Tuesday, February 10, 2009

Whole Life Insurance - Understanding the Policy

Why would someone buy whole life insurance? After all, term insurance cost much less. Can one justify paying more premiums for the same death benefit? Why would a buyer even consider such a purchase? Let us examine the facts. Let us try to uncover the things that nobody wants you to know.

The Premiums

Yes, you would, initially, need to put out more for your whole life policy than you would for therm insurance. I say initially because, as you will learn, further down this page you can use your dividends to reduce premiums. This means that you would pay less than the premiums contracted for. That is if the company pays a dividend.

The Death Benefit

You whole life policy pays the face amount of the policy to a named beneficiary upon the death of the insured. This money can be paid in one lump sum or in income form. You can keep your policy for as long as you choose, even to age 100. The life of term policies are limited to specific periods. The death benefit of whole life insurance never decreases. So regardless of how you die your whole life policy will pay the sum you are insured for.

Cash Values

Whole life insurance policies have cash values or cash surrender values. Here is how this works. If you keep you policy for a specific period of time you will begin to build up guaranteed cash values. These cash values pay a guaranteed interest rate each year. This can amount to quite a considerable sum over time, even more so when added together with the dividends. Dividends, however, are not guaranteed.

Dividends

You whole life policy may earn a dividend each year. If the life insurance company you have your policy with performs well they will pay a dividend on your policy. If they keep down expenses and are effective with their investments they transfer much of this profit to the policy owner in the form of a dividend. Dividends can be paid in different forms. Here are your options.

Paid In Cash

You may take your dividend in cash. Each year, usually beginning with the second or third policy year the life insurance company will send you a check for the amount of dividend that is applied to your policy.

Accumulate At Interest

You may choose to leave your dividend with the company to accumulate interest for as long a period as you desire. Whenever you choose to take it you can.

Purchase Paid Up Additions

You have the option of electing to apply your dividends to purchasing paid up additions. Paid up additions are tiny single premium whole life policies. They have a cash value and continue to earn interest. They also have proportionate dividends applied to them.

Premium Reduction

As mentioned above you may use your dividend to reduce your premium. If you elect to apply them in this manner you will pay less in premiums than you initially expected to.

As you can see whole life insurance is quite different from term life insurance. A term policy pays only upon the death of the insured. With whole life insurance there are benefits gained if you live a long and healthy life. There is definitely a choice as to the type of policy you buy. It is all up to you.

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Whole Life Insurance - Did You Know?

Did you know that whole life insurance or some variation thereof is bought more than another types in the United States? Why do you think this is so? Is it because the people know nothing about term insurance? Not so! Term insurance is simple to understand. You own $1,000,000 of term life insurance for a specific period of time and you die within that period the life insurance company pays $1,000,000, as long as you keep paying the premiums. Everyone knows about term life insurance.

Permanent life insurance is a different matter. There is much more to absorb when it comes to a permanent policy. You can consider the whole life insurance policy which is really a policy which lasts for the rest of your life, even if you live to age 100. The premium payments can be level for the entire period or, as with some modified whole life policies, you start out with a lower premium and it increases every year for 5 or 10 years then it levels off.

On the other hand you can contract with the life insurance company to pay only for a specific period of years, 10 years or 20 years for example, and the policy will remain in force for the rest of your life. You can also arrange with the company to pay one lump sum and you have your single premium whole life insurance policy for the rest of your life.

Even the the variable life insurance policy is whole life based thus it is considered permanent life insurance. Variable life insurance is a whole life policy with an investment portfolio attached.

These are the basic variations of whole life insurance. Each life insurance company has a different slant to their modified whole life policies, however.

Whole life insurance policies have guaranteed cash values which you may use as you see fit. You may use these values as collateral if you want to get a loan from a bank or other financial organization. On the other hand you may choose to borrow the money from the policy itself. The interest rate is usually lower and you are never under pressure to repay within a given period of time. Any outstanding balance, however, will be deducted from the face amount upon your death.

Whole life insurance policies also earn dividends if your life insurance company is effective with their investments and also if they keep expenses down. Dividends are not guaranteed. These dividends are applied according to your wishes.

The dividends earned on your whole life policy can be used to reduce premiums, can be paid to you in cash each year, can be left with the life insurance company to accumulate interest or they can be used to purchase paid up additions. Paid up additions are tiny single premium whole life insurance policies which increase the amount paid at death. They also have cash values which accumulate interest and they earn dividends as well.

Permanent life insurance policies are very effective, yet complex, tools. If you take the time to understand them you will more appreciate why more people buy them than term insurance. Whole life insurance can be kept for the rest of your life.

