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A Life Tip about IF
Contributed by: Leigh Baran on 12/10/2007

The French had Tontines, the Romans had Burial Clubs, the English developed modern life insurance to protect traders/merchants, and as early as 5000 BC, the Chinese, the Babylonians, developed the concept of Insurance to reduce risk.

Here is a guide to life insurance and common types of ways to address your life risk.

To qualify for life insurance, you will have to provide evidence of "insurability", or prove to the insurance company you are healthy. Most people neglect when you're buying a life insurance policy, what you're buying is risk. The process known as "Underwriting" determines the risk to an insurance company, thereby setting your policy premium, and can either be quite extensive or fairly simple.

Fully underwritten policies may require blood tests, urine samples, and MIB (Medical Information Bureau) reports determining your current and past health conditions. If you have had a history of health conditions, usually in the past 5-10 years, these conditions could eliminate your "insurability" giving the insurance company grounds to decline a policy. Generally, if diagnosed with cancer, HIV, heart disease, stroke, depression, Type II diabetes, Crohn's disease, and other death-causing ailments, you are what insurance companies call, "un-insurable."

A growing popularity of Simplified policies, commonly referred to "instant issues" are sold at your local Bank, Credit Union, or telemarketed. These are policies with a series of yes or no questions to common health problems. Additionally, risk-based activities, skydiving, car racing, military duty, aviation activities, can immediately result in a turn-down if you engage in any of these practices. The trade-off for convenience is cost, as policies without full-underwriting, are assessed a higher premium.

A period of contestability exists for insurance companies to investigate potential fraudulent insurance claims. In Colorado, this period is 2 years and once your policy is in force for 2 years, any cause of death requires payment. Suicide is covered if you commit after the policy is in force for one year.

If you lied on your application and you die from related causes within the two years, your beneficiaries will only receive return of premiums paid.

Your age, smoking habits, and overall health will determine the amount of your "premium", or price. Obesity suggests ill-health and will cause an increased premium amount.

If you are young and healthy, generally your premium will be cheap. As you grow older and less healthy, your premium will become more expensive as insurance companies use what is known as the actuarial process to determine the cost of insurance. Actuary tables identify the "risk" associated, using statistical data to predict life expectancy. These tables factor average life span as well as additional genetic statistics to process your final insurance quote.

Congratulations, you're healthy, and qualify for life insurance, now the question of types of insurance arise. Common types of insurance include TERM, Permanent Insurance (Whole Life), and Annuities, all priced accordingly. Variations of Term include Decreasing Term and Level Term. Variations of Whole Life include Universal Life and Variable Universal Life. Variations of Annuities include Fixed Annuities and Variable Annuities.

All insurance policies allow payment of premium either monthly, quarterly, or annually, some providing discounts for annual payments. Insurance products that accrue are tax-deferred in earnings and growth and in some cases tax-free. The policy's stated face value is always tax free to your beneficiaries upon an untimely death.

The most common type of insurance offered and purchased is TERM insurance, and as the name implies, the insurance is offered for a specific term, provided you make your premium payments on time. When you purchase term insurance, you generally need to prove eligibility for coverage, or provide information to ensure you are healthy. Typically, people will buy term to cover a specific liability or debt for a specific period of time, and often, you'll see TERM insurance called Mortgage Protection Insurance.

Just remember, the term, TERM can apply to any life insurance with these basic characteristics, specific period of time for coverage, usually a fixed face value, and hold a guarantee your premiums will not increase for the term you purchased, even if you develop health conditions during the policy period. *(Be cautious of decreasing term, popularized in conjunction to mortgages, and just as the name states, your benefit amount decreases although your premiums may stay the same price)

Term insurance is pure insurance, much like auto insurance where premiums are priced at the "cost of insurance."

WHOLE LIFE insurance refers to insurance that covers you for your entire life, or in some cases age 95-100. Your premium is divided into two areas, the cost of insuring you and a separate cash value account. Generally, the cash value account has stated interest rate, with a minimum guarantee as determined by your insurance company, which grows and can increase the face value or policy benefit over time. The greater the guaranteed rate minimum, the better, as you'll only benefit from earning higher interest rates.

Whole life premiums are determined by assessing the average cost of insurance over a policy-holder's life. Usually, you pay into a whole life policy for your whole life unless the policy has been structured to pay itself through the separate cash value account after the interest has compounded, increasing your policy value.

