Here are some basic features of the different types of annuities and life insurance plans to consider before investing:
Term Life Insurance
- Purchased to provide income for dependent in the event of death.
- Usually purchased from individuals 25-50 years old.
- It does not accumulate money tax deferred.
- Pays out when you die typically in one lump sum.
Whole Life Insurance
- Purchased to provide income for dependents in the event of death as well as to provide financial planning needs.
- Usually purchased from individuals 30-60 years old.
- Accumulates tax deferred.
- Pays out in three different ways depending on circumstances: death, borrow against the policy, or surrender the policy.
Deferred Annuities
- Purchased to invest and contribute tax deferred.
- Buyers typically 40-65 years old.
- Accumulates tax deferred.
- Death benefit pay out can be a single sum or monthly withdrawals to give a steady cash flow.
Immediate Annuities
- Purchased to give coverage against outliving retirement income.
- Buyers typically 55-80.
- Accumulates tax deferred but only if you have early payout.
- Pay out is for a period of time but it stops when the annuitant expires, however payments will continue at death if the annuity has an option of "guaranteed period" and it hasn't expired when the annuitant expires.
Many people wonder what the difference between Term and Permanent
life insurance is and if they should own one or the other. The answers to these questions are really quite simple.
Term Life Insurance is a policy that lasts for a specified period or term. Typically the terms run 10, 15, 20, 25 or 30 years. Term policies are less expensive than permanent policies because you are only paying for the death benefit for a known period of years. In addition the younger the insured is at the time of purchase, the lower the cost of the insurance. There is no cash built up in a term life policy and when the term ends the policy expires with no death benefit or continuation of coverage.
Term life policies are an excellent way to provide inexpensive coverage for a mortgage, a debt or child's education. Once the debt is gone or the child is off on their own, there is no more reason for the insurance.
Permanent life insurance policies, on the other hand, can last for the life of the insured. The most common type of Permanent life insurance is a Whole Life Policy, but there are also other types such as Universal Life and Variable Life policies. Permanent life policies are more expensive coverage than term life. In addition permanent life insurance generally builds a Cash Value which can be borrowed against, used to fund retirement or to even pay premiums in the later years of the policy.
Permanent Life policies provide lifelong coverage for a spouse, burial expenses, to pay taxes on an estate and many other situations.
The best advice to the question of which type of policy to own is to buy a permanent policy when you are you young so that you can lock in lower premiums; and supplement with term policies for specific needs.
If it sounds too good to be true it generally is, but not in the case of
Return of Premium Life Insurance.
Life Insurance is a risk. If the insured dies someone is paid the death benefit. But what happens if the insured lives? In the case of term insurance policies, the policy ends and nothing is paid out at the end of a specified term (generally 10, 15, 20, 25 or 30 year periods). However there is a product that takes the financial risk out of buying a term life policy, called Return of Premium
Term Life.
What is Return of Premium (ROP) Term Life? Simply stated it is a policy that guarantees to pay the owner back all of the premiums paid into the policy at the end of the specified term. An example would be owning a 20 year ROP term policy and paying a premium of $500.00/year. At the end of the 20 year term the owner will receive a check for $10,000 (20 x $500.00) and the policy expires. Under a traditional term policy the same owner may pay less premiums per year but will not receive anything at the expiration of the term.
It is easy to see that this kind of product makes sense if you apply the above example to leaving that same $500.00 in a low interest checking account vs. paying into a ROP term policy. Many people look at ROP policies as a forced savings where the protection (death benefit) is more valuable than the small amount they would have earned at low interest rates.
The only risk to an ROP term policy is that the owner discontinues payments prior to the expiration of the term. In that case they would forfeit all, or the majority of, the premium payments they have made. So if you buy a ROP term policy plan on keeping it for the entire term and at the end you will be very happy.
Term Life Insurance is generally less expensive than other life insurance products
and is designated for a certain time period or to a certain age. Term is
named for the contracts limited length. The premium, a cash payment that’s
required to fund your policy, on a term life policy is lower compared to other
types of life insurance because it builds no cash value, the cash amount
offered to the policyholder by the insurance company upon cancellation. You only
pay for the cost of insurance, the
amount of money the insurance company charges to keep your life insurance
policy in force, depending on your age and health at the time you apply for coverage.
