In recent years, Americans have experienced economic challenges. While some are maxing out credit cards and cashing in 401(k)s, many overlook life insurance as a potential source for emergency funds. And, few are aware of the investment features some policies offer.
When thinking about life insurance, you should know there are two main types: term and permanent. A term life insurance policy pays if the insured dies during the “term” of the policy. Permanent life insurance, the type of policy that offers investment features, combines the death benefit coverage of a term policy with an investment component that can build cash value over time. Some permanent policies also include provisions for policyholders to access money immediately for any reason.
Permanent Life Insurance Options
Unlike term insurance, all permanent policies remain in place as long as the premium is paid. They also all have a cash value component that increases over time and allows the owner to borrow against that cash value. There are four types of permanent life insurance:
- Whole Life Insurance
- Offers a fixed premium for the duration of the policy, guaranteed annual cash value growth and a guaranteed death benefit.
- Does not provide investment flexibility and, once established, you are not allowed to change the policy coverage.
- Universal Life Insurance
- Allows the policyholder to determine the amount and timing of premium payments (within certain limits) and to adjust coverage levels as needs change.
- Includes guaranteed annual cash value growth but no investment flexibility.
- Variable Life Insurance
- Allows allocation of investment funds across stocks, bonds or money market accounts with different levels of risk and growth potential.
- A minimum cash value is not guaranteed because of market fluctuation, and coverage amounts cannot be changed.
- Exposes the policyholder to greater market risk, but has the potential for greater long term returns compared to whole or universal life insurance policies.
- Variable Universal Life Insurance
- Combination of variable and universal life insurance.
- Offers the most flexibility (compared to other permanent life insurance options) with the ability to vary premium payments, investments and coverage amounts.
- Allows investment in a variety of market products chosen by the policyholder, and may allow policyholders to make tax-free transfers among investments.
- Exposes the policyholder to greater market risk than whole or universal life policies.
There is more to think about than the death benefit when selecting life insurance. If you choose permanent life insurance, be sure to consult a licensed investment or tax advisor for guidance on which policy best fits your risk tolerance and investment objectives.
A number of factors may affect life insurance premiums:
- The age you purchase your policy. The older you are, the more expensive the premiums.
- Your overall health. Life insurance companies typically ask you about your medical history, request access to medical records and even obtain blood and urine samples for testing.
- Pre-existing and/or chronic health problems, such as diabetes, heart disease, cancer or sexually transmitted diseases may prevent you from getting life insurance or place you in a high-risk pool at greater cost.
- Poor health habits, such as smoking and excessive drinking. Be aware that insurance companies may look back and consider these behaviors for the past five years.
- Engaging in dangerous hobbies, such as skydiving, skiing or rock climbing
- Your driving record, in terms of accidents, DWI/DUI citations, claims and tickets. The better your driving record, the better rates you’ll receive for your life insurance.
- Your geographic area. Life insurance companies have access to regional data that document mortality rates and life expectancy, and they use that data to calculate the rates they offer.
Some of these factors are in your control. Others are a function of your genetics, occupation or location. Either way, it’s important for you to be educated on these issues so that you can make the best insurance decisions to fit your life.
Read the fine print. Look carefully at the annuity you are considering. Check the interest rate, find out how quickly the annuity will grow in value and when you can reap its benefits. Some annuity rates can change over time, so make sure that you understand the difference between the guaranteed minimum rate, the current rate and any first-year or so called “bonus” rates. Also make sure you know whether the annuity is tax-deferred, meaning that you will not have to pay taxes until you receive payments from the annuity.
Try before you buy. Many states have “free look” laws that give you a set number of days — typically 30 to 60 days — to review an annuity contract after you buy it. You can back out of the contract at any time within the “free-look” period; a refund is required to be issued within an allotted time period, as stated in your contract. Take advantage of this review period to make sure you understand what you are purchasing.
Don’t get caught by surrender charges. Withdrawing your money from an annuity before it has matured might subject you to fees, known as surrender charges, as well as other administrative fees and acquisition costs. There could be high penalties if you make a withdrawal prior to the maturation date provided in the policy. Be sure you are aware of these provisions so that you don’t inadvertently incur such costs.
Don’t judge a financial professional by title alone. Designations such as “certified senior adviser,” “certified retirement financial adviser,” “chartered senior financial planner” and “certified financial gerontologist,” might seem to imply expertise in providing investment advice to senior citizens. However, such titles don’t always guarantee that the financial professional actually has specialized knowledge or education in that area. Ask them what the designations mean to them and what they had to do to earn them. Ask them if they have ever lost or given up a designation and, if so, why.
Ask for help. Many people have been harmed by annuity scams. If you are concerned that you might have been misled by a fake company or fraudulently sold a misrepresented product, call your state insurance department to get assistance and/or to file a complaint. You can file a complaint directly with your state insurance department via the NAIC’s Web site at www.naic.org/cis/fileComplaintMap.do.
Check the insurance company’s credit rating. Through resources such as Standard & Poor’s, A.M. Best Co. or Moody’s Investors Services, you can see whether the annuity company you are considering has a solid credit rating. An “A+++” or “AAA” rating is a sign of strong financial stability.
Check the NAIC’s Consumer Information Source (CIS). The NAIC provides a database for consumers to research an insurance company’s financial information and complaint data. The information in the CIS is supplied voluntarily by state insurance departments. Not all states provide the data, nor are all companies listed within the directory.
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