June 10, 2022
Life insurance comes in many different shapes and size to meet different planning needs. It is important to understand the different product options when considering purchasing a life insurance policy to ensure that what you choose meets with your planning goals and budget. Below is a review of the six most common types of life insurance.
Term insurance provides coverage for a certain period of time or a specified “term” of years. If the insured dies during the time period specified in the policy and the policy is active, or in force, a death benefit will be paid. Term insurance has no investment component or “cash value” accumulation, so if premiums are not paid or the end of the term is reached without the insured dying, the insurance company will not pay anything. Term insurance is least expensive form of life insurance and also the most popular type of life insurance policy, accounting for the vast majority of life insurance outstanding. An important aspect of term insurance policies is that they can frequently be converted into a permanent insurance policy (see below, whole life, universal life, variable life, and indexed life). This conversion option may expire before the term ends (can be as short as halfway through the defined term).
Whole Life Insurance
Whole life insurance (WL) provides permanent death benefit coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate on a tax-advantaged basis. The savings/investment component is invested in the insurance company’s “general account” and pays a dividend based on the performance of these investments. The dividend rate is set by the insurance company on an annual basis and may have a minimum guaranteed rate. This dividend is applied to the cash value of the policy (i.e., it is not paid out directly to the policy holder but rather stays “inside” the policy). As a policy owner, you can access the cash value in a whole life policy by taking out a policy loan. Since a whole life policy has a cash value component, the policy owner can “surrender” the policy back to the insurance company for that cash amount (typically, less a “surrender charge” or penalty for early termination of the policy). The surrender charge reduces over the life of the policy, typically ending anywhere from 10 to 20 years after policy issuance.
Universal Life Insurance
Universal life (UL) insurance is permanent life insurance (lasting the lifetime of the insured) that has an investment savings element (like whole life) but has a flexible premium schedule. With a whole life policy, the premium schedule is fixed whereas universal life allows the policy holder to modify the premium schedule, just requiring that the policy owner pay a minimum amount that covers the “cost of insurance” (this amount can be “paid” out of the cash value of the policy but if there is no cash inside the policy and the minimum amount is not paid, the policy will lapse without value) and no more than amount that is set by IRS guidelines. Some variations of universal life policies require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums). The savings/investment component is invested in the insurance company’s “general account” and pays interest based on the performance of these investments. The interest rate is set by the insurance company on an annual basis and typically has a minimum guaranteed rate. This interest is applied to the cash value of the policy (i.e., it is not paid out directly to the policy holder but rather stays “inside” the policy) and can be used to offset the premium amount due. Similar to a whole life policy, the policy owner can “surrender” a universal life policy back to the insurance company for the cash value amount (typically, less a “surrender charge” or penalty for early termination of the policy).
Variable Life Insurance
Variable universal life (VUL) is a type of permanent life insurance policy with a built-in savings component that allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible. The primary difference with variable life policies is how the cash value is invested. While the cash value can be invested in the insurance company’s general account, VUL is designed to provide alternative options that are more market-based – typically, mutual funds. VUL insurance policies typically have both a maximum cap and minimum floor on the investment return associated with the savings component. Exposure to market fluctuations can generate significant returns but may also result in substantial losses. While VUL insurance offers increased flexibility and growth potential over a traditional cash value or a whole life insurance policy, policyholders need to understand that market-based risks exist in VUL policies. Similar to other permanent insurance policies (WL and UL), the policy owner can “surrender” a universal life policy back to the insurance company for the cash value amount (typically, less a “surrender charge” or penalty for early termination of the policy).
Indexed Universal Life Insurance
Indexed universal life (IUL) insurance is a variation of universal life insurance that allows the policy owner to invest the cash value amounts to either the insurance company’s fixed account or a market-based equity index. Indexed life policies typically offer a variety of well-known equity index options, such as the Nasdaq-100, or the S&P 500, and Russell 5000. Indexed life insurance policies are more volatile than standard universal life policies but less risky than variable life insurance policies because no money is actually invested in equity positions. IUL insurance policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit. Many IUL policies have minimum and maximum return thresholds, i.e., the insurance company may guarantee that the investment return is never negative (minimum 0%) but, in return, there is a capped maximum investment return (maybe 9% or 10%). Similar to other permanent insurance policies, the policy owner can “surrender” a universal life policy back to the insurance company for the cash value amount (typically, less a “surrender charge” or penalty for early termination of the policy).
Group Life Insurance
It is important to point out that Group Life Insurance, exactly as the name implies, is taken out by a group, typically an employer or an affinity group, and cannot be purchased individually. In many cases, the employer provides a life insurance policy as an employee benefit, at no cost to the employee. The amount of the insurance provided is usually based on some percentage of the employee’s salary (frequently equal to 100% of salary). It is important to point out that many of these Group Life Insurance plans allow the employee to purchase additional coverage. A further important point is that these policies are typically provided without the need for individual underwriting – eliminating the need for paramedic exams, medical records, etc. – since the insurance company analyzes the collective group. For those individuals with some health impairments, Group Life may be a great option when getting individual coverage may not be possible or too expensive. Group policies are most frequently term life insurance policies, but can be a permanent policy (WL, UL, VUL, IUL). A final important point about Group Life policies – when leaving the group, the policy will typically be discontinued. However, the Group policy typically allows for the individual to “spin the policy” out of the Group plan and continue the policy like an induvial one. With many groups, if the reason for leaving the group is a “qualified” retirement, the policy may continue for a period of time.
Did you know that you can sell your life insurance policy?
A life insurance policy is personal property, and as such, can be bought or sold like any other personal property. That’s right! You can sell your life insurance policy, just like you can sell your house or your car. The insurance companies do not want you to know this, because you can get many multiples of the policy cash value in a policy sale at its market value. Selling a life insurance policy is known as a “life settlement” and is a regulated sales transaction. Selling your policy is safe and can be a great retirement planning tool.
What Types of Insurance Policies Can Be Sold?
Any of type of life insurance policy can be sold in the life settlement market. Typically, policies with a death benefit of $50,000 or greater and with insureds over the age of 65 are eligible for review. Even term life insurance policies that have no cash value can be sold in a life settlement. You can get an instant estimate of the value of your client’s life insurance policy by visiting the LCX Life calculator. You can also call LCX Life at 888-388-0988, contact us here, or email us email@example.com discuss your client’s situation. Our team is available and ready to explain to you all that you would want to know about life settlements. Remember to visit our Life Settlement Genius portal for client materials and additional information.
Remember: Never let your clients abandon a life insurance policy without looking at the life settlement option first!