Whiskeyman

In the Fall of 2017, my high school classmate, Ana, passed away. I had known her since elementary school, although we were never close friends.

In 4th grade, her problem was with homework. It wasn’t that she struggled with it, in fact quite the opposite; she just never did it.

What I admired most was how much she didn’t care. She never looked ashamed or scared when she said she didn’t have it. Right or wrong, she was confident. I’ll never forget the teacher offering to carry her on his shoulders around the school if she just did her homework once. (She never took him up on it.)

Ana was broadsided in a car accident by a driver that wasn’t paying attention. She loved going to the beach. She had a dog. She had two kids. She had parents and siblings. She was young – only 31 years old. She was a normal person who lived a normal life, and then lost it. The fact that she didn’t do her homework in 4th grade is inconsequential now.

I wasn’t her financial advisor. I don’t know anything about her personal financial situation. But based on the footer of her obituary asking for donations to her children’s GoFundMe account, my guess is that Ana didn’t have life insurance.

If you were to ask the average 20-something how they envision themselves going out, my hunch is you’d find a common theme between “in my sleep” and “peacefully” at an old age.

As we grow older, the natural passage of time begins to show us that old age is not always what takes loved ones away. Death might always be expected, but it is often a surprise. And that was the case with Ana.

We can never know for sure when death will come, but we can prepare. The phrase “hope is not a plan” applies here, as does the phrase “hope for the best, but prepare for the worst.”

A 30 minute conversation, uninterrupted, is all it really takes to understand whether there’s a need for life insurance. Another 30 minute conversation would suffice for most in determining what that need exactly is.

Of note, when considering your life insurance plan: “he/she’d sell the house” or “I’d move in with my brother” are not plans. They are wishful thinking at best, because it assumes the following:

  1. The housing market will always be a seller’s market
  2. Your brother is alive
  3. Your brother will always welcome you unconditionally for an indefinite amount of time

These common objections to life insurance are not bad ideas. Nor are they implausible. But I have never once seen a someone with a notarized, mapped out, legal, step-by-step agreement to execute these ideas. Not only that, they are not fully forward-thinking, because they only consider the immediate next step after death – not the years and decades to follow.

So what’s the bottom line? Do you need life insurance? I don’t know you, so I can’t tell you the answer to that – but what I can tell you is what questions to ponder so that the answer comes to you.

  • If I died, would someone I love suffer?
  • If they would, do I care?

If the answer to both of these questions is yes, then you need life insurance. What kind? How much? Consider the following questions:

  • If I died, how would my loss impact my loved ones financially?
  • What kind of life do I envision for my loved ones if I don’t die?
  • Can my family continue to live their current lifestyle if I die? If not, what sacrifices would they have to make?

The term ‘life insurance’ can bring up many misconceptions. I encourage you to set aside any preconceived notions you may have on life insurance and find a trusted advisor to help educate you and look at your personal situation.

No one can predict the future or when your time here is finished, but an advisor can help you prepare so when that time comes, your family can take the time they need to grieve before having to make any major decisions. It’s not morbid to think about your death but rather practical and your family will appreciate your forethought.

I’ve never had a client say to me, ‘wow, I wish you hadn’t told them to buy so much life insurance, that’s really more money than I need right now.’

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Categories
Financial Planning Income Protection Insurance Life Insurance

Buying Term Life Insurance? Here’s 5 Things to Consider Other Than Price

Buying Term Life Insurance? Here’s 5 Things to Consider Other Than Price

Pictured above: representation of someone’s actual life insurance policy

We’ve all seen the television advertisements for cheap term insurance. “I protected my family with $500,000 of life insurance for only $18 per month,” proclaims a young, suburb-dwelling professional. Sounds like a good deal, right?

Everyone hates fine print (myself included). Unfortunately, it’s the details buried in the fine print that need to be understood before purchasing that cheap term insurance policy. For one, how long is the coverage for? 10 years or 40 years? How about the premium – will it be $18 per month for that entire time?

Perhaps most importantly: what if you actually die? Is the insurance company financially strong enough to make good on their promise to pay your family? Does their service model have a record of providing solid guidance to beneficiaries collecting death benefits? And what kind of settlement options are available – i.e., will your beneficiaries get a lump sum check or a stream of payments?

Everyone wants a good deal, especially when it comes to insurance. As you can see, there are many factors that go into getting a good deal, and a fair price is only one of them.