Term Life Insurance pays a specific lump sum to your designated beneficiary,
the person(s) who you want to receive your death benefits, if you die within
the period covered by the policy. The policy protects your family by providing
money they can invest to replace your salary, and to cover immediate expenses
incurred by your death. Term Insurance is best for young, growing families,
whose financial needs would be
especially high in the case of an untimely death, but whose resources
without life insurance, are often
insufficient to cover those needs.
Pros:
Affordable coverage that pays only a
death benefit, Term Insurance initially costs less than other insurance
policies mainly due to the fact that, unlike other policies, it builds no cash
value.
Cons:
Term Insurance premiums increase with age because the risk of death
increases as people get older. Some Term Insurance premiums may rise each year
(e.g., "Yearly Renewable Term), or after the initial guarantee period of
5, 10, 15, 20, 25 or 30 years. Over the age of 65, the cost of Term Insurance
becomes very expensive, often unaffordable.
Simplicity
Planning
financial goals around a cash value insurance plan can get
really complicated. There are important rules governing things like the size of
your cash value savings versus the policy death benefit, and the repayment of
policy loans. Term life insurance, on the other hand
is easy to understand -- pay the premium, a predetermined amount worked out
with your insurance agent, you get covered for the term.
Competitive pricing
Because they are so simple, term life policies can be easily compared on the
basis of price. This has led to a very competitive market in which term life
policies are rapidly becoming a good.
Flexibility
Many term life policies are both "renewable" and
"convertible." Renewable insures that you can re-up for another term
policy without a medical exam. Convertible allows you to
convert your term life policy into an equal cash value policy from the same
carrier, should this make sense during the term of the policy.
Not all
term life policies offer these features, however, so be sure to ask for them
specifically if you want them. (In particular, be sure you know what they mean
by "renewable.")
On the
other hand, cash value policies only work out well when they are held for life.
Once you're in, it's tough to get out without a little financial pain.
Tax-advantaged savings available elsewhere
The fundamental savings advantage of cash value insurance savings is
tax-sheltered earnings, lowering taxes on current earnings. Most Americans,
however, now have access to a wide variety of tax-sheltered savings plans,
including employer-sponsored retirement plans, individual IRAs, education IRAs, and
state-sponsored tuition savings plans. Moreover, the IRS has recently relaxed penalties
on early withdrawals for things like first-time home purchases, educational
expenses, and large medical bills.
Investment options
As is the case with some employer-sponsored retirement plans, cash value
investment options are often limited. Variable life insurance policies
typically offer index funds, money invested my your insurance company, but not
necessarily a broad-market index fund, and rarely the option to buy individual
stocks.
Learn
more about life insurance
Subject to the relative rights of the assignee and the
beneficiary, the policyholder of a
life insurance policy or
annuity contract has the unrestricted right to designate an irrevocable beneficiary or change the beneficiary if not irrevocable.
The policyholder may, at any time, make an irrevocable designation of the beneficiary effective at once or at some time in the future. If the designation of the beneficiary is not explicitly irrevocable, the policyholder may change the beneficiary without the consent or knowledge of the previously designated beneficiary.
Subject to statutory requirements as to changing the beneficiary by will of the
policyholder, any act of the policyholder that unequivocally indicates an intention to make the change in beneficiaries is sufficient to effect it.
An insurer may prescribe formalities to be complied with for the change of beneficiaries which may be only for its own protection. The insurer discharges its obligation under the insurance policy if it pays a properly designated beneficiary, unless it has actual notice of either the assignment or an unequivocal act by the policyholder which indicates an intention to change beneficiaries. The insurer has actual notice if the policyholder has complied with its prescribed formalities.
Examples:
A holder of an individual
whole life insurance policy in
Wisconsin originally named his daughter as beneficiary. The policy contained no explicit restrictions on the right to change the beneficiary. After the policy had been in effect for six months, the policyholder decided to change the beneficiary to his oldest son. After the policyholder’s death, his daughter told the insurance company that she was entitled to receive the death benefits as the first beneficiary instead of the son. Is the daughter entitled to the benefits?
