Life Insurance

Life insurance offers several key benefits, including:

Financial Protection for Loved Ones: Life insurance provides a financial safety net for your loved ones in the event of your untimely death. It helps ensure that they are financially secure and can cover expenses such as mortgage payments, education costs, daily living expenses, and any outstanding debts.

Income Replacement: If you are the primary breadwinner in your family, life insurance can replace your income and help your family maintain their standard of living after you’re gone. It provides a regular income stream to cover essential expenses and helps your family maintain financial stability.

Debt Repayment: Life insurance can be used to pay off any outstanding debts, such as mortgages, car loans, credit card balances, or personal loans. This prevents your loved ones from inheriting your financial liabilities and eases their financial burden during a difficult time.

Business Continuity: If you own a business, life insurance can play a vital role in ensuring its continuity. It can be used to fund a buy-sell agreement, where the policy proceeds are used to buy out the deceased owner’s share, allowing the surviving partners or shareholders to maintain control of the business.

Estate Planning: Life insurance can be an effective tool for estate planning, especially for individuals with substantial assets. It can provide liquidity to pay estate taxes, allowing your heirs to inherit your estate without the need to sell valuable assets or disrupt the family business.

Cash Value Growth: Permanent life insurance policies, such as whole life or universal life, accumulate cash value over time. This cash value grows tax-deferred and can be accessed during your lifetime through policy loans or withdrawals, providing you with a source of funds for emergencies, retirement planning, or other financial needs.

Peace of Mind: One of the most significant benefits of life insurance is the peace of mind it offers. Knowing that your loved ones will be financially protected if something happens to you can alleviate worries and allow you to focus on enjoying life.

It’s important to note that the specific benefits and features of life insurance can vary depending on the policy type and the insurance provider. It’s advisable to consult with a financial advisor or insurance professional to determine the most suitable life insurance coverage for your needs.

There are several common types of life insurance policies available. Here are the most frequently encountered ones:

Term Life Insurance: Term life insurance provides coverage for a specified period, usually 10, 20, or 30 years. If the insured person passes away during the term, the policy pays out a death benefit to the beneficiaries. Term life insurance is typically more affordable than other types of policies and is suitable for individuals who need coverage for a specific period, such as while they have dependents or outstanding debts.

Whole Life Insurance: Whole life insurance is a type of permanent life insurance that provides coverage for the entire lifetime of the insured person. It offers a death benefit as well as a cash value component that accumulates over time. Whole life insurance premiums are generally higher than term life insurance, but the policy builds cash value that can be accessed during the insured’s lifetime.

Universal Life Insurance: Universal life insurance is another form of permanent life insurance. It provides flexibility in terms of premium payments and death benefits. The policyholder can adjust the death benefit and choose how much to pay into the policy’s cash value component, subject to certain limits. Universal life insurance offers potential for cash value growth, and the policyholder can use the cash value to pay premiums or take out loans.

Variable Life Insurance: Variable life insurance is a type of permanent life insurance that allows the policyholder to allocate a portion of their premiums into investment accounts. These accounts are invested in various financial instruments such as stocks, bonds, or mutual funds. The cash value and death benefit of a variable life insurance policy can fluctuate based on the performance of the underlying investments.

Indexed Universal Life Insurance: Indexed universal life insurance combines features of universal life insurance with the potential for cash value growth linked to the performance of a stock market index, such as the S&P 500. The policyholder can allocate premiums to a fixed account or an indexed account. While the policy offers a minimum guaranteed interest rate, the cash value growth is tied to the performance of the chosen index.

Final Expense Insurance: Final expense insurance, also known as burial insurance or funeral insurance, is designed to cover the costs associated with a person’s funeral and other final expenses. It provides a smaller death benefit compared to other types of life insurance and is primarily intended to alleviate the financial burden on the family.

These are the common types of life insurance policies, but it’s essential to evaluate your needs and consult with a financial advisor or insurance professional to determine the most suitable option for you.