Financial Strength Ratings of Carrier
In the insurance universe, ratings agencies serve as watchdogs to keep the public informed on how financially stable a particular company is. Rankings are usually letter graded – however, what is the strongest ranking possible at one company may not be the strongest at the next, even though they use the same letter.

Life Insurance Carrier Rating Agency Names & Ranking

Name of Agency
Website
Financial Strength Ranking Examples
A.M. Best Company, Incwww.ambest.comConsidered “Secure”

A++, A+ (Superior)

A, A− (Excellent)

B++, B+ (Good)

Fitch Ratingswww.fitchibca.comConsidered “Investment Grade”

AAA, AA

A, BBB

Moody’s Investor Services*www.moodys.comConsidered “Fair” or Better:

Aaa (Superior)

Aa (Excellent)

A (Good)

Baa (Fair)

Standard & Poor’s
Insurance Ratings
Services*
www2.standardandpoors.comConsidered “Adequate” or Better:

AAA (Extremely Strong)

AA (Very Strong)

A (Strong)

BBB (Adequate)


Duration of the Coverage Offered

If you own a term policy, flip it open. You may see that you are guaranteed coverage through age 95. Of course, your end of the bargain is this: you have to pay for it the the entire time.

What’s the big deal? Term insurance is cheap right?

Term insurance policy premiums are typically banded for simplicity’s sake. This means that the premium you pay stays the same for 10, 15, 20 or 30 years, depending on what the insurance company offers. This type of policy is known as “guaranteed level term insurance.” Does the coverage go away after that time? Usually, no – but what does go away is the affordable premium. It’s not uncommon for policies to increase tenfold  on the 21st year of a 20 year term policy.

If you’re thinking, “Hey, I have a term insurance policy, but I already pay more every year!” then you may have what’s called “annual renewable term insurance.” The premium is substantially lower in the early years of the policy – even lower than a 10 year term policy in many cases. The trade-off: every year the premium goes up – and exponentially so the older you get.

Additional Policy Benefits

If you become disabled and can’t earn a paycheck, let’s face it: life insurance premiums will likely be on the chopping block. But what if your insurance company promised to pay the premiums for you?

This is just one of multiple available benefits, known formally as “riders,” to tack on to term life insurance policies. The cost is often less than a dollar per month. Other common term insurance riders include:

  • Accidental Death Benefit: In the event that the cause of your death is ruled accidental, the death benefit often doubles, and sometimes even triples or quadruples. (I personally am not a fan of this rider – if you’re protecting your family, the amount of money they need isn’t going to double based on how you die.)
  • Child Term Insurance Rider: Again, for what is tantamount of pocket change each month, you can insure your living and future children for $5000 or more. Typically, the death benefit expires on the policy anniversary following the child’s 25th birthday. Note that all children have to be insured equally.
  • Spouse Term Insurance Rider: Just like the child term rider, you can protect your spouse with the a spouse term insurance rider for just a little bit extra each month. The benefit usually expires at a stated age – for example, age 60 – and can’t be more than the primary insured’s death benefit.

Conversion Privileges

At the end of the level premium period (or at the time you’re just sick of paying a higher premium every year), you may wish to convert your term insurance policy into a permanent insurance policy. Examples of permanent policies included Guaranteed Universal Life, Index Universal Life, and Whole Life. The mechanics of these policies is beyond the scope of this post, but suffice it to say that not every company that offers term insurance offers permanent insurance; and not every term policy comes with the privilege to convert to a permanent policy, even if it’s offered.

Portability

Will your term life insurance policy always be yours?

If your employer provides you with a company car, you won’t get to keep it if you leave. Company provided term insurance – whether paid for by your company, or you – might not come with you if you switch companies or careers. (It certainly won’t come with you by default.)

Don’t get me wrong: if you’re offered term insurance through work, take advantage of it. The dangerous thing to do is to completely rely on it. Ask yourself: can you be sure the next place you go will offer you term insurance coverage? If they don’t, what changes in your health could occur that might prevent you from qualifying for an individual term insurance policy?

In Summary

Not all term life insurance policies are created equal. When considering insurance, be sure that it fits your needs as well as your budget.

We offer complimentary insurance policy reviews. E-mail us to ask how to get started.

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Categories
Insurance Life Insurance Long-Term Care Savings Taxes

3 Things Whole Life Insurance Won’t Do For You (And 5 Things It Can)

3 Things Whole Life Insurance Won’t Do For You (And 5 Things It Can)

Life insurance is confusing.

