There are several forms of life insurance with many variations. While they all provide a death benefit, some have a cash value (living benefit) as well. The main types of life insurance being purchased today are term, universal life, whole life, indexed universal life and variable universal life.

Term insurance is a policy form that provides only a death benefit. Usually there is no cash value associated with it. It can be purchased to cover a specific time period, usually 1, 5, 10, 15, 20, or 30 years.
Usually the premium stays the same for that period and increases annually & rapidly after that.

The issues that need to be considered when purchasing term insurance are as follows:
1- what is the purpose of the coverage
2- how long will you need to have the coverage
3- how is the face amount determined
4- what happens to the rates at the end of the rate guarantee period
5- can you keep the coverage after the guarantee period and if so for how long
6- does the term policy offer you the option of converting it to a permanent policy (ie. universal or whole life) without going through additional underwriting.

Remember that as you age, and the guarantee period ends, it is increasingly more expensive to go back into the marketplace and purchase a new policy for a new term period. There are also age restrictions that limit purchasing term insurance at older ages. It also becomes increasingly more expensive to purchase permanent coverage as one gets older.

Universal life insurance is a permanent policy form that will allow one to keep the coverage to age 100- or sometimes longer, if properly funded. This means paying a premium that is sufficient to withstand decreases in interest crediting rates and / or increases in mortality and other expenses.

Think of universal life as a policy where after certain expenses are deducted (often a portion of each premium), the remaining cash value is credited with a current interest rate. This rate is sometimes tied to an index, but more often than not is a rate arbitrarily determined by the insurer. No matter what the insurer may want to do with the rates the downside is limited due to a stated minimum interest rate. In addition to the up front expense charges, the insurer makes deductions from the cash value every month to cover the risk associated with the insured dying, known as mortality (or cost of renewal) charges. These charges increase as one gets older and can cause a policy to “self destruct” early if premium payments are insufficient and if interest rates are low enough as to not allow the cash value to cover these deductions.
If properly funded, and if checked on a regular basis, by ordering an in-force ledger from the insurance carrier, and if adjustments to premiums are made to cover the downside exposures, the policy should last until maturity- usually age 100 or longer.

Universal life was designed to be the most flexible policy form in terms of amount and timing of premium payments as well as the number of ways that one can access the cash value.

In that regard, it is sometimes used as a vehicle to accumulate money for a child’s education, to help support one’s retirement, or for a number of other cash accumulation needs.

In addition, there are new types of universal life now available that have “secondary guarantees”. The generic term for this is “guaranteed no-lapse”.

If it is important that the policy not be subject to the usual potential changes associated with universal life, such as decreases in interest rates, which can affect a policy’s longevity, one can ask for a guaranteed no-lapse policy. As long as the guaranteed no-lapse premium is paid when due, the policy will typically last to age 100 and beyond- some lasting as long as to age 125.

These policies usually have all of the design flexibility of traditional cash accumulation universal life.

Indexed Universal Life is a sophisticated & complicated variation of Universal life & offers tax-deferred cash accumulation while maintaining a death benefit. People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs.

Variable universal life differs from universal life in that the accumulated cash value can be self directed into a number of “sub-accounts” that are offered as part of the policy. These sub-accounts are offered through a number of investment companies that the carrier has made arrangements with, resemble mutual funds in some ways, and offer a number of investment objectives from conservative to aggressive.

It cannot be stated too strongly that this can be an extremely risky policy form in that the cash value is directly related to the performance of the underlying sub-accounts. Therefore, one must carefully consider the consequences of partial or total loss of cash value, and perhaps the policy itself, including the death benefit, in the event of a significant downward market correction.

The agent must hold a securities license in order to sell you a variable life policy.

Whole life is the most conservative policy form and is usually the most expensive. The reason the higher costs is because the underlying cash value is guaranteed. You will find a chart within the policy that indicates what the guaranteed cash value will be in any given year.

Participating whole life policies, usually sold by mutual insurance companies, may pay a non-guaranteed dividend in any given year. A dividend by law is a return of an overpayment of premium. The carrier may choose to pay a dividend if it has divisible surplus. Divisible surplus is available when a carrier performs well as respect to its operating expenses and overhead, its claims ratios, its general investment results, and its persistency – the ability to keep the business it writes on the books. Dividends are not guaranteed, but if they are paid, there are a number of dividend options that are available. The most common is to use the dividend to purchase single premium purchases of paid up additions to the policy. This increases the death benefit and the underlying cash value.
They may possibly, by cashing them in, be used to abbreviate the premium paying period, while keeping the original face value.

Many carriers offer different riders such as accidental death benefit, spouse rider, child rider, future purchase options, and long term care or critical illness.

These benefits should be carefully considered by the client in light of their present and potential future needs.

There are a number of settlement options (distributions) available to the beneficiaries of a life insurance policy. These should be carefully considered, based upon the beneficiaries and their potential future income needs.

