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TERM LIFE INSURANCE

 

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The Basics of Term Life Insurance

Should you "buy term and invest the rest," or fuel your life insurance with "the power of cash value"?

Term life insurance is often touted for its "pure insurance protection," which includes none of the cash value features inherent in whole life policies. Term life insurance covers you for a specific period of time - as short as one year, or as many as 10, 20, or even 30 years.  You can also buy term insurance that covers you until you reach a certain age, usually 65 or 70.  Term insurance policies expire at a set time.

Generally, you purchase term life insurance if you want to protect your loved ones from debts. For example, if you and your spouse own a home, and you were to die tomorrow, your spouse could be stuck paying the mortgage on his or her own. If you had a term life insurance policy, your spouse could have enough money from the policy's death benefit to pay off the mortgage.

Term insurance doesn't just cover specific debts, however. If you have children or if your spouse does not work, term insurance can protect your family's finances, providing money for college and living expenses if you die before your children are fully grown.

Medical exam is usually required for term life insurance

When you apply for term life insurance coverage, the insurance company will probably require a medical exam  before issuing a policy. Some companies require a medical exam for all policies, but others require the exams only for policies with a substantial face value.

The examination is basic, covering your height, weight, medical history, and blood and urine testing. With the blood and urine tests, the insurer looks for specific medical problems. Positive results could affect your premium, or even your ability to buy a policy.

Smokers will pay more for life insurance, although cigar smokers  might get less expensive premiums than those using cigarettes. If you smoke marijuana, but not cigarettes, you still must admit to being a smoker on the policy application. Insurers don't generally differentiate between different types of smoke inhalation. (Marijuana users must also disclose their drug use.)

As you age, the likelihood you will die sooner increases. That's why older individuals pay more for life insurance. Many term life insurance policies give you the option to renew your coverage at the end of the term without undergoing another medical exam. You also can lock in low premiums by asking for a "level premium" policy. That means for a specific time period, say 20 years, your premium rate stays the same. After that term expires, your rates will increase.

If you have trouble finding term life insurance because of illness or a troubled medical history, you can turn to guaranteed issue life insurance coverage, also called "quick issue" or "simplified issue" insurance. Guaranteed issue policies require no medical exam, but you pay a higher premium in exchange for the guaranteed coverage.

That's because the insurance company takes on more risk in insuring people without knowing their medical condition. Guaranteed issue policies can require waiting periods before coverage kicks in, and often require yearly fees. They might be the only option for some people. A life insurance broker can search the marketplace for a guaranteed issue policy that meets your needs.

How long a term?

When you are researching what kind of policy you should buy, your income, short-term and long-term debts, and financial obligations to your loved ones  are among the factors to consider.

Figuring out which term you should buy - 10 years, 20 years, 30 years, or some other number - requires a major review of your debts, financial needs, dependents' needs, and when all these might change. One professional suggests you ask yourself, "When will my dependents reach financial independence?"

Also look at major debts, such as mortgages or other loans, and at how much money your spouse or dependents would need in order to pay them off if you die.

Another pro says it's a good idea to review your life insurance needs carefully, both when you buy the policy and on a regular basis throughout your life. "You may not have the coverage you need. You may have more than you need," Ruch says.

The expert has the following recommendations for anyone buying life insurance, or anyone who already has coverage:

·         Schedule a routine "check-up" with your insurance providers at least once a year.

 

·         Shop around for identical products and services. Not every company charges the same rate.

·         Remember an insurance policy is a legal document. Read it carefully, and make sure you understand what your policy states.

Determining the best term life insurance coverage for your family is an important financial decision, both now and for the future. " Consumers can save themselves hundreds, and sometimes thousands, of dollars if they know how to shop wisely for insurance," says an expert.

"If you are purely interested in financial protection for your family, that's what term life insurance is designed for. So when your children are grown, reconsider your life insurance needs," the expert says. You might still need coverage if a spouse or other relative depends on you. On the other hand, you might be able to scale back on the amount of life insurance you own.

"Perhaps you want to leave assets for your heirs, or for charity, or you need the death benefit for business planning purposes.  These are all areas where term life insurance can play a role, but it's really designed for financial protection," Dolan says. For that reason, after you've purchased life insurance coverage, you should periodically evaluate whether your current coverage amount is still right for you.

Term vs. whole life insurance: The cash value debate

Variable universal life insurance (VUL), a form of whole life insurance, is popular because it offers a pool of money known as cash value that builds up with interest over time. The interest earned is based on the performance of the stocks, bonds, and mutual funds in which you choose to invest the cash value.

Some financial planners advocate VUL policies because they force you to save money in the cash value component. Others recommend you buy term insurance for the cheaper premium, and then invest the money left over in mutual funds or other investments. VUL also allows you to change your death benefit - and subsequent premium payments - over time.

Cash value in term life insurance should not be considered a traditional investment, because any partial withdrawals or loans will reduce your death benefit. Also, if you partially withdraw your cash value or take out a loan against it, and the cash value exceeds the premiums you have paid into the policy, you will face a tax bill.

In addition, every year you own the policy, more of your premium goes to pay for the cost of insuring you, and less goes toward the cash value.

