The Chartiers Valley Source

A recent article I prepared for the Chartiers Valley Source was entitled The Ultimate I Love You. It dealt with life insurance, and how our hypothetical family man, John, needed to secure a $2.2 million policy to care for his family should he die prematurely. I concluded by promising a follow-up regarding different types of life insurance. With that in mind, allow me to continue with a basic outline, a primer for smart people!

Term Life Insurance:
Commonly known as term, this form of life insurance is analogous to paying rent. By paying a specified premium for a fixed period of time, the insured guarantees a certain amount to his/her loved ones for a relatively insignificant premium outlay.

Assume John is a 40-year-old, very healthy non-smoker. He could secure a $2.2 million term policy through a big-name, highly ranked insurance company for an annual outlay of $1,810 for 20 years. In the possible but unlikely scenario that he dies prior to age 60, the proceeds would be paid. In the more likely scenario that John survived the 20-year-period, he would be faced with some difficult decisions:

1). Do I still need coverage and if so, how much?
2). Am I still healthy enough to qualify for the best rates?
3). Assuming yes, a new 20-year-level term policy for $2,200,000, if
purchased by a 60-year-old today, would be $12,458 per year. This policy would then last to age 80, and still would not result in a death benefit if John lives longer.

Permanent Life Insurance:
If term life is analogous to renting, then permanent life is owning. The insured has an opportunity to create a death benefit for loved ones, while simultaneously building up a type of savings account, known as the policys cash value. Keep in mind, though, that permanent premiums are much higher than term life.

Not too long ago, permanent life insurance was viewed by insurance agents and customers alike as an ideal place to marry a death benefit and a tax-deferred cash value pool. But recent reductions to capital gains tax rates (presently maxed at 15 percent), coupled with the emergence of tax-favored Section 529 College Savings Plans, have somewhat reduced the luster of building equity within a life insurance policy.

But lowered tax rates and tax-favored college savings vehicles still do not eliminate the need for a permanent death benefit. Newer products have emerged to provide a lifetime guaranteed death benefit, yet offer little or no cash value build up. These newer permanent policies, known as Guaranteed Universal Life, normally offer much lower premiums than do higher priced and higher cash value building policies, known as whole life.

Getting back to our hypothetical leading man, if John were to secure a $2.2 million guaranteed universal life policy through a highly ranked insurance company, it would cost him approximately $13,600 per year. So long as the annual premium is paid, the coverage will be guaranteed to age 120, making it much more likely that a death benefit will actually be paid. The policy would also build some cash value, peaking at over $166,000 by age 62 based on current, nonguaranteed interest rates. While the primary reason for this insurance is to secure a forever death benefit, the cash value could come in handy along the way for low-cost borrowing purposes.

Combination Approach:
Obviously, the low cost of a term life premium is offset by the fact that its death benefits will likely never be paid. But at the same time, the much higher premium of the guaranteed universal life may be prohibitive. Depending on ones disposable income, a combination of the two may be a smart approach.