Universal life insurance is a type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium payment or coverage amounts throughout your lifetime. Additionally, due to its lifetime coverage, universal life typically has higher premium payments than term.
I have a AARP New York life policy . I began this policy in 2000 term life. My son-in law was working in insurance and told me whole life was better. I didn’t listen for about 5 years more . I then told them I wanted to borrow a certain amount they told me I hadn’t put enough in the policy as I had just changed to whole life a few months ago.they had also told me I couldn’t borrow on the term life anyway ! So I lost over ten years on permenent life
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But here is the key: the most astute line in the article is “If you have a large amount of money, have already maxed out all of your tax-deferred savings, and you can afford to front-load your policy with large payments in the first several years, it can provide better returns than was discussed above. It is a useful product in a limited number of cases.”
Thanks so much for the great article! My husband has a whole life insurance plan that was set up for him by his dad when he was a teenager, so he’s always had it. It’s expensive, though, and we’ve often talked about discontinuing it because it’s so pricey. Still not sure what the best route to take is, but I appreciate the very informative article!
Good question Lisa. I’m not an expert on Northwestern Mutual’s policies so I can’t give you a precise answer. But I believe that their adjustable comp life insurance policies allow you to combine term and whole life insurance in various proportions based on your desired outcome. In other words, it’s a more flexible policy than typical whole life insurance.
As a financial planner I find this article very misleading. Whole life insurance can be an excellent way for someone to save for the long term. If you earn too much for a Roth IRA especially (180K plus for a household roughly) then whole life insurance is literally the only place to get tax free savings on growth (tax free municipal bonds also but these have a lot of risk especially with interest rates going up). A properly designed whole life insurance policy with a good company like a New York Life, Mass Mutual, Northwestern etc which have always paid dividends since the mid 1800s can easily earn NET of fees and taxes 4-5% over a 25-30 year period. Which means in a taxable brokerage account for example or a bank account you would have to GROSS 6% or so to match this over that same period every year on average? On a virtually guaranteed basis this is tough to do. This doesn’t even speak to the point that you have a tax free permanent death benefit. When a client’s 20 year term runs up they almost always still want and need some life insurance, and what if they aren’t insurable anymore? Getting some whole life when young and healthy, savings/cash value aside, assures them they’ll always have coverage which can someday go to kids, grandkids etc which is a nice option. Whatever cash you pull out reduces the death benefit dollar for dollar, but if set up properly there will always be more than enough death benefit even after most of cash is taken out tax free in retirement, when the stock market is down (this is especially when you appreciate having a non correlated asset like whole life for when the market crashes and you can tap into your whole life cash so you don’t have to touch your investments in that downturn OR take advantage of the opportunity and but stocks when things are down with cars value). Interest does accrue on policy loan which is why the tax is cash free and the loop hole exists. But often the dividend more than offsets the policy loan interest which doesn’t have to be repaid and just comes off of the death benefit which is often just a bonus anyways. A client should make sure they have enough coverage of course which is why people often get a large term life insurance which is “cheap” in addition to a smaller whole life which is a dual savings, dual coverage to be in place when the term expires.
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As for your question, I don’t believe I’ve ever reviewed a USAA whole life policy so I can’t comment on then specifically. I would simply encourage you to start by clarifying your personal goals and to then evaluate each option based on how well it will help you meet them. With that said, of your main goal is investing for retirement then I would typically encourage you to max out traditional retirement accounts before considering any kind of life insurance.
Insurance broker became a regulated term under the Insurance Brokers (Registration) Act 1977 which was designed to thwart the bogus practices of firms holding themselves as brokers but in fact acting as representative of one or more favoured insurance companies. The term now has no legal definition following the repeal of the 1977 Act. The sale of general insurance was regulated by the Financial Services Authority from 14 January 2005 until 31 March 2013 and by the Financial Conduct Authority since 1 April 2013. Any person or firm authorized by the Authority can now call themselves an insurance broker.