We all should recognize the importance of term life insurance. After all, we want to make sure that our loved ones are taken care of when we die. But before you run out and purchase a policy, do some research ahead of time. That way, you'll be sure to get the best possible coverage at the right price. Here are some helpful tips to get you started:

1. Shop around  
2. Never buy more term life insurance coverage than you need
3. The healthier you are, the better the rates
4. Buy sooner rather than later
5. Realize the importance of periodically reviewing your coverage
6. You don't necessarily have to pay a commission
7. You may be paying more for monthly premium payments
8. Don't rely solely on the life insurance offered by your employer  
9. Tell the whole truth and nothing but the truth
10. Buying more is sometimes cheaper

Shop around
When it comes to term life insurance, it pays to shop around because premiums can vary widely. And thanks to the Internet, it's now easier than ever. Try out one of the many insurance websites that can provide you with instant quotes. Make sure the website you shop from takes into consideration the factors in your medical history that can affect the premiums.

Never buy more coverage than you need
The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you'll be paying unnecessarily for higher premiums. On the other hand, it's important not to have too little coverage, resulting in you being underinsured.

The healthier you are, the better the rates
It's true – healthy people get better rates on term life insurance. You will be asked to pay a higher rate for anything that shortens your life expectancy (e.g., if you smoke, take medications regularly  , are overweight, have a bad driving record).

Buy sooner rather than later
If you've been putting off purchasing term life insurance because you don't want to pay the premiums, you may be doing yourself a disservice in the long run. The younger you are when you purchase life insurance, the lower your premiums will be.

Realize the importance of periodically reviewing your coverage
Any life change signals the need for a review of your overall financial plan. When it comes to life insurance coverage, you'll want to make sure that this major life event (e.g., birth of a child , children are grown) won't leave you underinsured or overinsured.

You don't necessarily have to pay a commission
One of the reasons for higher premiums is that most life insurance policies pay commissions to the agent/broker. However, you may be able to purchase a no-load policy through an insurer that sells no-load policies directly to consumers.

You may be paying more for monthly premium payments
You may not realize it, but you may be paying more for your term life insurance if you pay your premium in monthly installments. Many term life insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium.

Don't rely solely on the life insurance offered by your employer
Many employers offer their employees some sort of group life insurance. But this amount of coverage is usually not enough to adequately meet your life insurance needs. In addition, group life insurance policies are not portable, meaning that if you leave your job, you can't take your life insurance coverage with you.

Tell the whole truth and nothing but the truth
If you're thinking about lying on your insurance application, think again. If your insurance company finds out that you lied about a health-related condition or your lifestyle (e.g., smoking habit), they may be able to terminate your coverage.

Buying more is sometimes cheaper
Life insurance usually costs less per thousand dollars once you get into higher coverage amounts (e.g., $250,000). If the numbers work out, you may be able to pay a lower premium while increasing your coverage.

Buying term life insurance is an easy way to protect your family after you're gone. If you know what to look for, you can get great coverage at a price you can afford.

Why buy life insurance?
Topping the list of reasons to buy term life insurance is the financial protection term life insurance offers. If you're single and just starting out, you may not need term life insurance. But as you take on more responsibilities and your family grows  , your need for term life insurance increases. The proceeds from a term life insurance policy can replace the income lost to your family upon your death. You might also want to buy term life insurance to pay off debts and expenses, leave money to charity, and cover final and estate expenses.

Choose term or cash value
There are two basic types of life insurance: term life insurance, which provides life insurance coverage for a specified period of time (the term), and cash value (permanent) life insurance, which combines a death benefit with a cash value component. Cash value insurance offers lifetime protection, while term insurance may be the most affordable option if you're buying life insurance mainly for the financial protection it offers, and your need for life insurance is temporary (until your children leave the nest, for instance). Some term policies (called "convertible") will permit you to exchange the term life insurance policy for a permanent one at some point.

Decide how much coverage you'll need
The amount of life insurance protection you should buy depends on how much income your survivors will need, how much you own and owe, and the amount of other life insurance available to you. If you're married, both you and your spouse should consider buying life insurance. One of the easiest ways to estimate how much life insurance protection   you should buy is to use a term life insurance needs calculator.

Pick a number between 1 and 30
Term life insurance is usually offered for periods ranging from 1 to 30 years. Consider choosing a term that matches your need for life insurance protection. For instance, if your main reason for buying life insurance is to protect your 7-year-old twins until they're out of college, you'll want to buy a policy with a term of at least 15 years.

How much will it cost?
How much you pay for life insurance will depend on a number of risk factors, including your age, your health, whether you use tobacco,    your family health history, and the type and amount of life insurance you're buying. Keep in mind that the premium you're quoted initially will increase later.

For instance, when you buy term life insurance, rates are guaranteed only until the end of the term (annually for annual renewable term or at the end of a specified number of years for level term). While most term life insurance policies can be renewed at the end of the term, you'll pay a higher premium for coverage.

Shop around
When comparing quotes for life insurance, make sure that the insurance coverage you're comparing is similar. And remember, any policy that you buy is only as good as the company that issues it. Find out what rating the company has received from major ratings services, such as A. M. Best or Standard & Poor's.

These companies evaluate an insurer's financial condition and claims-paying ability. The company giving you a quote should provide you with this information. You can also contact your state's department of insurance to find out more about an insurer's record.

Submit an application
Once you're ready to purchase a life insurance policy, you'll fill out a term life insurance application that contains questions about your current and past health history and lifestyle. You'll generally be required to take a medical exam, arranged and paid for by the insurance company.

The answers you give on your application,   along with the results from the medical exam and your past health history, will help the insurance company determine whether to offer you a policy, and if so, at what price.

Learn the lingo
Maybe a term life insurance contract isn't as exciting as a best-selling novel, but read it anyway. Policy provisions, the amount of benefits, the premium, and other charges you'll pay will be listed along with other important information such as the beneficiaries you've named and the premium guarantee period.

