Have questions about life insurance or income protection (disability insurance)? Get the answers you need.
Q. Does it make sense to buy both term life insurance and permanent life insurance?
A. It can be a wise strategy to purchase both.
Why? Because it can be expensive to meet your entire insurance needs with permanent life insurance.
Buying some term insurance makes it possible to meet your total insurance need now. And it can often be converted to permanent insurance with the same company at a future date—without going through underwriting at the time of conversion.
The combination strategy also makes sense for young families, especially if you’re planning for more kids. By supplementing the purchase of a permanent policy with term insurance, you can help assure your future insurability.
Buying convertible term insurance during your healthy, younger years helps avoid the question of insurability later on. It’s also priced more reasonably, making it a smart financial decision, too.
Q. What factors impact the cash value of my policy?
A. Insurance policy cash values are impacted by the insurance company investments that back your policy, as well as mortality and expenses.
- Universal Life Insurance policies are fixed-interest rate policies. You get a guaranteed interest rate, and the insurance company gets the right to invest policy premiums in conservative, fixed-interest investments such as bonds. In addition to the guaranteed interest rate, these policies also have a current interest rate that may be higher than the guaranteed rate.
- Variable Universal Life Insurance offers more risk, but also offers more control over the allocation of your premium dollars. In exchange for the opportunity for higher returns, you can allocate premiums to a variety of investment choices with varying levels of risk.
The range of alternatives includes small, medium, and large company stocks; passive and active management styles; and domestic and global investment approaches. Other common investment options within Variable Universal Life policies include fixed-income investments, such as bonds, and even guaranteed interest accounts.
Guarantees are based on the claims-paying ability of the issuing insurance company.
Q. Can I use my cash value?
A. The cash value that accumulates inside a permanent life insurance policy can be accessed in three ways.
- Loans. These are typically free from current income tax, even if they exceed the premiums paid or cost basis in the policy. Outstanding loans are deducted from the death benefit upon the death of the insured. Or, if the policy is later surrendered, the unpaid loan amount is deducted from the cash value.
Interest is charged on the loan, and may either be paid or accrued to the loan. Look for a policy that helps minimize costs with a contractually reducing net loan rate after a given number of years.
- Partial surrenders from Universal Life policies. These reduce the death benefit, dollar for dollar. They’re usually income tax-free, unless they exceed the premiums paid or cost basis. This is one of the potential benefits of life insurance, yet many people are not aware of it.
- Full surrenders from Universal Life policies. This means taking the entire remaining cash value from a policy and ending the policy. It will trigger an income tax obligation for any portion of the cash value that exceeds premiums paid.
The unpaid balances of any loans will be forgiven at the time of surrender, but will be added to the surrender value when calculating the tax on the proceeds.
Withdrawals (or loans) from policies called “modified endowment contracts” can incur taxes and early withdrawal penalties. Be sure to consult with your financial representative and your tax advisor about the tax benefits and liabilities of any insurance policy.
Q. How is the death benefit paid?
A. Death benefit settlement options may be selected either by the policy owner (prior to death) or the beneficiary (after death). Options typically include:
- Lump sum, where the death benefit is distributed to the beneficiary in one payment
- Income options, where the death benefit is kept by the insurance company and an income is paid to the beneficiary for life (or for some other stated period of time)
- A continued interest account, where the death benefit is held by the insurance company in an interest-bearing account, which can be accessed by the beneficiary upon demand
Q. What is underwriting all about?
A. Underwriting lets insurance companies charge rates commensurate with the risk of insuring specific individuals. As part of this process, you may be asked questions or required to undergo medical tests or exams.
Underwriting time can vary from a few days to a few weeks. It depends on the complexity of your case, and the time it takes to get information from third parties, such as your doctor.
Q. How are the costs of life insurance calculated?
A. The cost of a life insurance policy is generally based on three factors:
- Mortality, which is the calculated likelihood of death, largely based on age, gender, health, occupation, and hobbies
- Expenses, including the cost of operating the issuing company and administering the policy
- Riders added to the base policy, which may require additional premiums
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.