No. Under s. 632.48 (1) (b), Wis. Stat., if the designation of beneficiary is not explicitly irrevocable, the policyholder may change the beneficiary without the consent of the previously designated beneficiary. Assuming that the insured did not make a valid assignment of the right to the death benefits to the daughter after changing beneficiaries, the son is entitled to the benefits and not the daughter.
• A holder of an individual
term life insurance policy changed the beneficiary by replacingvthe name of his mother with his daughter’s name. The policyholder failed to notify the insurance company of the change as required by the policy. After the policyholder died, the insurance company paid the benefits to the mother who was the original beneficiary. The daughter claimed that the insurance company should have made payment to her under the policy. Was the insurance company correct in making payment to the original beneficiary?
Yes. Although the policyholder is free to change beneficiaries, under s. 632.48, Wis. Stat., the insurance company may require the policyholder to properly notify the company of any change of beneficiary. Since the policyholder failed to provide adequate notification under the terms of the policy, the insurance company discharged its obligation under the contract when it paid the properly designated beneficiary.
Accumulation phase - The period of time prior to annuitization.
Annuitant - A person who receives benefit payments from an annuity.
Annuitize - A method of receiving annuity benefits through a series of income payments for life or some other defined period of time.
Annuity - A contract with a life insurance company which guarantees an income for life or some other defined period in exchange for premiums you pay.
Back-end load - Company expenses that are charged at the time benefits begin.
Beneficiary - When provided in a contract, the person who receives benefit payments if the annuitant dies.
Contractholder - A person who pays premiums for an annuity. Often the same person as the annuitant.
Death benefit - A provision in certain annuity contracts that pays the beneficiary when the annuitant dies before the payout phase begins.
Deferred annuity - A contract that begins the payout phase at some future date.
Equity-indexed annuity - A contract that combines a guaranteed minimum interest rate with earnings linked to the performance of an external stock or bond index.
Fixed rate annuity - A contract that specifies your funds will earn a specified interest rate and guarantees a return on your premium.
Flexible premium annuity - A contract in which the amount of each premium payment you make can vary.
Front-end load - Company expenses that are charged at the beginning of a premium payment period.
Free look - A period specified in the contract (such as 10 days) during which you can decide whether to keep an annuity or return it for a full refund of your premium. Your free-look period is 20 days when you buy an annuity contract to replace one you already had.
Guaranteed interest rate - A minimum rate of interest specified in a fixed annuity. The actual rate the insurance company credits your contract at any given time may be higher but can never be lower.
Immediate annuity - A contract that begins the payout phase within one year after you pay the single premium.
Level premium annuity - A contract in which the amount of each premium payment you make stays the same.
Loan provision - A feature in certain annuity contracts that allows you to borrow up to a specified percentage of the value. Contract loans are usually subject to taxes.
Morality Tables - Statistics that project ones life expectancy based on many variables.
Payout phase (also called the annuity phase) - The period of time when benefit payments are being made to the annuitant.
Premium - The money you pay to fund an annuity contract.
Refund Annuity - Refunds part or all of the premiums paid if the insured dies before the start of the liquidation period.
Surrender charge - A fee the insurance company will charge you if you cash in (surrender) an annuity before the payout phase begins, or if you make a withdrawal larger than specified in the contract.
Variable annuity - Traditionally, a contract with no minimum guarantee (some newer products do include guarantees). Because the benefit amount depends on the insurance company's investment gains or losses, you share some part of the investment risk with the insurer.
Withdrawal privilege - A provision in many annuity contracts that allows you to withdraw an amount less than the surrender value, without paying a surrender charge. Any withdrawal may be subject to taxes and penalties.
The best way to make an informed decision about buying life insurance is to become familiar with the basics. There are three life insurance basics that all consumers should consider:
- Start by considering how many people are financially dependent on you, what their major expenses are likely to be and whether you're likely to leave them with substantial debts or taxes to pay on your estate. Life insurance can help on all of those fronts.