In addition, beneficiary designations and ownership should be carefully considered so as to minimize estate tax consequences, and in some cases to protect the beneficiary against themselves and others.

Long term care insurance is a policy form designed to help pay for the costs associated with care received in a nursing home, an assisted living facility, at home, and sometimes in some alternative setting. The primary reasons that a client would purchase a long term care policy are to receive care in the setting that is most beneficial and desirable and to preclude having to use existing assets to pay for long term care related costs.

Some carriers offer a choice of tax qualified (TQ) or non-tax qualified (NTQ) policy forms. Some carriers offer either one or the other policy form. Great care must be taken in deciding which policy form to purchase. TQ policies offer significant tax advantages to individuals and businesses regarding issues such as deductibility of premiums, not attributing corporate paid premiums as bonuses to employees, and not taxing benefits when received.

LTC benefits are usually triggered by either cognitive impairment or the inability to perform 2 of 6 activities of daily living (ADLs) such as bathing, continence, dressing, eating, toileting or transferring.

In addition to the regular policy forms issued, some carriers, in some states, offer Partnership policies.  The Long-Term Care Partnership Program is a Federally-supported, state-operated initiative that allows individuals who purchase a qualified long term care insurance policy or coverage to protect a portion of their assets that they would typically need in order to spend down prior to qualifying for Medicaid coverage. There are a number of considerations, when deciding which policy form is in a client’s best interest.

Listed below are a number of cost related options and built in features that one must consider when considering purchasing this type of coverage:

Elimination Period– this is the period of time that must elapse once a claim has been “Triggered” before a payment is made to the insured. The usual choices are expressed in “Days” for example 0, 30, 60, 90, 180, & 365.

Daily or Monthly Benefit– this is the amount paid for each day that the insured is on claim. The daily costs of care can be researched up to the minute but the average daily benefit in New York state is somewhere between $300 – $500. Most carriers will issue between $300 – $400 daily benefit depending on the state and region within the state the client resides.

Benefit Period– this is the length of time that an insurer will continue to pay a claim. This is usually expressed in terms of years, for example 1, 2, 3, 4, 5, 6, 10 and lifetime.  Most insurers today do not write longer than six years.

Inflation / increase Option– this is an option to increase the level of daily benefits originally purchased. It is usually expressed as simple, compound, and cost of living. What that means is that the increases increase based upon the original daily benefit purchased, the prior year’s daily benefit, or are tied to a consumer price index.

Survivorship Benefit– this option would pay the premiums for a surving spouse at death of spouse subject to premiums having been paid for a specified period of time.

Dual Waiver of Premium– this option would waive the premiums on both spouses policies, if one of the spouses has had their premiums waived under the built in waiver of premium benefit.

Restoration of Benefits– this option restores benefits already used if the insured has recovered for a specified period of time.

Shared Pool of Money– this benefit isavailable when two spouses each purchase a benefit period less than lifetime. An additional pool of money is purchased allowing either or both spouses to access the additional pool of money to pay claims.

Indemnity Option / Cash Benefit- Usually a portion (35%-40%) of whatever the reimbursement benefit is on the contract can be sent to the policy owner each month as I direct check that they can use to pay anybody they want to, and it doesn’t have to be a care professional, without having to show receipts.

Discounts– there are usually discounts available for preferred health risks, non tobacco users, spouses, members of affinity groups- such as a chamber of commerce, & members of employer sponsored groups. The discounts vary based in part on the size and location of the group.

In addition to the cost related options listed above, there are a number of policy features that are sometimes included in a long term care policy. One must be careful as not every carrier offers each of these features, and some carriers offer more than one policy form, each with it’s own features. These features include:

Hospice Care– this benefit will pay for some or all of the costs associated with a stay in a hospice.

Respite Care– this benefit pays to temporarily relieve your informal care giver for an emergency or a vacation.

Bed Reservation Benefit– this benefit reserves your accomodations while you are temporarily absent from a nursing home or alternate care facility.

Informal Care Giver– depending upon the carrier, this either pays to train an informal caregiver- usually a family member, neighbor, or close friend, or it pays them for the services they provide.

Independent Care Giver Certification– this type of benefit usually pays to train an independent person to the point of their receiving certification and licensing. Some carriers will exclude paying for this type of benefit for family members who are living with the insured / claimant.

Waiver of Premium– this feature waives the claimants obligation to pay premiums upon either receiving care for a specified number of days or satisfaction of the elimination period, or a certain number of calendar days from day of diagnosis.

International Coverage– this benefit provides for benefits to be paid while traveling or living outside the united states.

Mental & Nervous Condition Coverage– this benefit provides for coverage when the claim arises from mental or nervous disorders that are determined by clinical diagnosis or tests, including alzheimers’s or senile dementia.

