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Life Insurance 101

The array of life insurance products available to the consumer today can be overwhelming.

You may have come across terms such as term life, return of premium term life, decreasing term life, universal life, indexed universal life, variable universal life, whole life, endowment whole life, etc.

What are all these various life insurance products?

In general, there are two broad types of life insurance products:

  • Term life insurance
  • Permanent life insurance, also known as universal or whole life.

Term Life Insurance

  • Purchased for a set, predetermined number of years.
  • Premiums are typically level and do not change over the policy term.

Advantages:

  • Low cost, especially if you are 30 or younger.
  • You define the length of the policy term (Ex. 5, 10, 20, 30 years)

Disadvantages:

  • Premiums increase at the end of each term, and at an exponential rate as you age.
  • If your health declines, premiums could be much higher at renewal than normal.
  • If your health has declined at renewal, you may be denied coverage.

Permanent Life Insurance

These policies include the various forms of universal life and whole life policies. The goal is to design a policy that will be inforce with a death benefit paid when you die, no matter when that occurs.

Advantages:

  • You can design a policy that is paid-up at a future date and requires no additional premiums.
  • If designed correctly, the policy premiums can stay level for your lifetime.
  • These policies build up equity in the form of cash value (a type of savings account).
  • Flexibility to decrease your death benefit if the amount you need has changed.
  • The policy cash value can be used for loan collateral.
  • If policy is not needed at some future date, it can be surrendered for the cash value, which acts as a return of some or all of the premiums paid.
  • If the policy is not needed at a future date, the policy could be sold for more than the current cash value.

Disadvantages:

  • Premiums are higher than term life insurance in the early years of the policy.

Which Type of Policy Is Best?

I have heard people say you should only buy term life insurance and invest the difference. That may not be the best strategy for each individual, and rarely does an individual insured follow through on the second half of this strategy.

Conversely, I have had people tell me they should only buy whole life insurance. Again, this is not necessarily true and it depends on the objectives and goals of each insurance buyer.

In most cases, when we recommend life insurance, we end up using a combination of term and permanent insurance. Each person is different in their planning needs and this is what drives the direction to take for your life insurance needs.

Ownership & Beneficiary Designations

The ownership of a life insurance policy is not some random item to overlook. Due to the many variables that impact the ownership of a life insurance policy, this decision often involves not only the insurance agent, but your CPA and estate planning attorney.

Ownership designations are driven by how benefits could be paid in the future and the potential tax implications.

Correspondingly, all too often people do not properly designate beneficiaries at initial purchase of a life insurance policy, but also do not keep beneficiaries up to date based on changing personal, financial, and business circumstances.

Life insurance policies are not a buy it and forget it product.

Working With Fiduciary Advisors

As fiduciary advisors, we are unlike those who are only licensed to sell insurance, or those who may be influenced by a large commission, or pressured by their primary insurance company to sell you products that may not be in your best interest.

If and when we make an insurance recommendation, it is because we believe it is the correct product to meet your financial goals and objectives.

Likewise, if we do an analysis of your current life insurance policy and it is best to keep that policy, we will tell you so and not convince you to buy a new policy just so we earn a commission.

Remember, our duty is to do what is in your best interest.

 

Kompass Financial Advisors

6500 S. Quebec St., #300
Englewood, CO 80111

PO Box 67
Wauneta, NE 69045

 Toll Free: (888) 770-0004

 (303) 770-7078

  [email protected]