Life insurance: Choosing Secure Life Insurance Policy
Fifty years ago, most life insurance policies sold were guaranteed and offered by mutual fund companies. Choices were limited to term, endowment or whole life policies. It was simple, you paid a high, set premium and the insurance company guaranteed the death benefit. All of that changed in the 1980s. Interest rates soared, and policy owners surrendered their coverage to invest the cash value in higher interest paying non-insurance products. To compete, insurers began offering interest-sensitive non-guaranteed policies. Guaranteed versus Non-Guaranteed Policies Today, companies offer a broad range of guaranteed and non-guaranteed life insurance policies.A guaranteed policy is one in which the insurer assumes all the risk and contractually guarantees the death benefit in exchange for a set premium payment. If investments underperform or expenses go up, the insurer has to absorb the loss. With a non-guaranteed policy the owner, in exchange for a lower premium and possibly better return, is assuming much of the investment risk as well as giving the insurer the right to increase policy fees. If things don’t work out as planned, the policy owner has to absorb the cost and pay a higher premium. Term Policies Term life insurance is guaranteed.
The premium is set at issue and clearly stated right in the policy. An annual renewable term policy has a premium that goes up every year. A level term policy has an initially higher premium that does not change for a set period, usually 10, 20 or 30 years, and then becomes annual renewable term with a premium based on your attained age. Permanent Policies Permanent coverage: whole, universal and variable life is more confusing since the same policy, depending on how it is issued, can often be either guaranteed or non-guaranteed.
Do you want to invest the premium and grow the cash value?Many insurers promote the ‘living benefits’ of permanent life insurance that include the tax-free growth of the cash value, the ability to invest in mutual fund sub-accounts or index products, and taking loans against the cash value or surrender a portion of the cash value. If these benefits are important to you, then guaranteed coverage may not be the best choice.
The Bottom Line It is critical to think about why you are buying life insurance and how it fits into your financial picture. If the primary reason for having insurance is to help transfer risk—then adding risk to the insurance may not make sense.
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