Miscellaneous– some policies contain language that reference future types of care, some not even developed yet, and leave the door open to pay for these benefits.

Disability income– this is a policy form that is designed to pay an income to an insured based upon the inability to perform the duties of the insured’s occupation and / or a loss of pre-disability income.

This type of coverage is as important as life insurance, in order to maintain the insured’s family in the lifestyle to which they have become accustomed.

The cost is determined by some of the same factors (see above) as a long term care policy, for example:

1- elimination period
2- benefit period
3- monthly benefit
4- inflation rider
5- future purchase option
6- automatic increase option
7- residual benefit- this changes the policy from an “All or nothing” type of benefit, to one whereby the insured may receive a portion of the benefit if there is a partial decrease in income due to the disability.
8- occupation and duties
9- non cancellable and / or guaranteed renewable
10- catastrophic benefit rider

There are several additional disability income related policy forms, namely business overhead expense and disability buy-out insurance.

Business / professional overhead expense– this policy form is designed to pay certain specific fixed and recurring expenses associated with a small business or professional practice.

These expenses will continue even if the insured is disabled and not working. Therefore this type of covergae helps the insured from having to borrow or use savings in order to pay expenses. The insured would want to pay these expenses in order to keep the business going while recovering from a disability. Usually the benefit period is 1-2 years based upon the fact that by then either the insured is back to work or has sold the business / professional practice due to an inability to return to work.

Examples of types of covered expenses are:

1- rent
2- electricity
3- telephone
4- heat
5- water
6- laundry, janitorial, maintenance expenses
7- interest on debt
8- real estate taxes
9- depreciation
10- other fixed expenses as are normal and customary in the conduct of the business and / or professional practice
11-salaries of employees who are not
Members of the insured’s occupation

Disability buy-out insurance– this is a policy form that is designed to buy out the business interest of an insured who has been disabled for a specific period of time, usually one year or longer. Benefits can then be paid out in either a lump sum or installment payments.

This policy form protects the surviving shareholder / partner as well as the surviving spouse / estate of the deceased. In effect, this is the same as using life insurance to buy out a business interest in case of death.

In all three of these disability policy forms, the heart of the contract is the definition of disability. Careful comparisons should always be made as to all policy provisions and exclusions. Amounts available to be purchased are based upon a carriers issue and participation limits, and financial underwriting is an integral part of the process.

Key Person Disability Insurance– this is a policy form that is designed to indemnify the business if one of their key employees is disabled due to accident or sickness.

Fixed annuities– an annuity is a financial product offered by a life insurance company that can be used to both accumulate and distribute money to an annuitant.

The appeal of this type of investment product is that the principal that is invested is not subject to the ups and downs of the stock market. Instead an interest rate is credited to the contract and is locked in for a period of time. There are annuities that lock in interest rates for periods ranging from 1, 3, 4, 5, 6, 7, & 10 years. Once the lock in period is over the interest rates can be adjusted based upon what the marketplace is offering (competitive pressure on the existing carrier to keep the money in house), but can never fall below a contractual minimum.

Another major feature that an annuity offers is tax deferral. That is to say that the annuity grows on a tax deferred basis, until money is distributed to an annuitant.

Additionally, upon distribution to an annuitant, a portion of the distribution is deemed to be a return of basis and is not taxable. This is called the exclusion ratio. The balance of the distribution is taxable at ordinary income tax rates.

The flexibility in distribution of the annuity, called annuitization, is yet another reason why it is such a popular investment vehicle.

One can arrange to have distributions for life (single life annuity); for life but guaranteeing a period of time, for example life and 10 years or life and 20 years (life with period certain); for life with a percentage-100%, 75%, 50%- to a named survivor (joint and survivor); an interest only distribution; a refund annuity that guarantees that if the annuitant dies before payments equal the amount deposited, the balance is paid to the beneficiary; and a distribution for a specific period of time (annuity or period certain).

There are a wide variety of fixed annuities available that are capable of meeting the needs of the policyholder. They can be broken down into several categories as follows:

Immediate annuities– this type of annuity requires a lump sum deposit and starts to make distributions on a modal basis ranging from a month to one year from date of purchase. Therefore the main purpose of this type of annuity is guaranteeing an income stream.

Deferred annuities– this type of annuity can be purchased by either a lump sum or by flexible contributions. Unlike the immediate annuity, the usual reason one purchases this type of annuity is for tax deferred accumulation, with distribution to happen at some later time.

Most annuities today are “No-load”, meaning that 100% of the investment will be credited with interest. Conversely, there are usually sliding surrender fee penalties for early withdrawal, usually over a 5-10 year period.

Be aware that annuities have tax deferral advantages but also have penalty taxes if the annuity is surrendered or if distributions are made prior to age 59 ½.

Annuities can be used as after tax personal investments, as ira’s, or as investment vehicles in a qualified plan.