When it comes to whole life insurance, there’s a lot of myths, opinions, and partial truths, all of which find themselves muddled together with facts. Where does one begin if they want a straight answer?

Like any puzzle, it’s helpful to break it down into pieces and work backwards.

Let’s start with what whole life insurance will not do for you:

  • Make you rich
    • Whole life insurance is not going to make you a multi-millionaire. While there is cash value, that cash value builds slowly, over time.
  • Outperform the stock market
    • Did I mention that life insurance grows slowly? Don’t look at whole life insurance as a replacement of your stock market investments. (Better yet, look at not as an investment, but as an asset.)
  • Save you money on insurance right now
    • Tired of paying for life insurance through work? Term insurance premiums going up every year? Whole life won’t solve either of these problems. And that’s because whole life does more.

Now, let’s talk about what whole life insurance can do:

  • Help you build wealth
    • The key to building wealth is paying yourself first. Over time, the cash values that build inside your policy can be used while you’re alive.
  • Encourage discipline
    • It can be tempting to pause your savings strategy when more immediate demands for your money present themselves. However, there are some things that just cannot be paused – your mortgage payment or your groceries, for example. Whole life insurance is much the same: if you want the benefits, your end of the bargain is to pay it – no matter what.
  • Give you a death benefit you’ll never lose
    • A retiree losing their life insurance coverage. A father with a term policy expiring after 20 years of payments. A mother who needs life insurance, but now has a chronic health condition that disqualifies her from almost all types of insurance. These are actual circumstances my clients have faced which have resulted in unfavorable insurance rates, or lack of insurability altogether. Got whole life insurance? You’ll never have to worry about losing coverage because of the curveballs life throws you, as long as you pay your premium.
  • Save you money on taxes
    • Turns out that whole life can help protect against that second certainty in life. Used properly, the cash value of life insurance can be used tax-free. Imagine being able to fund your lifestyle with income that is not only tax-free, but not actually considered income at all. Why does that matter? Well, if it’s not considered income, that means your other income will be taxed at a lower rate.
  • Pay for the cost of a long-term care
    • In the morning, you get out of bed, brush your teeth, use the bathroom, take a shower, get dressed, and have breakfast. It’s a routine that it almost unfathomable to imagine needing help with. And because it’s a routine that’s repeated daily, it’s expensive to pay for help when we do. Enter whole life insurance with a chronic illness or long-term care benefit. Our bodies deteriorate as a natural part of the aging process, making daily activities increasingly difficult. Whole life insurance is permanent: no matter how old one gets, the protection is there – and that protection can be used to offset the cost of routine care.

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Financial Advisors Financial Planning Life Insurance

Do You Have All of the Facts?

Do You Have All of the Facts?

I am often asked if I play basketball, because I’m 6’7″. Does this question get old? Sometimes. It is born out of the worldview that height and athletic talent are somehow interlinked when it comes to that specific sport. At least, that’s my perspective, because I have been down the path of trying to be something I’m not: a basketball player. I was cut from the team my freshman year of high school as the tallest person trying out. As a result, the assumption that I play basketball because I’m tall is ridiculous. However, if I had never grown taller than six feet, and lived a life encountering tall athletes, how might my perspective be differerent?

Having all of the facts means having thorough understanding of things that are not only always changing, but that are formed for through an entirely different set of circumstances and experiences. Stephen Covey says it best in “7 Habits of Highly Successful People” – “We see the world, not as it is, but as we are – or, as we are conditioned to see it.”

As a financial advisor, I do my best to understand of the facts. The challenge: the facts are always changing. Whether it’s a major tax overhaul, or general economic conditions, we can all agree that the world is fluid. And we have to swim to keep up. This is especially true when it comes to our financial situations and goals.

Run a service-based business? You’ll always be advising people that have an entirely different set of experiences. No amount of statistics or generalizations will bring you closer to their point of view. But a story can. Take this video for example, which is a story about a family that loses a father to a brain tumor. The story of this family’s experience is more powerful than any set of statistics about cancer or death.

Listening to others’ stories moves us  closer to understanding a worldview that is entirely separate from our own. Hearing one’s story provides insight into a completely separate set of experiences that are unique to ours. Experiences shape our worldview. Without understanding one’s experiences, we cannot have all the facts.

The easy path to take is to  to get frustrated when others don’t agree with my point of view. The hard path to take is to ask oneself: “what can I do better to understand his or her point of view?”

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