Life Insurance & Annuities
Term Life Insurance
Term Life Insurance provides a cheaper premium to get the most death benefit making it an excellent choice for most people.
Term life insurance covers the policyholder for a specific amount of time, known as the term. The term lengths vary according to what the individual chooses. Term typically ranges from 10, 15, 20, 25, and 30 years, and premiums are usually level during this period. Some carriers offer Annual Renewable Term, coverage for one year a time with increased premiums each year.
If the policyholder dies during the term period, the beneficiaries will receive the face amount of the policy also known as the Death Benefit. The death benefit claims are usually tax free to the beneficiary.
Whole Life Insurance
A Whole Life Insurance policy provides lifelong protection and includes “cash value” which grows steadily throughout the life of the policy. The death benefit of a whole life policy is typically paid to the beneficiaries tax-free and the cash value grows tax deferred.
If structured properly a policyholder can take a tax-free loan against the cash value in their policy. This loan and interest will reduce the death benefit. The policyholder can repay the loan at their discretion. Some policies allow the policyholder to “withdraw” a portion of the cash value as well.
Two types of whole life are:
Participating – The policy has the possibility of receiving dividends each year. Dividends are a reimbursement of premium and maybe received tax-free. Some of the common uses of dividends are paid in cash, reduce the premium, or paid up additions (which enhance the cash value and death benefit). Dividends are not guaranteed, they can change every year of the policy. The death benefit could increase over the years due to the Dividends.
Nonparticipating – This policy has a level death benefit and does not have the possibility of receiving dividends. Cash value does not grow fast and the death benefit does not increase.
Whole Life Advantages
Guaranteed premium that will never increase
Death benefit is guaranteed for life as long as premiums are paid
Cash value is guaranteed to increase every year (assuming no loans or withdrawals from the policy)
Most whole life plans offer a paid up policy option: no more premiums using a reduced paid up policy at that time.
Indexed Universal Life Insurance
An Indexed Universal Issue Policy is a flexible life insurance product with benefits that last until the insured passes away, with the cash value linked to investment benchmarks and accumulating over time. The main advantage for policyholders is the ability to take advantage of the upside of the investment market while being protected from the market’s downside.
Upon the insured person’s death, the beneficiary receives a lump sum of cash. This type of policy provides death protection plus savings (or cash value). The amount of money dedicated to death protection is based on the age and health of the person, as well as the face amount of the policy.
The main advantages of an Indexed Universal Issue Policy are:
The ability to pay more into the policy than the cost of insurance (COI), because the remainder is invested — creating tax-deferred cash value.
There are no contribution limitations, hedging risks associated with retirement savings.
Final Expense Life Insurance
In 2019, the National Funeral Directors Association calculated the national median cost of a funeral to be $7,640 — or $9,135 with the inclusion of a vault (usually required by a cemetery). But most people are not prepared for these kinds of expenses.
Also known as burial insurance or end-of-life insurance, a Final Expense Plan is an insurance policy that helps cover medical bills and funeral expenses facing a family after a loved one’s death. There are three main types of Final Expense policies:
A single-pay funeral trust plan = For people who choose to put a lump sum into their plan.
A simplified-issue level and graded plan = For people who want to pay over time. (This is the most popular type of policy.)
A guaranteed issue plan = For people whose health issues disqualify them for coverage with a simplified issue plan; this type of policy has a much lower coverage cap.
These options cost less than traditional insurance, and can be an affordable option for people on a fixed budget — such as seniors who want to plan for their end-of-life expenses.
Most importantly, a Final Expense plan enables an insured’s loved ones to handle funeral costs, medical bills, and any other financial obligations during a highly emotional time.
Long Term Care/ Life Insurance “Hybrid”
In an effort to provide more long-term care options, there are now “hybrid” products that link long-term care benefits to additional insurance benefits — such as a life insurance policy or an annuity. These types of policies are unique because:
Benefits are available whether the insured lives, quits the policy (asks for their premium to be refunded), or dies.
The estate can receive a tax-free death benefit.
The long term care benefits are received tax free.
Flexible financing: The insured can “roll” money from cash value in a life insurance policy or another annuity.
Some contracts offer a 100% money-back guarantee if the insured changes their mind.
Many times, the Life/LTCi hybrids are funded with a one-time, upfront premium payment. However, there are policies that offer lifetime premium payments, or policies that can be “paid up” in a certain amount of years.
These policies have become popular because many folks like the idea that someone will receive a benefit from the policy whether it’s in the form of LTC benefits or a death benefit, or both. Also, with hybrids, the premiums are guaranteed never to change.
Fixed Indexed Annuities
A fixed index annuity (FIA) is a tax-friendly product whose annual growth is benchmarked to a stock market index (such as Nasdaq, NYSE, S&P 500) instead of an interest rate. While it does bear the risk of a stock market decline, a policyholder cannot lose any principal; many FIAs also offer premium bonuses.
An important advantage to this kind of annuity is that earnings grow on a tax-deferred basis — meaning no income taxes are paid until money is withdrawn. In addition, an FIA is a very safe option because the premium and earnings are guaranteed by the issuing insurance company.
Other benefits include:
Potentially higher interest rates
Withdrawals satisfy the Required Minimum Distributions (RMDs) for retirees over 70½ years of age
Ability to create probate-free inheritance
A fixed annuity is a contract between an investor, or annuitant, and an insurance company. The investor contributes money to the annuity in exchange for a guaranteed interest rate during the annuity's accumulation phase and a predictable income stream during its payout phase.