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Term Life Insurance - Term Policies May Be Ideal For These Times

Since term life insurance cost so little it could be the perfect policy for today. I believe that everyone needs some life insurance at some time during their lifetime. The reason I feel so strongly is that I have seen families who had a breadwinner die without adequate coverage. I have known businesses that had no protection for their partners or shareholders when one of the owners died.

I, on the other hand, have known adequately covered families, corporations or partnerships. I have seen the faces of the heirs who were overcome by fear but on learning of the term life insurance policy that was on the life of the deceased spouse, partner or shareholder had a complete reversal of countenance.

In America today the economy is stressed to say the least. The uncertainty is getting to even those who up until now paid little or no attention to these matters. People know they just have to continue on until the problem turns around. They depend on their elected officials to take care of the problem. They still need to protect the family in the event of death. Term life is ideal for today, even if it is only for a temporary period.

There are several term policies to choose from. For the married couple with young children the longer term policies may be best. The 15 year, 20 year, 25 year or 30 year term policies would work very well. These policies may also be applied to married people with no children at all or those whose children are grown and now live on their own. the amounts would just be different, likely less.

For shorter term needs like covering college costs or may be guaranteeing that a loan is repaid one could use a 5 year or 10 year level term policy. In some cases the yearly renewable term, or increasing premium term policy, may fit.

If you own a house with a mortgage you may choose to take out a decreasing term policy that will last until your mortgage is paid off. The death benefit decreases as the balance owed decreases. If you have a large estate you may want to use your policy to offset Federal Estate Taxes. These taxes have been repealed but it will take until 2011 I believe for you not to pay any Estate Taxes at all.

As these term life insurance policies are quite inexpensive you will find that they can be quite useful. You may decide to keep these policies mentioned for the duration or you may choose to convert to permanent life insurance. As time goes by you may want to consider the combination policies like universal life or variable universal life or , on the other hand you may prefer a whole life policy combined with term insurance.

These permanent policies have cash values and may earn dividends which serve to offset the cost of the policies themselves. Dividends are not guaranteed but the larger and more established carriers tend to always pay a dividend.

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Life Insurance Settlement - How Beneficiaries Get Paid

Life Insurance Settlement. Over the years I have paid many a claim upon the death of my clients. Everything always goes smoothly for me in these cases. The carrier usually wants proof of death and they also want to be assured that the beneficiary is who s/he claims to be. When a beneficiary calls to let me know of the death of an insured I always try to make it to the funeral. I also set up an appointment to help them get paid as quickly as possible. I advise them of the requirements of the life insurance company at that point.

To make certain that I don't miss anything I confirm everything with the claims department of the company before I go on the appointment. I then advise them that I will call from the beneficiaries home or place of business to to make certain all will goes well. As long as all the requirements are met the proceeds will be paid in a very short period of time. Most of my time on the field I was with the Northwestern Mutual Life Insurance Company, now Northwestern Mutual Financial Network. Because they are so thorough at the time of application for the policy when the time comes to pay it takes about one week.

There are several choices an insured has when it comes to the payment of proceeds.

One Lump Sum

More often than not the proceeds of the policy is paid in one lump sum. If the policy is small that is fine. When the policy is for a large amount I don't recommend payment in this manner. It is much better to provide an income rather than a lump sum. Income can be paid in many different ways. There are many options.

Interest Income Option

Putting a large sum of money into the hands of one who is not used to handling large sums can result in waste. As a result the intentions of the insured goes for naught. His or her plan is not achieved. The beneficiary of the policy can leave the principal with the company just taking the interest earned at intervals. The principal remains in tact until you decide to take it.

Fixed Amount Income Option

The beneficiary has the option of taking the money in the form of a fixed income. The insured can stipulate that this is how it should be paid or s/he can leave that up to those who receive the money. S/he may say, "pay out $x per month to my family, named person or persons, until the proceeds are exhausted". The actual amount paid is usually considerably more than the lump sum death benefit itself.

Fixed Period Income

This option is similar to the fixed amount option in that the amount paid out is the same. You say to the life insurance company - "pay this money to them in equal amounts over the next 10 years", for example.

Life Income Option

Some people may choose to have life insurance proceeds paid in life income form. This is particularly effective when dealing with large amounts. There are several life income options.

You can have income paid for life but when the beneficiary dies no more income is paid. This is a way of providing the largest life income but I see it as a gamble. I much prefer to have the beneficiary take an income for life but with a certain, or guaranteed period. Let us say the person receiving the income wants a life income 20 years certain. The income will be paid for as long as the beneficiary lives but if s/he dies after 5 years, for example, the income still must be paid out to an heir for an additional 15 years. 20 years certain was an example you may choose 5 years, 10 years, or 15 years certain.