This is a powerful benefit that can provide additional income and retirement protection for you and your family.

Living Benefits or Accelerated benefits are additional protection benefits to cover terminal illness or major illnesses (cancer, heart attack, or stroke) while you are alive.  Coverage options vary based on the insurance carrier and state.  

For example, if you are diagnosed with a terminal illness or a major illness the insurance company would allow you to accelerate the death benefit (pay you an amount) up to a certain amount. Some companies offer 100% accelerated benefits up to $2,000,000.  No one likes to think about a major illness happening but it does and if it does would it be nice to know that you have this option to cover medical expenses, and day to day living expenses during this time of need.

The single biggest risk people have when it comes to life insurance is not working with an experienced agent or buying life insurance through TV commercials or their bank or credit union. Insurance through TV, banks, and credit unions are typically the cheapest and most limited group policy.  People who have a bad experience with life insurance is usually due to working with an inexperienced agent or buying insurance from a bank, credit union, or their auto insurance company.

What Happens When an Insurance Company Fails?

Insurance is monitored and regulated by state insurance departments, and one of their primary objectives is protecting policyholders from the risk of a company in financial distress. When a company enters a period of financial difficulty and is unable to meet its obligations, the insurance commissioner in the company’s home state initiates a process—dictated by the laws of the state—whereby efforts are made to help the company regain its financial footing. This period is known as rehabilitation.

Guaranteed Coverage

While laws governing maximum limits and types of policies covered vary from state to state, most states are consistent with the NAIC Model Act and provide coverage at least in the amounts specified below. Check your state association’s website to confirm the applicable benefit levels in your state.

• $300,000 in life insurance death benefits
• $100,000 in cash surrender or withdrawal values for life insurance
• $250,000 in present value of annuity benefits, including net cash surrender/withdrawal values
• $500,000 in major medical or basic hospital, medical and surgical insurance policy benefits
• $300,000 in long-term care insurance policy benefits
• $300,000 in disability insurance policy benefits
• $100,000 in other health insurance benefits

How does Whole Life insurance compare to an Indexed Univeral Life? Like an IUL, Whole Life policies provide a safe place for you to set aside your money where it can grow tax-deferred. Also like an IUL you can access your money through tax-free loans or tax-free withdrawals up to basis (and then pay taxes on any money taken out over and above basis), and your heirs will receive an income-tax-free death benefit upon your passing.

Whole Life insurance you can receive dividends, which you can reinvest into the policy to increase the cash value and death benefit. With an IUL you do not receive dividends, and once it is maximum-funded, you cannot add more money into the policy. 

Whole Life policies also come with guarantees: a guaranteed cash value and a guaranteed death benefit amount. The IUL’s cash value can vary, growing in market up-years and remaining stable during down-years (based on your index performance, with the protection of a 0% floor during market downturns). The IUL’s death benefit can increase due to policy performance and can decrease if there are any outstanding loans or if you make adjustments to your policy to save on costs.

One thing to keep in mind is that whenever a company builds guarantees into a financial vehicle, those guarantees come at a price. Generally, Whole Life policies are more expensive than compared to an IUL that is structured properly.

And even more challenging, Whole Life expenses and surrender charges
are often not clearly disclosed, so you also have less transparency with
Whole Life policies than an IUL.  For example, Say you have a setback to your income while you are in the midst of funding your policy, and you cannot make your premium payment. You are expected to pay your Whole Life premium each year. If you don’t make that payment, the policy can lapse or go into what’s called a non-forfeiture option (such as extended-term insurance or a premium loan which allows you to take money out of cash value to pay the premium).

With an IUL, you have enormous flexibility when funding your policy. You can miss a year or two and catch up. Or say you’re only able to fund it 50%, you can work with your financial professional to make adjustments, still enjoy tax-free access to the money in your policy, and pass along an income-tax-free death benefit to your beneficiaries.