Make sure you understand everything in the policy. Under the laws of your state, you may have a "free look" period (typically at least 10 days) during which time you can cancel the policy without penalty.

10 WayTechniques s to Save on Term Life Insurance

Just as there are different life insurance plans to meet your needs, there are different ways to save money on life insurance.

The most important is to shop around. There are hundreds of insurance companies, offering a wide variety of plans and prices. You could save big bucks, just by doing some comparison shopping.

Here are 10 more ways you can save money on your next life insurance purchase:

Consider term insurance

Some financial planners advocate life insurance policies with cash value components because they force you to save money. Others recommend you buy term insurance for the cheaper premium, and then invest the money left over in mutual funds or other investments.

The Texas Department of Insurance claims for those who want to save money, or who cannot afford the larger premiums for whole life policies, term insurance is a good option: "Term life insurance usually gives you the most coverage for the least cost."

If you choose to buy a whole life policy, there are also ways to save money. "You may save money, particularly in the purchase of cash value policies, by buying a policy with low administrative fees," the Texas Department of Insurance advises.

"A small number of companies sell these 'low load' policies by mail or telephone. Financial planners, licensed as insurance counselors, also may sell low load policies. Generally, these planners charge service fees   and do not receive commissions. Since the initial fees are low, they reduce your risk of losing money if you cash out early."

Cash value in life insurance should not be considered a traditional investment, because any partial withdrawals or loans will reduce your death benefit. Also, if you partially withdraw or take out a loan against your cash value, and the cash value exceeds the premiums you have paid into the policy, you will be hit with a tax bill.

In addition, every year you own the policy, more of your premium money goes to pay for the cost of insuring you, and less of it goes toward the cash value.

Furthermore, the difference in price is not just a matter of a few dollars per year. According to one expert, the annual premiums for a universal or whole life insurance policy could be eight or nine times more than a term life insurance policy with the same death benefit.

Seek out no-commission term life insurance policies

"No-load" or, more appropriately, "low-load" life insurance policies have fewer expenses built into them, such as agent commissions and fees for marketing, than more traditional life insurance policies. This can mean lower premiums. For variable life insurance, these lower expenses mean a higher percentage of your premium goes to work for you right away, allowing you to build your cash value faster.

No-load policies can be purchased through financial advisors, who charge "flat fees" rather than collect commissions from insurance companies. Several companies also sell "no-load" or "low-load" policies directly to customers.

Don't buy a guaranteed issue policy if you are healthy

"Guaranteed issue" term life insurance policies, also called "simplified issue" or "quick issue" policies, require no medical exam and are sold to anyone who comes along. For this reason, guaranteed issue policies are riskier for the insurer than policies that require medical exams   , and are thus more expensive than regular term insurance policies. While these policies can be a great way for people who have medical problems to obtain life insurance, if you're healthy, you'll get better rates by taking the tests.

The high premiums, combined with a low face amount for the death benefit, can make guaranteed issue life insurance a less desirable option. For some of these policies, you could end up paying more in premiums after only a few years than your beneficiaries will ever receive from the term life insurance company.

The problem of consumers paying more in premiums than their beneficiaries will receive in death    benefits has drawn the attention of state insurance regulators. The National Association of Insurance Commissioners (NAIC) has established a working group to consider what, if any, actions it should take.

Although critics have questioned the ethics of selling insurance products that might perform worse than a savings account, no insurance companies seem to be making excessive profits on these policies, according to Ernst Csiszar, the director of the South Carolina Department of Insurance and the chairman of the NAIC working group on small face value life insurance.

"We are developing a disclosure statement that would warn consumers of the possibility that they might pay more in premiums than the face value of the policy," says Csiszar. "Anything more than that would potentially be a form of rate regulation, and the consensus of the NAIC is that we are simply not prepared to regulate the rates of life insurance."

Shop online first

While not all online life insurance quoting services will give you the best quote available for term life insurance, they can still be a useful source of information about prices. Just remember, the more personal information you give, the more accurate your online quote will be, but "the lowest quote" should still only be used as a baseline for shopping around.

Improve your health

Having health problems can make it hard for you to buy life insurance. High blood pressure   , diabetes, and heart disease are among the conditions that can make life insurance companies reluctant to sell you a policy.

Life insurance companies want their policyholders to be in good health at the time of purchase. You're rewarded with lower premiums if you're in excellent health, because it reduces your chances of dying sooner. One expert says many companies are dividing up their non-smoker rating classes into as many as five different categories based on many different types and combinations of medical conditions.

Then there are rates for smokers. Research shows smokers pay nearly three times the premium of non-smokers, and you can't quit the day before you apply. According to the professionals, no company will offer you a non-smoker rate if you've quit for less than a year. For many companies, the minimum "nicotine free" period is two years for a non-smoker rate. Some companies will consider you a smoker    as many as five years after your last cigarette.

If you smoke marijuana , pipes or cigars, but not cigarettes, you still must admit to being a smoker on the policy application, although insurers don't generally differentiate between different types of smoke inhalation. (Marijuana users must also disclose their drug use.)

Insurance companies use urine tests to check for the presence of nicotine. If you chew tobacco, you might end up with smoker rates on your life insurance policy.

If you're healthy but somewhat overweight, you still might have a hard time buying life insurance. Even if you're not obese v , there are some cases where you'll have to pay more for life insurance if your weight reaches a certain level. In most instances, the heavier you are, the more you'll pay.

If you have a pre-existing medical condition that could lead to higher rates, by showing your insurer a history of improving your health, taking your medications regularly, and acting responsibly about your health, you'll make your underwriters happier and probably get yourself lower life insurance premiums.