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Thanks Paul. I 100% agree that it’s important to read the fine print and know the terms of your contract before signing on. Convertibility is an option that most quality term policies will have, but you should understand the specifics ahead of time. So I don’t think my statement was inaccurate, as much as you made the smart added comment to “read the fine print”. Thanks for the input!
2Partial withdrawals and surrenders from life policies are generally taxed as ordinary income to the extent the withdrawal exceeds your investment in the contract, which is also called the "basis." In some situations, partial withdrawals during the first 15 policy years may result in taxable income prior to recovery of the investment in the contract. Loans are generally not taxable if taken from a life insurance policy that is not a modified endowment contract. However, when cash values are used to repay a loan, the transaction is treated like a withdrawal and taxed accordingly. If a policy is a modified endowment contract, loans are treated as a taxable distribution to the extent of policy gain. On a modified endowment contract, loans, withdrawals and surrenders are treated first as distributions of the policy gain subject to ordinary income taxation, and may be subject to an additional 10% federal tax penalty if made prior to age 59½. Loans, if not repaid, and withdrawals reduce the policy's death benefit and cash value.
In any case, once when I was younger, I used to think like the author, that you can overcome your risk tolerance and become a better investor if only you can control yourself and learn to love the equities roller coaster ride…now that I am in my mid-40s, I realize that I’m old school and conservative. I am happy with 5-6% return that is tax free risk free and doesn’t involve me making any decisions except how much I want to save this year.
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Assuming you’re already maxing out your regular retirement accounts, have a full emergency fund, are comfortably saving for other short and medium-term goals, are able to spend money comfortably on things you enjoy, AND still have money left over to save, AND expect that to continue indefinitely without any big risk of disruption, then you don’t have to worry too much about the slow growth in the beginning, the complications of accessing the money, or the rigidity of having to pay the premium.
Within Australia there are also a number of industry bodies that issue professional accreditations to members that comply with best standards of professional practice and integrity and maintain up to date skills and knowledge. The two main accreditations are the ANZIIF CIP (certified insurance professional) and NIBA QPIB (qualified practicing insurance broker) qualifications.
Alternatively, you could purchase a whole life policy that will not only pay that policy face value if you should die before your children are through college, but would accrue a cash value that would provide additional benefits to your family or a growing fund of emergency money. You could also consider converting portions of your term life policy over to whole life insurance over time to build a cash portfolio for your retirement as you age.
Ally or Matt, Can I ask what you used(formula?) to calculate their colorful presentation of the long term growth plan? I was recently presented with this Whole life idea from a Salesman or “Wealth Planner” and he made it sound really good but deep down inside, I don’t feel right, i felt the need to research more because i know there’s more to it than pretty graphs and colorful numbers…until i found this article which explains A LOT so thanks Matt:)
Terrorism insurance provides protection against any loss or damage caused by terrorist activities. In the United States in the wake of 9/11, the Terrorism Risk Insurance Act 2002 (TRIA) set up a federal program providing a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The program was extended until the end of 2014 by the Terrorism Risk Insurance Program Reauthorization Act 2007 (TRIPRA).
Naturally, the float method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.
2) With whole life, if you keep paying your premiums, your heirs will ALMOST DEFINITELY GET PAID. For instance, if you have a $1mn policy at $10k/year of premium, you know with near certainty that your spouse and kids will one day get $1mn. Even if you are paying in $10k per year which is a lot of money, then if you start at age 30, you will pay in $500k cumulatively by age 80. If you die at 80, your heirs get $1mn. Also keep in mind that this benefit is generally NON-TAXABLE!
The bottom line is that I feel that the insurance industry has adapted to the negative stigma attached to whole life insurance polices and are introducing some variants that do not look at all like the whole life insurance that is described in the above article. They have found ways to counter some of the Reasons not to invest in whole life insurance mentioned in the article above (such as the interest rate). I read about another variant called EIULs and I think there are many other similar products out there. But they can not counter all of the Reasons mentioned in the article above. So buyer beware and do your due diligence!