When it comes to accessing money from your policy, the interest rate on Whole Life policy loans tends to be higher than the policy’s interest crediting rate. To explain, let’s say your Whole Life policy is currently earning 4% interest. You borrow $10,000 from your Whole Life policy. Loan rates are typically 1% to 2% higher than crediting rates, so you end up paying 5% or 6% on that $10,000. If you do not repay that loan, over time this can create a situation where the policy loan is increasing faster than the cash value. If your policy does not have an over-loan protection rider, this can cause the policy to lapse, which can be disastrous from a tax perspective.

We had a client, for example, who came to us after his Whole Life policy had lapsed. He told us that he had received a 1099 that year for $199,000 (which would have been the amount of cash value over and above what he paid in premiums). He did not have the cash on hand to pay the taxes, so not only did he no longer have a Whole Life policy, but he also had to get a home equity loan just to pay Uncle Sam.

Overall, Whole Life policies do have some merits, especially when compared to traditional financial vehicles that are at risk in the market, but they also have some limitations when compared to an IUL. Make sure to explore your options carefully when deciding which financial vehicles you will include in your financial portfolio.

This description was taken from the book Laser Fund by Doug Andrew. Doug Andrew is recognized as one of the top experts with IUL’s. 

In an IIUL your money is not in the market.  It’s a contract with a life insurance company that provides you with a floor of 0%.  You participate and benefit when the market goes up with interest that is credited to your account (based on the index you choose with your IUL). If the market is negative any gains you realized are locked in and never go backward due to the market downturn.

If the market dives your gains are locked in and can not go backwards.

Steady consistent growth is the key to a successful retirement.

There are some bad IUL’s and there are some great IUL’s.  When some says they are bad it’s most likely because they don’t understand how something really works. The reason we focus on educating you is so you’ll know the differences between a bad and good IUL.  IUL’s are not always the right solution for everyone and it requires you to work with a financial professional who has access to several different IUL providers and products. 

If your financial advisor says IUL’s are bad ask these key questions to determine their experience. 

1. Do you offer IUL’s and how many have you placed in the past year with other clients?
2. When you say they are bad what type of IUL’s are you talking about?
3. If you are so against an IUL then what other type of retirement income solution is available that can do the following?

• Provide me with a Tax-Free retirement.
• Income received won’t increase my taxable income.
• Contribute more than the traditional $6,000 per year.
• No market risk.
• Available to borrow money without penalties before age 59.5.
• Plus, provide a death benefit and living benefits if life happens to protect my family and retirement.

Where your 401k, IRA, and traditional retirement accounts have limits on how much you can contribute per year an IUL has no max limits.  The limitation will be based on how the IUL is structured at the time you purchase one based on your age, and how much you ultimately want to fund it with overtime. 

This makes the IUL an ideal retirement solution option for high-income earners who want to put away more each year and at the same time have access to their money without IRS penalties if needed. Business owners, executives, and high-income earners love IUL’s because there is simply not another product available that can do what an IUL does.  

For high-networth individuals who need a financial vehicle to put away more for retirement, there are additional options such as Premium Financing.  Premium financing is where a bank will finance the premiums for an IUL for a fixed term such as 5 to 15 years.  At the end of the term, the IUL has a significant cash value that you own and was paid in part with bank financing.  This allows an individual to accumulate a larger cash value in their policy. This is can be anywhere from $50,000 a $1,000,000. Speak with your financial professional for more details about premium financing. 

Who an IUL is ideal for is based primarily on the individual and what you want the IUL to do for you.  It can be used as a retirement solution for someone during their working years.  It can be used to fund a child’s college as an alternative to a 529. It can be used for legacy planning to pass on to your loved ones. And lastly, we find many high-income earners and business owners who utilize an IUL to put away more for retirement than what the traditional plans allow while having access to cash during their working years.  

Age – As a general rule, an IUL is ideal for those typically up to age 60 when planning to fund it monthly or annually.  Certain cases for those over age 60 with a single premium can be a viable option based on your unique situation.  