Don't buy more, or less, than you need

Many experts say the best way to determine the amount of life insurance you need is a needs analysis. It's a basic formula: short-term needs + long-term needs - resources = how much life insurance you need. A term life insurance expert in Denver says this method is "probably the most accurate approach in what is an inaccurate and imprecise science."

Experts advise you do an analysis at least once every three years, or whenever you have a major life change. For example, if you have a new baby, you have to recalculate college education    needs and child-care costs. If you own a home, a mortgage is likely your biggest financial burden. Because your mortgage balance decreases with each payment, it's important to include those revised figures in your calculations.

If you need more life insurance, get a rider as opposed to a new policy

Just because your needs change doesn't mean you should run out and buy a new life insurance policy. In many cases a rider - an amendment to an insurance policy - can let you expand your coverage without sacrificing your built-up cash value. At the same time, be sure to shop around. If you're still in good health you might be able to get a better deal by buying a second policy to supplement your original one.

Buy as soon as the need exists

An advantage to buying life insurance earlier in life is your premiums will be lower. As you age, life insurance gets more expensive. Many term policies give you the option to renew your coverage at the end of the term without undergoing another medical exam. You also can lock in low premiums by asking for a "level premium" policy, which means for a specific time period, say 20 years, your premium rate stays the same. After that term expires, your rates will increase.

If you don't have any dependents, your money might be better spent elsewhere.

Check your cr report before you apply

Just as you should check your credit rating before applying for a loan, you should have a look at your credit report before purchasing a life insurance policy.

If there are problems with your credit  , you could be denied coverage or be placed in a higher risk class because insurance companies will be concerned you would let the policy lapse due to non-payment of premiums. If this happens in the first few years a life insurance policy is in effect, the insurer stands to lose a lot of money because of the high up-front commissions they pay to agents.

According to another term life insurance expert, some general agents, who supervise insurance agents, can earn as much as a 90 percent commission on the premiums you pay on a life insurance policy for the first year. That number can soar to more than 100 percent due to the bonuses typically used by life insurance companies as sales incentives.

Fractional premiums

Once you've found the best insurance policy for your specific needs, find out if you can save money by the way you're billed. Some insurers charge you less if you pay annually, and more if you pay monthly.

In general, the fewer payments you make over the course of the year (known as fractional premiums), the less you'll pay overall. Also, some insurers charge less if they can deduct the premiums directly from your checking account.

Saving money after you've bought a life insurance policy

Just because you've been put in a relatively expensive rate class by your life insurance policy doesn't mean you're out of luck.

According to another term life insurance expert, if you see your doctor regularly   and establish a record of being a "responsible patient," there's a pretty good chance you can improve your insurance rates.

"If you have a rate-able impairment, ask your insurance company if you can apply for a rate reconsideration in a year or two," says the expert. If you've established a history of lowering your blood pressure, cholesterol, or any of the other controllable rate increasing factors, many insurance companies will be willing to lower your premiums, says the professional.

Buying term and investing the difference is a concept involving term life insurance and investment strategies that provide individuals an alternative to permanent life insurance. Generally speaking term insurance premiums are considerably less expensive in the short term than permanent life insurance for an individual for the same benefit amount.

Permanent programs are more expensive because they typically combine some form of  cash   accumulation with the insurance program as a single package. Consumers making use of the "buy term invest the difference" concept, separate their investments from their insurance by setting aside money every month equal to the premium that a permanent plan would require, then use a portion of this money for the term premium and place the rest in a tax-deferred investment vehicle.

Cases for and against implementing the strategy

The advantages of this strategy, if implemented correctly, are obviation of insurance, immediate accumulation of investment moneys, more investment options that allow for similar tax advantages, and return of cash accumulation. Other advantages include elimination of loans and stability in the death benefit.

Obviate the need for permanent insurance

Pros

This viewpoint assumes consumers believe that they can self insure and will eventually be able to eliminate the need for permanent insurance. They believe the responsibilities for which they purchase life insurance are temporary in nature (paying off mortgage and/or debts, provide education for dependants and create cash reserves to replace the income of the breadwinner.)

In the event of the insured's death  , many or all of these responsibilities can be resolved using the proceeds from the policy or policies. When the consumer has cash reserves large enough, they consider themselves to be "self insured". Insurance terms may be a number of years in length (1, 5, 10, 20 years or more) which, in theory, should provide enough time for the insured to invest and eliminate these responsibilities.

In the event these responsibilities are not eliminated at the end of the term, many insurers will allow the insured to renew their current policy (guaranteed renewal) or purchase a new policy (conversion) without being subject to the same medical and financial qualifications as a new applicant.

Cons

First of all, "Self Insure" is a misnomer, since a financial loss is not indemnified. Anyone adopting this strategy is simply retaining the risk and, ultimately, would be willing to accept a loss. For example, someone with a home worth $500,000 who has $1 Million in cash could (theoretically) cancel their fire insurance and self insure. If their house burns down, they have enough money to buy or build another.

They will still suffer a cash loss, however, since they have chosen to retain their own risk. If, on the other hand, they never have a claim that would have been settled by property insurance, they have saved the premiums they would have paid, along with the earnings on those premiums. In this case, it can be proven that they came out ahead by not buying insurance.

The risk they retained, however, was enormous.

Those who believe in buying Term Insurance and investing the difference in premium between a Term and Permanent policy must intend to obviate their need for life insurance, since the Term policy will eventually expire or become too expensive. If they are not disciplined enough to invest, pay off their debts, or assist their dependents   in becoming independent, they still have a need for insurance. For individuals with additional responsibilities or an indefinite responsibility, this strategy would not be beneficial.