UNIVERSAL life added a tweak to whole life insurance, which allow policies to accrue cash values faster. UL's charge the actual cost of insurance, rather than the average cost of insurance. The current age of the insured determines the yearly cost for insurance, then places the additional premium into a separate cash value account. With whole life, the insurance company assesses the average cost of insurance at the time of policy purchase, averaging this cost over life expectancy. With UL's the cost is re-evaluated every year the policy holder keeps the policy in force.

This version of Whole Life combines the best features of term insurance and whole life, by utilizing the policy holders dollars in the most cost-effective manner. UL's offer the same guarantees around rate as a whole life policy and covers the insured for their entire life versus a 10, 20, or 30 year period.

Variable Universal Life invests the cash value portion into "investment markets" or mutual funds. VUL's are dependent on the market. If the market experiences negative returns, a policy holder may have to invest more dollars for the same amount of death benefit. Premiums earmarked to pay the cost of insurance will feed the negative returns in your separate cash value account. VUL's are usually offered as "single premium", or a large, one-time investment, but can be sold as a policy with a recurring premium paid monthly, quarterly or annually.

With permanent insurance, the insurance company will have provisions where you can borrow against the policy's cash value. These distributions are considered tax-free and in some cases can assist with retirement income pre 59 1/2. Ask your agent about the policy net loan rate and stay away from insurance companies that charge a net rate greater than zero. (You shouldn't have to pay to borrow your own tax-protected money) If you do borrow against your policy, the insurance company will subtract the amount borrowed, from the face value paid to beneficiaries, upon your untimely death.

Fixed Annuities are an insurance product usually requiring an initial lump-sum investment and offer a stated guaranteed rate with a minimum guaranteed rate.

Variable annuities will take your initial lump-sum investment and offer "sub-accounts" for your assets. These sub-accounts are usually mutual funds and can provide higher rates of return over longer periods of time versus a fixed annuity. Risk is again at the hands of the investor as sub-account performance is never guaranteed. Many VA's will have the option to invest in a fixed rate sub-account, and some will offer Dollar Cost Averaging from this account. DCA is the concept the average cost per share is less than the average price per share. Your lump sum is placed in the guaranteed account, then every month from 6 months-2 years, take 1/6 or 1/24 of the initial amount and invest in your chosen sub-accounts. A VA works much like a 401 (k) or retirement plan offered through your employer.

All annuities grow tax-deferred and follow the rules of 59 1/2. Once you start taking distributions, all gains will be taxed at ordinary income or your tax bracket versus long-term capital gains (20%). There are provisions to withdraw funds from an annuity early and avoid the 10% penalty, called 72(Q) but consult your investment advisor for additional details.

DO NOT annuitize, unless you need a guaranteed stream of monthly income to supplement your SSI benefit or other retirement. Once you annuitize, the insurance company will inherit your lump sum. There are usually three main options to annuitize including Life, Life with period certain, and Joint Life w/Rights of Survivorship. Your monthly payment

Annuities do not require evidence of insurability and for people in the later years of life, annuities offer additional guarantees to act in the place of life insurance. Annuities offer what is know as "M&E expense" or Mortality and risk Expense, guaranteed options to increase your initial investment. A beneficiary will receive a guaranteed growth amount.

Life Insurance plays an integral role in your personal financial plan. Often, we as individuals forget the two guarantees of life: death and taxes, and Life Insurance offers a solution to both issues.

The majority of Americans own Health Insurance, Homeowner's Insurance, and Auto Insurance. Let me offer you a few statistics-1 out of 14,400 homes will catch on fire, 1 out of 47 individuals were involved in a Car Accident last year, 82% of the population owns some type of health insurance coverage. If you are part of the 50% under-insured or uninsured, maybe it's time to re-evaluate your insurance priorities.

Life insurance is the most selfless financial commitment you can buy; it's purpose- benefit the people who survive you. Even if you are single, young, and have little debt, the average funeral costs between 5,000-25,000. Imagine if your parents, friends or family had to fork up funds to cover this expense.

As many industry professionals state, life insurance is really "Death Insurance" a financial tool to supply tax-free income for those that survive your passing, and many Americans forget, it's not a matter of IF you'll die, but when.


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CONTRIBUTOR INFORMATION

Leigh Baran

Denver , CO

Leigh Baran has posted 37 stories and 6 comments since joining on 11/16/2007. Leigh Baran 's average story rating is 4.58.
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