Income Replacement

During our working years, the primary financial goal is generally to build wealth for the purpose of retirement. During this phase of life, should a death occur to the primary income earner, the surviving family may not have sufficient savings to maintain their standard of living indefinitely. Life insurance can provide an effective solution should this problem occur. So how much coverage and what type do you need?

Determining the amount of coverage needed to replace the premature death of a family member is based on several factors:

1. What was the gross and net income of the family member prior to their death?
2. What other potential capital losses were suffered due to their death (i.e. Business partnership losses, assets managed by the deceased that now must be sold, etc).
3. What are the ongoing current and future liabilities and financial obligations of the surviving family?
4. What other special circumstances need to be considered that will create a greater or lesser need for coverage in the event of the family member's death?
Determining the proper type of coverage also depends on several factors. Here are some of the basic types of life insurance plans available:

Term

Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.

There are two basic types of term life insurance policies-level term and decreasing term.

• Level term means that the death benefit stays the same throughout the duration of the policy.
• Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy's term.

In 2007, virtually all (97 percent) of the term life insurance bought was level term.

What are the types of level term insurance policies?

Common types of level term are:

• yearly renewable term
• 5-year renewable term
• 10-year term
• 15-year term
• 20-year term
• 25-year term
• 30-year term
• term to a specified age (usually 65)

Yearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday.

If a policy is "renewable," that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy.

Generally, the premium for the policy is based on the insured person's age and health at the policy's start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don't make that guarantee, enabling the insurance company to raise the rate during the policy's term.

Some term policies are convertible. This means that the policy's owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.

Return of Premium

In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.

Whole Life and Permanent Life

Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.

In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So the company keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.

By law, when these “overpayments” reach a certain amount, they must be available to the policy owner as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.

In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance. So what are the primary differences between the various types of permanent life insurance?

• Whole or ordinary life
  This is the most traditional type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on partially taxable dividends the company pays to you.
• Universal or adjustable life
  This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The tax-deferred savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might eventually lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.
• Variable life
  This policy combines death protection with a tax-deferred savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.
• Variable-universal life
  If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.

When to buy Permanent Life

Permanent life insurance is generally the most widely used type of coverage for estate planning needs. In addition to its other advantages including lifetime level premiums, premium borrowing capability, and the potential to re-sell the policy for an actual profit to various settlement carriers, a major advantage of permanent coverage is that it doesn't automatically expire. Consequently, this product is ideal for estate planning because the insured’s are generally older in age and the purpose for coverage is to pay for estate taxes which are due upon their death, regardless of when that death occurs.

The use of permanent life insurance can also be applicable when the need for coverage is coupled with the need for a tax-favored savings plan. Although term life coverage is suitable if your need is strictly death benefit related, you may want to consider permanent if that need is coupled with the need to create a tax-sheltered savings plan. Many businesses and individuals will elect to use permanent coverage in order to take advantage of the features that permanent policies offer, including tax-deferred savings, borrowing, flexible premiums, and permanent coverage.

When to buy Term

Term Life insurance can be an excellent option when the purpose for coverage is to protect a family against lost income from the unforeseen death of the family breadwinner. It is also an excellent choice for business insurance when the goal of the policy is strictly to protect against the unforeseen death of a key employee or partner. Generally, this need exists when the insured is still working (ages 25 through 65). At these ages, term insurance is very inexpensive because it is valid only for a limited period of time. In other words, by the time most individuals who own term insurance reach their life expectancy, the term policy has already expired. Studies show that the majority of term life Insurance policies never go to claim because the policies expire before the insured dies. Therefore, the insurance company will offer this coverage to you at a very low cost. However, if the need is ONLY to protect against an early unforeseen death, term life insurance may be the way to go.

Evaluating Your Exsiting Life Insurance Coverage

Life insurance policies, like stocks and mutual funds, absolutely require ongoing maintenance. The purpose of a policy review is to check the “condition” of the policy to determine the following:

Is the policy on track to meet its original expectations?

Many times, rates have changed within the policy, a loan has been taken out on the policy, the original scheduled premium has been changed, or a premium was late or missed. All of these factors can significantly affect the long-term performance of the policy.

Is the policy competitive with current rates?

An often quoted statistic is that, based on today’s life insurance rates, 85% of existing policyholders could obtain a 40% reduction in premium costs for the same amount of insurance, or conversely, obtain 40% more death benefit for the same premium cost.

As medical improvements and better health habits contribute to longer life expectancies for most people, mortality charges have been reducing over the years. This means that insurance costs have actually lowered for both term and permanent life insurance with many top rated insurance carriers. Unfortunately, these improvements to the mortality and expense costs in the life insurance market place are typically not reflected in existing policies, but in the newer policies, as the carriers introduce new products.

Combining the improvements in the mortality rates with the poor economic conditions over the last few years have made it prudent to review life insurance. The recent and historic low fixed interest rates and equity market volatility that we have experienced can drastically affect the underlying cash value in a permanent policy.

The life insurance industry and undergone many changes in the last decade. Over the last 10-15 years in particular, both the expense and mortality costs for life insurance policies have dropped. New, more efficient policies are introduced to the marketplace as the marketplace adjusts to a more competitive environment brought on by the mergers, acquisitions, and demutualization within the industry, and increased customer sophistication. All life insurance policies should be periodically reviewed to gauge actual policy performance against original expectations and to make sure that the policy will reach the intended goals. The purpose of a policy review by Wealth Management Group is to check the “condition” of the current insurance portfolio and see if it is on track to meet the original expectations. Our goal is to provide an understanding of the current insurance along with providing any strategies that may enhance the overall value. For instance, we can offer alternatives that may result in a savings or provide more benefit for the same cost. There is no cost for the service.