Term and Permanent Insurance both exist because a need for both exists. When selecting the proper type of insurance, it is necessary to take into account needs, wants, goals and means. Some people may have a permanent need for life insurance, especially when it comes to paying estate taxes. For those with substantial estates, the survivors may have to give up cash or sell off assets to pay the government.

Life Insurance provides a very efficient way to pay estate taxes, especially with policies that pay out (at death   ) the initial amount of insurance and return all premiums paid as well. Most proponents of Term + Investment are using this strategy to build up a large estate, but do not protect it for the next generation. It can be agreed that this is not necessarily a "need" but a "want."

 However, a want is nonetheless a legitimate concern, since someone who builds an estate has the right to see it preserved if they see fit.

Immediate accumulation of investment money

Pros

Permanent or whole life insurance (life insurance that typically provides a death benefit for the lifetime of an insured person up to age 100) policies usually direct a portion of the premium payment to a sub-account within the policy, called cash value and the other portion to insurance.

There are many different permanent life insurance products available with a range of options involving the cash value of the policy, including the ability to withdraw the cash value, borrow against it, and to allow it to be drawn on to pay the insurance portion without additional premium payments.

Ultimately, most permanent life insurance policies are combination of term insurance with a savings vehicle. Insurers may break down a policy into 2 components, the term insurance portion (the net amount at risk) and the cash value (the guaranteed amount).

The cash value in the sub-account can accumulate over the life of the policy depending on the policy, however it is not always available for the first several years of the program.

Universal and Variable or Variable Universal policies typically have immediate accumulation in the sub-account, but are typically not available for loans and are most often subject to a surrender charges for the first several years of the program (in the case of plans paying a premium close to the minimum, this is frequently in excess of the accumulation).

With the concept of buying term instead of permanent insurance, more investments vehicles are available, all of which are independent of the insurance program and remain in control of the insured if the insurance portion is canceled.

Cons

The con again is this approach requires discipline. As with budgeting, many consumers who reduce expenditures fail to invest the money saved, and simply allow it to be reabsorbed to become part of their monthly spending. An example is somone who quits smoking    thinking of all the money they'll save. looking at things a few years later, it is a rare occurrence for anyone to actually have a large amount of money in their special "non-smoking" investment account.

Investment options

Pros

This practice leaves the insured open to utilize whatever investment options they see fit. However, to take full advantage of the tax benefits of permanent programs they should first be understood. Life insurance death benefits are never taxable, and cash value growth on permanent plans are tax-deferred as long as the policy is in force.

If the policy is canceled (because the need for insurance is obviated) any accumulation in excess of Adjusted Cost Base (ACB) will be taxable. It is often thought that the only way to avoid these taxes is for the insured to die while the policy is in force (essentially making these monies unavailable to them).

Depending on how the insured structures themselves premiums may be paid with pretax dollars (as a business obligation in a corporation for example), but are most often paid with after tax money. Variable plans provide the insured the opportunity to choose the investments, though the investment vehicle is still within the life insurance plan.

To attain similar tax advantages, the insured may make investments through a tax deferred vehicles, such as an annuity, variable annuity, IRA, Roth IRA or even 529. Monies applied to a traditional IRA are pretax dollars while those applied to a Roth IRA are after tax. Both investment vehicles grow tax-deferred, similar to cash accumulation; however money withdrawn from a Roth are not taxed. 529s are educational accounts, and annuities are another form of life insurance account. (see http://www.irs.gov/pub/irs-pdf/p590.pdf http://www.irs.gov/retirement/article/0,,id=136868,00.html)

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Each program has provisions for accessing monies invested early as does permanent insurance; however the insurance death benefit is not impacted by accessing it.

Cons

Again this requires the implementer to research investments and how to best take advantage of them.

Return of Cash Accumulation

Pros

Proponents of BTAID (Buy Term And Invest the Difference) indicate the greatest advantage of this concept is the return of cash accumulation. Many permanent policies can be thought of as "cash surrender  " life insurance, due to the fact that the cash accumulation may be used to pay a portion of the death benefit (this may vary per program see below).

Each permanent program handles treatment of the cash value differently, but in the end the cash accumulation is always surrendered, even in return of premium policies or universal life plans that elect to pay the cash value option as well as the death benefit.

To illustrate this, consumers may review the loan provisions on their policy. The cash    accumulation could be drawn out of a permanent program as a loan, to be paid back with interest to the program. However, in the event of the insured's death, the death benefit is reduced by the amount of the loan. If the policy is cancelled, the loan is deducted from the cash value and the net paid to the insured.

To contrast this with the BTAID strategy, the accumulation is in a separate investment owned by the insured. In the event the insured dies while the insurance policy is in force, the beneficiary of the investment receives the investment as well as the death benefit of insurance policy. There may or may not be tax due on the investment account depending on whether the investments are in a gain or loss position.

If the insured dies when the policy is no longer in force, the beneficiary of the investment receives the value of the investment account, again after any applicable taxes, but no benefit from the insurance policy.

Some permanent insurance contracts offer "Plus Fund" or "Return of Premiums" as options for receiving the death benefit. In these plans, the initial amount is paid out, plus the cash accumulation or all premiums paid. In these programs where the cash accumulation is paid out, the insurance company, in essence, creates an additional policy. Premiums are generally higher for these types of policies, so consumers who are considering the BTAID strategy should take this into account as well when calculating    the opportunity cost.

