Estate Planning: Life InsuranceInvestment Retirement Funding Insights
When it comes to life insurance, there are many choices: Whole life. Variable universal life. Term. What do these descriptions really mean?
All life insurance policies have two things in common: They guarantee that they will pay a death benefit to a designated beneficiary after a policyholder dies (although the guarantee may be waived if the death is a suicide occurring within two years of the policy purchase). All require recurring payments (premiums) to keep the policy in force. Beyond those basics, the differences begin.
Some life insurance coverage is permanent; some not. Permanent life insurance is designed to cover you for your entire life, not just a portion, or "term," of it, and it can become an important element in your retirement planning. Whole life insurance is its most common form.
Whole life policies accumulate cash value. How does that happen?
An insurer directs some of your premium payments into a reserve account and puts those dollars into investments, typically more conservative ones. The return on the investments influences the growth of the cash value, which builds up according to a formula the insurer sets.
A whole life policy's cash value grows with taxes deferred.
After a while, you gain the ability to borrow against that cash value. You can even cancel the policy and receive a surrender value. Premiums on whole life policies, though, are usually higher than premiums on term life policies, and they may rise with time. Beneficiaries can only receive a death benefit and not the policy's cash value when a whole life policyholder dies.
Universal life insurance is whole life insurance with a key difference.
Universal life policies also build cash value with taxes deferred, but there is the chance to eventually pay the monthly premiums out of the policy's investment portion.
Month by month, some of your premium on a universal life policy gets credited to the cash reserve of the policy. Sooner or later, you may elect to pay premiums out of the cash reserve, so the policy essentially begins to pay for itself. If all goes well, a universal life policy may have a lower net cost than a whole life policy. However, if the investments the insurer chooses severely underperform, that can create an issue with the payment of the policy. If the cash reserves dwindle enough, the policy could end up being accidentally canceled if the premiums aren't paid.
What about variable life (VL) and variable universal life (VUL) policies?
VL policies are whole life or universal life policies with a riskier investment component. In VL and VUL policies, you may direct percentages of the cash reserve into investment subaccounts managed by the insurer. Assets allocated to the subaccounts may be put into equity investments of your choice as well as fixed-income investments. If you choose equity investments, you and the insurer assume greater risk in exchange for the possibility of greater reward. The performance of the subaccounts cannot be guaranteed. As an effect of this risk exposure, a VUL policy usually has a higher annual cost than a comparable UL policy.
The performance of the stock market may heavily affect the performance of the subaccounts and the policy premiums. A bull market may mean better growth for the policy's cash value and lower premiums. A bear market may mean reduced cash value and higher monthly payments to keep the policy going. In the worst-case scenario, the cash value plummets, the insurer hikes the premiums to provide the guaranteed death benefit, the premiums become too expensive to pay, and the policy lapses.
Term life insurance is life insurance that you "rent" rather than own.
It provides coverage for a set period, usually 10 to 30 years. Should you die within that period, your beneficiary will get a death benefit. Typically, the premium payments and death benefit on a term policy are fixed from the start, and the premiums are much lower than those of permanent life policies. When the term of coverage ends, you may be offered the option to renew the coverage for another term or to convert the policy to a form of permanent life insurance.
Term life can be affordable, but the trade-off comes when the term is up. Just as you cannot build up home equity by renting, you cannot build up cash value by renting life insurance. When the term of coverage is over, you usually walk away with nothing for the premiums you have paid.
Do you need a life insurance policy in retirement?
One school of thought says no. The kids are grown, and the need to financially insulate the household against the loss of a breadwinner has passed. If you are thinking about dropping your coverage for either or both of those reasons, you may also want to consider the excellent reasons to retain, obtain, or convert a life insurance policy after you retire. Take these factors into account and consult with your financial professional before making a decision.
Could you make use of your policy's cash value?
If you have a whole life policy, you might want to utilize that cash in response to certain retirement needs. If you need extended care, for example, you could explore converting the cash in your whole life policy into a new policy with an extended care rider. This might even be doable without tax consequences. If you need additional income, many insurers will let you surrender a whole life policy you have held for some years and arrange an income contract with the cash value. You can access the money, tax free, as long as the amount that is withdrawn is less than the amount paid into the policy. Remember that withdrawing money or taking a loan against a policy's cash value naturally reduces the policy's death benefit.
Do you receive a "single-life" pension?
Maybe a pension-like income comes your way each month or quarter from a former employer or through a private income contract with an insurer. If you are married and there is no joint-and-survivor option on your pension, that income stream will dry up if you die before your spouse dies. If you pass away early in your retirement, this could present your spouse with a serious financial dilemma. If your spouse risks finding themselves in such a situation, think about trying to find a life insurance policy with a monthly premium equivalent to the difference in the amount of income your household would get from a joint-and-survivor pension as opposed to a single-life pension.
Will your estate be taxed?
Should the value of your estate end up surpassing federal or state estate tax thresholds, then life insurance proceeds may help pay the resulting taxes and prevent the need for your heirs to liquidate some assets.
Are you carrying a mortgage?
If you borrowed to purchase your home or have refinanced and are carrying a mortgage, a life insurance policy may make sense. It could potentially relieve your heirs from shouldering some of or all that debt if you die with the mortgage still outstanding.
Do you have burial insurance?
The death benefit of your life insurance policy could partly or fully pay for the costs linked to your funeral or memorial service. In fact, some people buy small life insurance policies later in life to prepare for this expense. Alternatively, you may seek to renew or upgrade your existing term coverage for permanent life insurance.
Which coverage is right for you?
Many factors may come into play when you are deciding which type of life insurance will suit your needs. The best thing to do is to speak with a qualified insurance professional who can help you examine these factors so you can determine which type of coverage you should have.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
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Ryan Burklo is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 333 N. Indian Hill Blvd., Claremont, CA 91711. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Quantified Financial Partners is not an affiliate or subsidiary of PAS or Guardian.Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty. Optional riders are available for an additional premium. This article was written by an independent third party. It is provided for informational and educational purposes only. The views and opinions expressed herein may not be those of Guardian Life Insurance Company of America (Guardian) or any of its subsidiaries or affiliates. Guardian does not verify and does not guarantee the accuracy or completeness of the information or opinions presented herein. AR Insurance License #15319412CA Insurance License #0K24924. #2022-143320 Exp