Underfunded whole life insurance may have only performed 4%. However, designed with additional premiums they have actually earned closer to 7% in the 30 years from 1984-2013. Even during the period between 1977 and 1982 where interest rates shot through the roof and bond holders didn’t recapture their losses for several years, over funder whole life returned 35% after the cost of insurance is considered.
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My husband and I purchased a 20 year $250,000.00 term life insurance policy in 1999. I purchased a $500,000.00 20 year policy a couple of years ago but due to my husbands health he was declined. Our $250,000.00 term policy will expire in 2019 and it does allow us to convert to a whole life policy before it expires. From what I’ve researched it appears my husbands only option is to convert his term life insurance policy to a whole life policy since a health examination is not required. Plus we do not have enough funds to retire at present. Is this his only/best option?
It's difficult to apply a rule of thumb because the amount of life insurance you need depends on factors such as your other sources of income, how many dependents you have, your debts, and your lifestyle. However, a general guideline you may find useful is to obtain a policy that would be worth between five and 10 times your annual salary in the event of your death. Beyond that guideline, you may want to consider consulting a financial planning professional to determine how much coverage to obtain.
Captive Agents - Captive insurance agents represent just one insurance carrier. In essence, they are employees of the carrier. The upside of working with a captive agent is that he or she has exceptionally thorough product knowledge. The downside is that he/she cannot provide access to products or pricing from outside their respective company. For this reason, you must have a high tolerance for carrier-specific terms, since each carrier and its in-house representatives may use language that is tough to compare across several companies that you encounter. Nevertheless, tap into that exceptional product knowledge and get smarter along the way as you search. The surge in online insurance websites offers consumers yet another option to use as part of their selection strategy. It is easy to find an insurance agent online, particularly one from a national insurance provider. Moreover, with 24-7 online access and quick comparison of policies, these web services are convenient, quick and a great way to ballpark quotes and to give you exposure to a wide variety of insurance providers. When you find one that is appealing to you, give them a call or fill out an agent request online.
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My parents had been paying into a whole life policy for many years and did not pay much attention to the cash balance over that time. When they finally had evaluated what they had in the policy, they discovered the ‘cost of insurance’ on the now older policy had increased so much that the premium they had been paying no longer covered the costs of the policy and the balance needed was being withdrawn FROM THEIR CASH VALUE. Needless to say, the insurance company or their agent did not notify them of this, so a policy that they had paid $75,000 into had a cash value of just $12,000 and was actually decreasing in value. Whole life policies are advertised as you paying the same premium amount for the entire life of the policy, but in the small print they are apparently allowed to adjust for the ‘cost of insurance’. It’s a brilliant scam. Pay attention to the policies you have.
Response 2: OK, that’s fair. There is no way to counter this perfectly if you are that skeptical, which it is your right to be. For me, I insure with a company that I have close to zero doubt about delivering on its promises. You should keep in mind that insurance investment portfolios are generally quite boring, if you’ve done your homework and picked a good provider. They take the float from the premiums and invest in a broadly diversified portfolio of fixed income, equities, and alliterative assets. At then end of the day, I suspect it is almost certainly a more conservative portfolio than what you’re financial adviser is running on your behalf if you are a relatively young person with low liabilities.
I’ll be up front that I am not an expert on life insurance and long term care for people in your situation and therefore don’t have a great answer for you. I have heard good things about certain hybrid policies like you’re describing, but I would be very careful about who you’re buying it from and how exactly the policy works. If you would like a referral to a fee-only financial planner who specializes in this kind of decision, just let me know and I would be happy to help.
Health questions can vary substantially between exam and no-exam policies. It may be possible for individuals with certain conditions to qualify for one type of coverage and not another. Because seniors sometimes are not fully aware of the policy provisions it is important to make sure that policies last for a lifetime and that premiums do not increase every 5 years as is common in some circumstances.