Cons

Most tax-favoured investment vehicles have a cap as to the contributions that can be made on an annual basis. Individuals in some jurisdictions, though, may have maximized all available programs that can provide tax deferral or tax relief. Overfunding A Universal Life policy may provide an additional shelter. The proceeds may be passed on to their survivors and are also resistant to penalties brought from lawsuits. This has sometimes been criticized, since the insured person must die in order to pass on the savings with no tax consequences.

In recent years, however, strategies have evolved to increase the attractiveness of using a life insurance policy for investment. The IRP or "Insured Retirement Plan" is a program where a life insurance policy is overfunded for several years. When the cash value is to be accessed, the policyholder may assign the policy to a lending institution in exchange for a loan or line of credit.

The plan is monitored so that the loan principal and interest accumulation can never exceed the proceeds payable on death of the insured. Upon death, the loan is repaid and the remainder can still be paid out tax-free to the beneficiary or the estate of the insured. This means that an insurance policy can be used to tax shelter   money. Even this has a limit, though, since there will be a maximum annual contribution to the policy based on the age of the insured and the face amount.

The IRP, also known as "Life Insurance Leveraging" is a sophisticated strategy, used with paid-up policies that have large face amounts and large amounts of cash within them. The plans need to monitored carefully, but many financial institutions now have agreements with insurance companies to provide administration of such plans.

Other

Because of the increased premium at attained (then current) age, additional consideration should be given renewal or conversion of term insurance at the end of the original term. Also, purchasing annual renewable term insurance can add complexity to long-term investment strategies because premiums increase as the insured ages.

The basic forms of permanent insurance include:

·         Simple whole life insurance is essentially decreasing benefit term insurance, as the net amount at risk decreases at the same rate as cash value accumulates. Eventually, the cash value equals the benefit amount.

·         Universal life insurance is a form of whole life insurance in which, at a certain point, the cash value may be used to pay premiums and keep the policy active, or in force.

·         Variable life insurance and variable universal life insurance are permanent insurances in which some or all of the cash value in the sub-account may be invested in mutual funds, money markets, bonds, cash or other investment strategies.

Universal Life policies can now be structured with several different death benefit options such as:

Level Death Benefit - Where the face amount never changes regardless of cash accumulation within the plan

Indexed Death Benefit - Where the death benefit rises by a specific percentage each year (limits apply)

Level + Fund - Where the payout on death consists of the initial amount plus the cash or fund value

Level + ROP - Where the payout on death consists of the initial amount plus the return of all premiums paid

 

Term life insurance is the original

Term life insurance is the original type of life insurance and is thought to be pure insurance protection because it builds no cash value. This is in contrast to permanent life insurance like whole life, universal life, and variable universal life.

Term life insurance is temporary   , as it covers only a specific period of time, the relevant term. If the insured dies during the term, the death benefit will be paid to the beneficiary. Because the term expires the insurer often does not have to pay out making term insurance the most inexpensive way to purchase a substantial death benefit on a coverage per premium dollar basis.

Usage

Because term life insurance is temporary in nature its primary use is generally to provide for covering temporary financial responsibilities of the insured. Such responsibilities may include but are not limited to consumer debt, dependent care, college education for dependents, and mortgages.

Annual renewable term

The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one year term, while no benefit is paid if the insured dies one day after the last day of the one year term    . The premium paid is then just the expected probability of the insured dying in that one year plus a cost and profit component for the insurer.

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Since the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchasing one year of coverage is not generally done, nor cost effective. The main problem with this type of coverage is that the insured could acquire a terminal illness within the year, but not die until after the term expires.

Because of the terminal illness, the purchaser would likely be uninsurable after the expiration of the initial term, and would be unable to purchase a new policy. A variant that is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years.

This period varies from 10 to 30 years, or occasionally until age 95     . As the insured ages the premiums increase accordingly and later becomes financially unviable as the rates for a policy would eventually approach the face amount. In this form the premium is slightly higher than for a single year's coverage, but is much more likely for the insured to have the benefit paid.

Level term life insurance

Much more common than annual renewable term insurance is insurance where the premium is the same for a given period of years. The most common periods being 10, 15, 20, and 30 years. In this form, the premium paid each year is the same, and is the cost of each year's annual renewable term rates averaged over the term, with a time value of money adjustment made by the insurer. Thus the longer the term the premium is level for, the higher the premium, because the older, more expensive to insure years are averaged into the premium.

Most level term life insurance programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. This would be used if the health of the insured deteriorates significantly during the term.

Payout likelihood and Cost Difference for Term Life Insurance

Both Term life insurance and Permanent insurance use the exact same mortality tables for calculating the cost of insurance, and a death benefit which is income tax free, as long as the policy is in force and premiums are current, however the premiums are substantially different.

The reason the costs are substantially different is that Term life insurance programs potentially expire without paying out, while permanent programs must always pay out. Insurance industry studies show that it is very unlikely that the death benefit will ever be paid on an affordable term insurance policy. One study placed the percentage as low as 1% of affordable term policies paying a benefit.

The low payout likelihood allows Term insurance to be relatively inexpensive.  The low payout percentage is a combination of there being a low likelihood (in the aggregate) of a random, healthy person dying within a short period of time. Because of this low likelihood of an insurer having to pay a death benefit, term insurance is by far the most cost effective way and affordable to purchase a death benefit on a coverage per premium dollar basis.

Permanent life insurance offers coverage for the entire life of the insured and therefore must pay a death benefit on the death of the insured, or when the insured reaches statistical age of mortality (when the company closes the policy and pays), as long as premiums are current or there is enough cash value to cover the premiums in some cases.

