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In the early 1980's, life insurance products changed dramatically to accommodate the issue of disintermediation in the then-current economic environment. They simply had to compete for the consumer's dollar.
As a result, they began offering both living as well as death benefits to owners and beneficiaries of life policies. Variable Life is a good example. It now is the #1 selling permanent life insurance product* largely due to the myriad of tax advantages and flexibility it offers the consumer while living. (You can learn more about Variable Life by clicking here or scrolling down to the next Variable Life link.)
Today, there are basically Five (5) types of insurance one can purchase. And again, depending on your suitability, needs and financial situation, each has certain advantages and disadvantages.
To review a BRIEF synopsis of each type or to Order a Quote, please follow the appropriate link.
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Insurance Basics
Before you proceed, you may want to review below the basic terminology and primary policy features that are generally common to most insurance policies.
Protection Feature: This is commonly referred to as the "death benefit", which is either payable at the death of the insured, or the death of the second insured.
The actual amount of insurance or "net amount at risk" -- is the difference between the cash value of the policy and the face amount (a.k.a. as the specified amount) at any particular point in time. For example, if your policy has cash value of $20,000 and the face amount is $100,000, the actual amount of insurance is $80,000. This is not to say that the insurance carrier won't pay the full $100,000 at death, they will. But the true net amount at risk to the carrier is $80,000.
This does not apply to term life, where there is no cash value element.
Premium Element: The premium is simply the amount of money paid to the carrier in return for binding or maintaining a certain amount of coverage. Premiums can be paid in one lump sum, annually, semi-annually, quarterly or monthly.
Depending upon what best suits your needs, the actual premium duration varies as well as the duration of the coverage. For example, there are 5 to 30-year term plans, pay for life plans, pay until a specified age, etc.
One area that we caution you on is that of "vanishing" pay policies. Under a proposed "vanish pay period", the owner/insured is under the assumption that no more premiums would be required after a certain number of years. Consumers need to understand that vanish pay periods, like anything else, are purely hypothetical and based on current assumptions (interest rates, dividends, mortality assumptions and cost of insurance).
A large number of carriers such as Prudential, New York Life and Transamerica have been involved in large class action suits stemming from "vanish pay in" policies which indeed did not vanish as the selling agent had promised.
Illustrations: Virtually every insurance policy sold is done so using an illustration. These illustrations are generated directly from the home office, general agency office or the agent's PC.
Illustrations are simply a hypothetical ledger of numbers reflecting current assumptions and guaranteed (worst-case scenario) assumptions. Most illustrations will show a series of columns reflecting everything from your age, policy year, premium schedule, cash values (both current and guaranteed) and death benefit.
Again, it is very important to understand that illustrations are purely hypothetical (other than guaranteed level term) and your actual values will change based on the performance of the contract in question.
For example, some carriers who appear to be more cost competitive that the others might very well be penalizing existing customers merely to obtain new ones. A good measure for the consumer to take is the "frozen in time test."
What this test indicates is how your policy would have performed had you purchased it 8 or 10 years prior. This is a very telling statistic and would clearly indicate if the carrier has been fair to its existing policyholders.
Savings Component: Since the early 1980's, more and more carriers have designed their policies to include a savings element. This saving element is the cash value or cash surrender value. The actual amount of cash value will vary based on contract structure. Some plans lean heavily towards high cash value and low death benefit, while others are exactly opposite.
For example, most Variable Life plans purchased today place heavy emphasis on cash value accumulation, which can potentially (depending on performance) provide living, college funding or supplemental retirement benefits.
Cash values can be accessed via loans and/or withdrawals and depending on how your policy is classified under IRC Section 7702, this may or may not trigger tax consequences. Ask your Specialist for details, 1-800-480-7526.
Surrender Period: This is the period of time that must elapse before you can cancel, withdrawal or 1035 (to another carrier) without incurring some type of fee or penalty. Most surrender periods today run for a period of 0-10 years and are declining in nature. The actual surrender charge is usually expressed as a straight percentage of the cash in the contract or it is expressed as a formula of the death benefit.
Ratings
The financial strength of an insurance company is a very important factor to consider in purchasing life insurance or annuities.
All insurance carriers are rated by A.M. Best, which is the oldest independent rating service of the insurance industry. Although A.M. Best is still considered the most reliable, there are other rating services such as Standard & Poors, Weiss Research, Duff & Phelps and Moody's.
Each rating service has their own set of rating criteria and analysis. Below you will find the two most popular rating services and their respective descriptions of their letter grades.
F: In liquidation.
Standard & Poor's
These options refer to the type of death benefit structure a permanent insurance policy can have level death benefit or an increasing death benefit. Most companies will label Option A or I as the level death benefit option while Option B or II as the increasing death benefit option.
Which one you choose entirely depends on your personal objective behind the purchase of the insurance to start with. For example, if you want the death benefit to keep pace with inflation, Option B may be better.
Be sure to speak with your Insurance Specialist at Fielder Financial Management about which structure would best suit your needs.
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On June 21, 1988, Congress passed the TAMRA Act and within that legislation created the definitions and distinctions between modified endowment (MEC) and non-modified endowment (NON-MEC) insurance contracts.
The most important distinction between the two types is the rules governing the taxation of gains in a life insurance policy.
A policy which is classified as a MEC has very similar tax features as what you would find in a tax deferred annuity account: the earnings grow free of taxation until withdrawn. Upon withdrawal they are consider LIFO and the earnings are fully taxable. Also any distributions from a MEC policy while the owner is under the age of 59 will result in a 10% IRS imposed penalty.
Under a NON-MEC policy, distributions are consider FIFO through withdrawals and loans and therefore are non-taxable, providing the contract is kept in force and not surrendered.
Technically speaking, a policy, which fails a "7-Pay" test, is considered a MEC policy. The 7-Pay test has nothing to do with making 7 actual premiums, instead, a contract is deemed to fail the test if the accumulated amount paid during the first 7 years of the policy exceeds the sum of the net level premiums. These premiums would have been paid on or before such time if the contract provided for paid-up future benefits after the payment of the 7 level payments.
Confused? Don't worry. Our Specialists will help you determine which type of plan best suits your personal needs.
If you have not registered yourself, please do so now. Registered users will be added to our exclusive BROADCAST E-MAIL LIST, which provides periodic electronic communiqués on the subject of new offerings, cutting-edge investing ideas and newly developed estate preservation strategies.
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Copyright © 1998
Fielder Financial Management, LTD.
All Rights Reserved.
Securities are offered through Girard Securities, Inc.
member FINRA, SIPC.
Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.
Disclosure: For more complete information about variable life, including charges and expenses, obtain a prospectus by calling 1-800-480-7526. Read it carefully before you invest or send money. Investment return and principal value of an investment will fluctuate. An investors units, when redeemed, may be worth more or less than their original investment. Consult your tax advisor.
Above, the information mentioned "ratings" and how
the financial strength of an insurance company is a very important factor to consider in purchasing life insurance or annuities. Please know that these ratings apply only to the insurance company or carrier itself and not the underlying variable accounts that may be provided under a variable life or variable universal life policy.* LIMRA, 1999, "U.S. Marketplace"