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Types of Life Insurance - Rethink Type of Policy to Buy

This may be a good time to rethink the types of life insurance policies you should buy. Until the market settles down many people don't want to be spending a lot of money. Everyone is looking for a safe place to put their money. We see some stocks, like Wachovia, slide then rise again. Others may take a longer time before they are again viable.

What of life insurance though? Which types of life insurance policies should we buy?

Term life insurance requires very little premium outlay and, for some, may be a good idea. Why would one want to put out money for the higher premium permanent policies at this time. You get the same death benefit with term insurance as as you would with the more costly universal life, variable universal life and whole life policies. You have a variety of term policies to choose from.

Yearly Renewable Term

This policy has a premium that increases every year so you would likely want to keep it for a very short period of time. The premium is very low, initially. The death benefit is level throughout.

Decreasing Term

This is a policy that is more often than not used to pay off a mortgage balance upon the death of the insured. The death benefit decreases with the mortgage balance and the premium is level throughout.

5 Year Term

If you are uncertain what type of life insurance policy you should buy you probably should take out a 5 year term policy now and convert to a permanent policy later on.

Other Level Term Policies

The 10 year term, 15 year term, 20 year term, 25 year term or 30 year term may be best for you now. You will have quite a while to think where you go from here. Your family, or business, will be protected meanwhile.

Permanent Policies

During a past recession I saw something I considered quite strange at the time. People were putting large sums of money in annuities but they also put considerable sums in single premium, limited payment and regular whole life policies. At that time I was with the Northwestern Mutual Life Insurance Company, Now Northwestern Mutual Financial Network. When I asked why they said that they were not looking to make any big profit. They wanted safety and they knew the reputation of that company. They felt they would not loose their money. They were right.

There are other companies that you can feel safe with. Check out their performance with the A. M. Best company. There are also what may be arguably better types of life insurance policies to safely put your money in. I refer to the universal and the variable universal life policies. If you choose to do this, however, you should make it your responsibility to check out the performance history of the company and how well they do with these policies.

When everything settles down again some people will choose to switch to a term policy and invest your money in mutual funds or probably a money market plan.

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Life Insurance Premiums Reduced - Really Reduced

You pay a lot less for term life insurance today than you would 20 years ago.

A couple of weeks ago I picked up a rate book from one of the finest and largest life insurance companies in the industry. I was just scanning the pages and it occurred to me that the term insurance premiums looked really high. I decided to do a comparison between todays premiums and the premiums of yesteryear. The results were quite surprising.

Although I was very aware that term life insurance premiums had been lowered considerably by insurance companies I was not aware that the difference was so great. The premiums for the year 2007 are one third of those for 1987 in many a case and in some cases as little as a quarter of the 1987 costs. That is a dramatic change. Why is this?

I am not an actuary or a statistician but based on what has occurred in the industry over that time period it would seem that the rise in demand for term insurance has dramatically affected the cost. Everyone wants term insurance now. Some people are aware that they may need to convert to a permanent policy later on but there are those who have no intention of buying any other type of insurance.

I will not debate the correctness of thinking of either side at this point as this article is really intended to emphasize the great reduction in term premium rates. I do think, however, I should touch on which policies are the ones people tend to buy most and why. this is for the benefit of the reader.

The 10 year, 20 year and 30 year term policies tend to be the most purchased...the 20 year term policy being the most outstanding. Round and about age 30 or may be age 35 you find yourself in a pretty solid financial position. You have achieved some measure of success. May be you are already married or, on the other hand, may be you are thinking about it. You want to have children and it occurs to you that you will need some life insurance. You think, why not buy it now while you can still get your policy at a low rate and while you can still qualify. With these plans in mind you find the 20 year or 30 year term policies could fit your need nicely.

If for some reason you had found financial stability a little later in life and your children are in their teens you may feel the 10 year term policy would be ideal.

Regardless of your situation now you will find that later on you need to buy additional life insurance. Your term policies may be about to expire. In any case they will expire at some time. If you are still in good health you can start a new term life insurance policy at a higher premium than that of your original policy.

On the other hand, life insurance companies allow you to convert your term policy within a specific period. If you are still within that period you can convert to a permanent policy. A good policy to use would be a universal life policy. I suggest this because of it's flexibility. You can also convert to whole life but this will mean a higher premium.

All in all there is no reason why anyone who needs life insurance today shouldn't own a policy. The premiums are so low.

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