This high payout likelihood, though, increases the rate per premium dollar substantially, up to 10 fold. Permanent coverage allows certain tax incentives, including tax deferred growth of cash value. This tax deferred growth is effective as a tax shield  but can not be realized unless it is paid out as a death benefit when the insured dies. If the policy is canceled any cash value growth above premium payments is taxable.

Conversion privileges

Some people may need to take advantage of the benefits offered by affordable permanent programs, but may not be able to attain the proper coverage or higher premiums, many term policies offer a conversion privilege for a certain period of years, allowing the insured to convert to a permanent policy regardless of health condition at the time of conversion.

In this way a person can obtain the necessary coverage for a young family, for instance by purchasing the affordable, inexpensive term insurance, but be able to utilize the benefits of a permanent policy as cash flows increase or as coverage needs decrease.

Conversion generally allows the policy holder to convert a term program to a permanent program with an equal or lesser death benefit without proof of insurability.

Brief term life insurance explanation. Life insurance companies offer two basic types of policies...term life insurance and permanent life insurance. By far the simplest in structure are the term life policies. They are also favored by most people today because of cost. They are affordable, less expensive than permanent policies.

That results with you being able to buy more life insurance for your dollar  . That makes sense since life insurance was designed to protect your loved ones in the event of your death. Let us therefore look at detailed term life insurance explanations. How do these policies work?

Term life insurance provides death benefit protection for specified periods of time. The periods range from 1 year to 25 or 30 years and some even up to age 65, age 80 or age 90.

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1 Year Term

The one year term policy is more popularly known as the yearly renewable term life insurance policy or the annual renewable term term life insurance policy. As the name implies it provides a death benefit for a very inexpensive level premium for one year. The reason it is thought of as a one year term policy is that even though you can renew it there is a premium rate increase each tear if you choose to do so. For the first 5 years or so, even with the rate increase, the quoted premiums are still quite inexpensive. After that period it can get quite expensive.

Upon your death  the full face amount will be paid to your loved ones, regardless of how you die other than by suicide. If you should commit suicide within a certain number of years, usually 2 years, from the date you purchased the policy the death benefit will be limited to the premiums paid. If you committed suicide after that 2 year contestable period the full face amount of the policy will be paid.

If you get a quote and buy any these policies you have the option of converting to a permanent life insurance policy within specified periods of time.

5 Year Term

Now let us look at a 5 year term life insurance explanation. The 5 year term life insurance policy is considered by this author to be a better deal than the one year term policy even though it costs a little more in premiums, according to quotations.

The reason for this conclusion is that the quotes and premiums remain level for the entire 5 year period. This policy has a level death benefit as well which is paid upon the death of the insured. This type of insurance can be purchased as a separate policy but some companies also sell it as a rider to a permanent policy.

10 Year Term life insurance

Another participant among inexpensive short term policies is the 10 year term policy. Let us examine a 10 year term life insurance explanation. This policy is very similar to the 5 year level term policy but the premiums are a little more costly. You can keep this policy up to 10 years and the death benefit is paid to your loved ones   in the event of your death.

15 Year, 20 Year, 25 Year And 30 Year Term life insurance.

The main difference between the two policies described above and 15 year, 20 year, 25 year and 30 year term life insurance policies is that these policies can be kept for longer periods of time. The face amounts, quotes, and premiums are level throughout with these policies.

In some companies, however, the premiums of the 20 year term life insurance, the 25 year term life insurance and the 30 year term life insurance policies increase every 5 years. The first increase sometimes kick in after 5 years but in some cases the first increase occurs in 10 years.

Riders

Since I am giving you a term life insurance explanation I perhaps would be very remiss if I didn't mention riders   that can be added to your policy.

Most life insurance life insurance companies allow you to add a waiver of premium rider to most any policy which says that if you should become disabled for usually a minimum of 6 months the life insurance company will step in and waive your premiums for as long as you are disabled even if it is for the rest of your life.

The accidental death benefit rider provides that if you should die in an accident the life insurance company will pay your beneficiaries twice the basic death benefit. If you therefore have a policy for $100,000 the life insurance company will pay $200,000...double indemnity.

I sincerely hope this brief term life insurance explanation will help you make a decision whether or not this type of life insurance would fit your needs.

Term Life Insurance: Money Saving Tips

Life insurance, specifically Term Life, is arguably one of the best values in the entire financial services arena. Where else can you go and get hundreds of thousands of dollars in protection for literally pennies   per day? Rates for term life insurance insurance remain at all-time lows, and now is the time to lock in the best prices. This article discusses some ways to help you save money when purchasing life insurance.

Buy when you’re young. Many people may feel they don’t need life insurance when they are young. While your financial needs may be lower at a younger age, the rates are also substantially cheaper when you’re young. Remember, the goal is to cover your primary assets (like your salary and house) so that if something were to happen to you, your beneficiaries would be able to persevere financially. The best advice is to get a quote and lock in as much protection at a young age while your health and prices are still good.

Your “half” birthday could be costly. While some companies raise their prices based on your actual age, most companies increase the price of their policies six months before your birthday. It’s a term called “Age Nearest” in the industry, and that half-year price increase could really add up over a 20-year term policy. As above, the quicker you purchase your policy the better.

Buy before any major health issues arise. Healthy people have the best mortality risks and thus are much cheaper for companies to insure. This translates into lower quotation rates for the “Super Preferred” customer than someone with higher risk factors such as a heart condition, cancer or diabetes. Conversely, if you were unhealthy when you acquired your policy, and your health has now improved, it might be time to shop for a new policy, as your rates are likely to be lower.

