Finding the Right Insurance
Finding the right life insurance to meet your needs can be an agonizing process. The following is a life insurance primer designed to help educate you on the different types of life insurance so you can be better informed about your alternatives.
Once you think you have found the appropriate types of life insurance that may meet your needs, we suggest searching our checklists of life insurance questions in the Resources section of our website.
Appropriate Uses of Term Life Insurance
Term insurance is most appropriate when a large death benefit is required and there are cash flow limitations.
Term insurance is also appropriate when the need for life insurance is short term (10 to 20 years or less) and there are not other foreseeable needs that could extend the duration of the life insurance protection beyond this time period.
Appropriate Uses of Traditional Universal Life Insurance
Universal life insurance can be appropriate when a death benefit is needed for more than 10 to 20 years, but not necessarily for the insured’s lifetime. Examples include funding a buy/sell agreement until the owner’s retirement, or providing family protection until the insured’s retirement.
Universal life insurance can also be appropriate when premium payment flexibility is needed because, unlike term or whole life insurance, there is no fixed premium.
Finally, universal life insurance can be appropriate if the premium payor wants to spread the premium payments out over most or all of the projected duration of the policy. This premium payment arrangement leads to a lower annual premium payment than premiums paid over a shorter time period.
Caution: When paying premiums every year to achieve a minimum annual premium payment, it is important to make sure that the premiums do not become too low, leading to a premature lapse of the policy. This situation can be prevented by regularly requesting an “in-force illustration” calculating the minimum annual premium required to sustain the policy for the desired duration at the current interest rate and the currently projected cost of insurance, or at a more conservative assumption such as an interest rate 50 to 100 basis points below the current interest rate.
When Is It Appropriate to Consider Universal Life Insurance With No Lapse Guarantees? (click to view checklist)
Guaranteed premium universal life insurance is appropriate when estate planning life insurance is needed for the insured’s lifetime. The policy offers a guaranteed minimum premium on an annual payment basis, a shortened premium period, or a single premium. Often the guaranteed premium universal life insurance policy works best when the insured is 60 to 70 years old or older and in good health. Many policies designed around a guaranteed premium to age 100 or beyond have a substantially lower cash value than non-guaranteed universal life insurance, so there should be no desire for cash value when using guaranteed universal life insurance.
Appropriate Uses of Variable Life Insurance
When Is It Appropriate To Consider Variable Life Insurance? (click to view checklist)
It is appropriate to consider variable life insurance as an alternative to traditional universal life insurance or whole life insurance when the policy owner is willing to assume the higher investment risk associated with the non-guaranteed subaccounts within a variable life insurance policy.
The policy owner is willing to assume greater investment risk than in a traditional interest bearing universal life or whole life insurance policy through more speculative and growth-oriented subaccounts within the policy in an effort to increase the policy cash value, either as an income tax deferred accumulation account or as a strategy to reduce future premium costs.