It’s important to understand that all insurance policies are made up of 3 basic features: interest, expense and risk. In regard to life insurance, mortality is the risk factor. If one of these factors should change, it could affect the performance of the life insurance policy unless the policy contains some underlying guarantees.
Having been the first insurance major to graduate from Mississippi State & Forest’s only Chartered Life Underwriter, I’ve seen a number of changes in the life insurance industry in the past 41 years. The first major change came in the early 80’s when interest rates at the banks were so high that the insurance industry had to develop a universal life product to compete. Problem is that the values were projected at interest rates of 9-12%. However, interest rates have been extremely low for the past 25 years and many of these policies now stand a very good chance of terminating prematurely. Next, the variable universal life was developed. However, due to the high expenses associated with this type of policy and a volatile stock market over the past 10 years, these policies also have a very good chance of not being around when needed.
In recent years the Indexed Universal Life product has been very popular for those that want to emphasize cash value growth – this product allows one to enjoy part of the indexed growth with no risk to a declining stock market. These plans can be purchased with a guaranteed level premium and coverage until age 120.
The old “sacred” whole life polices do not have the problems mentioned above. However, they are often extremely expensive. Thus, in an effort to solve the problems mentioned above, the insurance companies came out with what I call a “No Lapse” universal life policy around the year 2000. Since the “No Lapse” policy has little or no cash values, it’s similar to having a guaranteed level premium, level coverage term to age 120 policy & generally costs much less than a whole life policy. Example: I had a 68 year old client that had several old whole life policies. He did not need the cash value & bought the policies to die with. I did a tax free 1035 exchange of his cash value from his old policies into a “No Lapse” policy and was able to increase his coverage 40% & decrease his premium by 95% while guaranteeing him coverage to age 120. I’ve had similar results in replacing traditional universal life and variable universal life policies with the “No Lapse” policies. Never cancel an existing policy until the new policy is approved & in force. Also, understand that a new 2 year contestable period will begin with the purchase of a new policy.
One of my companies even has a no cost “Chronic Illness Rider” on its “No Lapse” policies that will allow one to receive a portion of the death benefits on a monthly basis while living if after 90 days he or she can’t perform 2 of the 6 activities of daily living or has severe cognitive impairment. Premiums are waived, regardless of age while benefits are paid. This rider could allow one to reduce the amount of long term care insurance that they may need to buy in the future.
To find out if a “No Lapse” policy could improve your life insurance portfolio, simply ask your current company to provide you with in force illustrations of all of your life insurance policies. Then, if you have a good life insurance agent that you are comfortable with and trust, ask him to find a good “No Lapse” product to compare it to. Otherwise, please contact me. I’m licensed in Mississippi, Florida, Tennessee, Louisiana, Arkansas, Georgia, Alabama, Texas and New Mexico and will get licensed in other states if needed.
Many advisors think that if the government does not get control of spending and the deficit, income taxes will have to increase in the future. Thus, HENRY, High Earners Not Rich Yet, have found it advantageous to put the maximum premium with minimum coverage allowed by law into an indexed universal life product. Now, they are able to grow money on a tax-deferred basis and take out an income tax free income at a later date. This done through a net zero cost loan or a variable loan. Prior to all of the funds being used up, an over loan provision or a death benefit protective flexibility rider can be exercised to assure that everything will continue to be income tax free.
Married, retiring state employees and others with a defined benefit pension plan will have to make a decision of whether to take a life income only or a lessor amount using a life with joint survivor pay-out. I’ve been successful at increasing their monthly cash flow by providing life insurance on insurable retirees because the cost of the life insurance is normally significantly less than the difference between the life income only option and life income with joint survivor. Knowing that their spouse has been provided for, the retiree feels comfortable in selecting the higher life income only option. See the State & Federal Employees tab for an example.
Consider a “Life Settlement” plan whereby you sell your life insurance policy to an institutional buyer if:
You no longer need or want your life insurance (Divorced, No Children, Need Cash for Medical Expenses or Business Life Insurance Needs such as key man or buy/sell life insurance are no longer needed)
Life Expectancy of less than 10 years
You have a term insurance policy that is coming up for renewal and you can’t afford to keep it or convert it
You have an old universal life that may terminate prematurely due to a long-term low interest rate environment
I was able to get a client $175,000 cash for a term life insurance policy that he was getting ready to walk away from.
Most insurance companies will only write whole life & universal life insurance on kids under the age of 18. When purchasing life insurance for a child or grandchild, always remember to include a guaranteed insurability rider & waiver of premium for disability rider.
I most often recommend 20-30 year level premium, level coverage convertible term life insurance for clients that are between the ages of 18 & 40. This will allow them to purchase the amount of coverage needed at a very low cost at a time when they are raising children, paying back student loans and paying off mortgages.
Depending on how financially stable a client is, I generally recommend a combination of term and “No Lapse” coverage for clients age 41 and above. The older a client is, the more important it is for them to have an affordable policy that they can’t outlive. Many of my clients, age 65-75 whom had previously thought that all they wanted was term life insurance will change to a permanent plan if at all possible. They do this even if they have no debt and have cash in the bank. It appears that they finally realize their own mortality. The younger you are when you purchase a guaranteed level premium permanent plan, the less it will cost you.
Even though term life insurance serves a very important purpose by providing a large amount of coverage at relatively low price for a specific period of time, it’s like renting and there will come a time when it’s not affordable. Because most people outlive them, less than 5% of all term life insurance policies ever result in a death claim.
For my clients that want to buy life insurance for estate tax liquidity, I recommend a 2nd to die “No Lapse” Universal Life. If a married couple’s affairs are arranged properly, there are generally no federal estate taxes until the second death. It’s much more cost effective when 2 lives are insured and death proceeds are only paid at the second death when the taxes are normally due. In most cases I will need to work closely with your tax attorney and or CPA. An irrevocable life insurance trust or adult children should be the owner & beneficiary of this type of policy in order to keep the proceeds from being taxable for estate tax purposes. If an insured has an incidence of ownership, the face amount of the policy will be included in their estate & could be taxable. That would defeat the purpose of buying the policy. Currently, there is a $10,000,000 (adjusted for inflation) exemption prior to estate taxes being an issue. Thus, if a married couple has their property ownership, life insurance ownership and wills set up properly, up to $20,000,000 (adjusted for inflation) could be passed on to their heirs without federal estate tax problems. Even though there may be no taxes due at the death of first spouse, a federal estate tax return needs to be filed. Otherwise, you may forfeit $5,000,000 of exemptions. Consult your CPA and tax attorney.
Some companies such as Lincoln National and Prudential will allow one that chews tobacco or smokes cigars to get a standard non tobacco rate. Also, Lincoln National will give a standard rate on permanent life insurance to someone under age 75 that should have been rated table “C”, 75% rate increase.
With rare exceptions, most all death proceeds received from life insurance claims are income tax free. Life insurance proceeds could be taxable as income if the owner, insured and beneficiary are all 3 different people or entities.
If the owner is not the insured, the beneficiary needs to be the owner.
If the owner is the insured, anyone desired could be the beneficiary.
Some of my clients have had previous health issues that make it difficult to get life insurance. In cases like this, I take a trial application and ship it to as many as 50 insurance companies to review prior to a medical exam in order to see what company will make the best tentative offer. In a couple of extremely large cases, I was able to place the coverage because only one of those companies offered an acceptable rate.
Even though most life insurance policies allow people that are terminally ill to receive a portion of the death benefit while living, many policies now also allow access to some of the death benefit while living for critical and or chronic illness. This feature could reduce the amount of long term care insurance that one may need to purchase.