Check for price breaks. Companies often offer “price breaks” at certain coverage amounts (e.g., $250,000 vs. $225,000). The truth is that many people can actually pay less money for more coverage. Check how little your prices increase when you increase coverage to $250,000, $500,000, or $1,000,000.

Buy the right amount of coverage. Many agents   may try to sell you more coverage than you need. The purpose of life insurance is to “indemnify” (replace financial loss), and what most people should be looking for is income replacement for their beneficiaries. Independent financial planners recommend the following rule of thumb: purchase an amount of coverage equal to 6-10 times your annual gross income.

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The right hobby with the wrong company could cost you. People who participate in high-risk sports or activities (such as hang-gliding, skydiving, mountain climbing, scuba diving, and racing), or even those who like to have an occasional cigar could very well pay more money if they don’t pick the right company. Every company looks at risk factors differently and some are more liberal in certain areas than others. Speak with a licensed insurance expert and make sure they have all the underwriting criteria at their disposal and match you with the right company.

Work policies aren’t always the best deal. While purchasing a life insurance policy through your employer is convenient, it may not be the best deal available to you, according to quotations. Work policies are often based on a composite profile of the employees you work with, many of whom may be less healthy than you, or have other underwriting factors that might drive up rates.

These type of policies also expire if/when you leave the company  . Inexpensive term life insurance polices that cover your dependents until they can live comfortably on their own are often a better alternative.

Check out your payment/billing options. Many life insurance companies offer discounts to consumers who pay their premiums annually, or who pay monthly by electronic funds transfer (EFT).

Review your policy often. Do a review of your life insurance policy a minimum of every three years, if not more often. Rates may be lower, and your circumstances may have changed, necessitating more or less protection. If you are replacing a policy, make sure you allow enough time to get your new policy in place so coverages won’t overlap or lapse.

Don’t overspend on protection. Term life insurance is the most affordable and cost-effective pure protection available, and it is typically much less

FACT SHEET:

Here are tips for consumers who are in the market for a quote on life insurance or an annuity:

Know what you need: The classic and best reason for an individual to buy term life insurance is for protection against dying too soon. The person buying life insurance should be primarily concerned with seeing that his or her survivors do not face a financial handicap. There may be other reasons that apply: Life insurance is also purchased to pay estate taxes.

Business relationships   often require life insurance or can benefit from it, for example. Annuities offer a secure way for consumers to make sure they don't outlive their money. Beware of anyone who tries to quote and sell you life insurance as an "investment." Life insurance should be purchased for the protection it will give you.

Term life insurance: Most consumer advocates feel that term insurance is the best life insurance buy. Term life insurance is different from "whole life" or "ordinary life" in that you build up no equity, or cash value. In term, you pay each year for the cost of life insurance insurance, which typically increases annually as your chances of being alive the next year decline. Most term policies are renewable on an annual basis, and some have level premiums or a decreasing death benefit for a stated period -- one, five or ten years, or even to a specified age.

Whole life insurance: Whole, or "ordinary," life insurance is usually sold with a level premium. In the early years of the policy, the annual premium will be higher than comparable term insurance. (But because its premiums are level, whole life's annual premiums may eventually be less than term.)

Whole life policies build up a cash value that consumers can withdraw or borrow against. There are many variations of whole life. Premiums may be payable for a specified number of years on a limited-payment basis. Consumers also may have the option of a single premium — paying all of the premiums at once with a single lump sum.

Know the company you are buying from: You can check the financial stability of any life insurance company through several reputable national rating companies. Some ratings are available at public libraries.

Accelerated benefits: Under varying rules life insurers can issue policies that include the possibility of accelerated benefits. Under these rules, a consumer suffering from a terminal illness can opt to receive discounted benefits prior to death.

Shop around for rates: Term Life insurance is a competitive marketplace, and much of the competition focuses on price. Don't hesitate to seek premium quotes from several different companies.

Shop for your own needs: If term insurance fits, that's what you should shop for. If you want to lower your premium at all costs, you may want to consider using a direct writer — a company that cuts costs by operating without agents. Consider your own convenience, however: Do you want personal contact with an agent? Or if you buy an annuity, how fast can you get to your money in case of an emergency? If you are buying whole life, how fast does your money accumulate? What will the cash value be in one year? Three years? Ten years?

Update your coverage as your circumstances change: Don't be misled by someone who tells you you should buy additional policies for children as they are born. Children   rarely have an income and seldom require life insurance. But your situation may change dramatically from year to year. Review your net worth every few years and reconsider the prospects your survivors may face if you die.

Don't let yourself get fast-talked into changes: Some life insurance policyholders in recent years have fallen victim to a practice called "twisting" or "churning." Churning occurs when your coverage is changed only to benefit the seller even though you may suffer a loss in the process.

Churning often happens when people with cash-value policies are persuaded to convert their coverage to another policy, often one with a promise of better benefits. The problem is that the cash value of the original policy is raided in order to pay for the new policy.

Luckless consumers may not realize until years later that the "higher" benefit policy is actually worth only a fraction of the value of the original policy.

Never buy a policy you don't understand: If you are given illustrations or booklets, save that material with your policy. If your agent or company cannot explain the policy terms to your satisfaction, shop elsewhere. Make sure you understand the guarantees in your policy (not just the agent's promises of returns) and the surrender penalties if you choose to drop the policy at any time. These costs are often hidden in a life insurance or annuity policy.