Time – Ideally, you need 12 to 15 years of proper funding to allow time for growth. The variables that make each IUL unique are based on your age, how much you want to fund the IUL with, monthly or yearly, and when you would like to retire.  

The index options are linked to a market index, but you are not investing directly in the stock market or any index. You are protected from downside risk, and you are
guaranteed not to lose money due to market declines. At the end of each crediting period, any gains are locked in.

Each insurance carrier will have its own index strategy options available for you to choose along with a fixed index strategy.  You can choose one or multiple options to meet your financial objectives.

There are fees with IUL’s just like any other retirement product there are fees.  Your mutual fund has fees, your financial advisor charges you a management fee or trade fee, or a font load or backend load fee.  

Anyone in the financial services business is in business to make money. It doesn’t matter if it is the company that oversees your employer pension or an individual advisor you are working with. They charge fees to you and the employer for managing.  Your bank charges fees.  Anytime you have money that is being managed or moved there will always be fees. Some people and organizations may not be transparent about the fees they are charging so you may not realize it.

An IUL structured properly with the right company will have much less fees than what your financial advisor charges over the course of managing your money. When you work with our retire happy professionals we can run a fee analysis and show you a comparison. 

Here are the typical expenses and fees in an IUL.  Fees are typically higher in the early years and decline in later years.  The overall fees are much less than those of a traditionally managed retirement account. 

Cost of life insurance.  A portion of what you pay goes towards the cost of life insurance which is required by the IRS to have the ability to take your money tax-free as loans.  The IRS requires a certain amount of death benefit based on how much cash you would like to fund your IUL with. 

Premium / Expense fees – This is a fee the life insurance company charges to manage the IUL.  

Rider fees – If you choose to add any additional riders to the policy there may be an additional fee associated with the rider.

Surrender fees – If you choose to cancel the policy and surrender it there is a surrender fee.  This is clearly stated in the IUL illustration.  You have an account value and surrender value.  The surrender value is the value after the surrender fee has been deducted. 

Loan expense fees – When you take a loan there will be an interest loan fee.  Make sure you know what this is ahead of time before you commit to an IUL.  Some companies have a higher interest rate than others. 

You should not go into an IUL if you are thinking of having for just a few short years or giving it a try.  This product is designed to benefit you the most when you look at it as a long-term solution like you do with your employer 401k or pension.  

No it is not recommended.  Proper planning for retirement income is about diversifying your retirement income portfolio.  In working with your financial professional it is best to determine based on your retirement risk score, other retirement accounts you have, your retirement age, life expectancy, and other factors to determine how much of your retirement savings should be allocated to an IUL.

Any cash accumulation growth realized in your IUL grows tax-deferred, not tax-free. It’s how you take the money out of your IUL that allows you to enjoy it tax free.  Money is taken out in the form of a policy loan which there is no income tax assessed on loans.  Upon your death, the loan is repaid from the death benefit of the life insurance policy.  You never pay the loan back in your lifetime nor do your beneficiaries.  It’s a beautiful thing. 

Loans taken from your policy ARE NOT TAXED. Because ever since the 1986 tax reform, taxpayers pay income tax on only three types of income (see Section 7702 of the Internal Revenue Code): 

1. Earned income – This is money that you earn by working,
including wages, salaries, and bonuses.
2. Passive income – This would be the type of income you
receive from renting or leasing property.
3. Portfolio income – This comes in the form of interest and
dividends.

Now, if you choose to surrender your policy while you are alive then you are subject to paying taxes on the gains. 

At what age should you get life insurance?
The younger you are the cheaper it is so it’s always better to get it before you need it and get as much as you can for as long of a term as you can.
When you are younger you are more insurable. Waiting later you run the risk of developing health issues or having an injury which may cause you to be uninsurable or have much higher rates.

For example a 20 year term :
25 year old $1,000,000 coverage is: $35.00 per month
45 year old $1,000,000 coverage is: $97.00 per month
55 year old $1,000,000 coverage is: $192.00 per month
65 year old $1,000,000 coverage is: $625.00 per month