- Evaluate the two main types of life insurance: term life and permanent life. As its name implies, term life insurance pays a death benefit if you pass away within a specified time period. Permanent life insurance lasts your lifetime and also has the ability to build up cash value during the term of the policy.
- Understand the major factors that can affect life insurance premiums. Some are uncontrollable, like the age at which one purchases a policy or a serious pre-existing medical condition, like cancer or heart disease. Other factors are much more dependent on an individual's behavior, like poor health habits (e.g., smoking and excessive drinking), driving record (e.g., accidents and Driving While Intoxicated citations), engaging in dangerous hobbies (e.g., sky diving, car racing or rock climbing) and even where one lives, since mortality rates in a geographic region may be used by life insurance companies to help establish premiums.
An important feature of life insurance is that there is no federal income tax on proceeds paid to beneficiaries.
How much life insurance do I need?
Before buying life insurance, you should assemble personal financial information and review your family's needs. Factors to consider include:
- Any immediate needs at the time of death, such as final illness expenses, burial costs and estate taxes;
- Funds for a readjustment period, to finance a move or to provide time for family members to find a job; and
- Ongoing financial needs, such as monthly bills and expenses, day care costs, college tuition or retirement.
One rule of thumb is to buy life insurance that is equal to several times your annual gross income, to allow your family the ability to continue their lifestyle for several years without hardship.
If you need to stop paying premiums, you may be able to use the cash value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live. Usually, you may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.
What are the advantages and disadvantages of term and permanent insurance?
Term Insurance
Advantages
- Initially, premiums are generally lower, allowing you to buy larger amounts of insurance at a younger age when the need for protection often is greatest due to debt.
- Good for covering specific needs that will disappear in time, such as mortgages or car loans.
Disadvantages
- Premiums increase as you grow older.
- Coverage may terminate at the end of the term or may become too expensive to continue.
- Generally, the policy doesn't offer cash value or paid-up insurance.
Permanent Insurance
Advantages
- As long as the necessary premiums are paid, the policy will last your lifetime, or age 95 or 100, whichever is stated.
- Policy accumulates cash value that you can borrow against, or withdraw if needed.
- A provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence or insurability.
- Premiums never change during the life of the policy.
Disadvantages
- Higher premiums than term insurance which may not be as affordable.
- It may be more costly than term insurance if you don't keep it long enough.
| 1. Annuities |
|
Authority |
| Table of cash surrender values, if any, for 20 years (not applicable to variable, immediate, or flexible premium deferred annuities) |
|
IC 27-1-12.6-3 |
| Prohibition against a provision that automatically Withdraws or places a loan against annuity forfeiture values in order to pay premiums on a life or annuity policy. |
|
IC 27-1-12.6-4 |
| 10-day free look period. The policy can be returned to the company or the agent through whom it was purchased. The provision must be on the front cover. |
|
IC 27-1-12.6-5 |
| Requires certain disclosures requirements if a cash value or death benefit is not provided. |
|
IC 27-1-12.6-6 |
| Requires a statement of the mortality table, if any, and interest rate used to determine the nonforfeiture benefits and death benefits. |
|
IC 27-1-12.5-2(a)(3) |
| Requires a statement that the nonforfeiture values and death benefits are not less than that required by law. |
|
IC 27-1-12.5-2(a)(4) |
|
|
|
| 2. Group Annuities |
|
|
| Filing requirements. |
|
Bulletin 93 |
| |
|
|
| 3. Charitable and Gift Annuities |
|
|
| Exemption from regulation. |
|
IC 27-1-12.4-2 |
| |
|
|
| 4. Individual and Joint Life |
|
|
| The title of the policy (i.e. Term Life, Universal Life) must be on the face of the policy and the back of the policy. The back title page must face outward. |
|
IC 27-1-12-6(11) |
| Under the "Free Look" provision the insured may return the policy to the insurer (the company), the agent who sold the policy, or to any other agent of the insurer. The free look provision must be on the front cover of the policy. All of the premium received must be refunded. |
|
IC 27-1-12-43 |
| There must be a provision that settlement will be done within two (2) months of receiving a death claim. |
|
IC 27-1-12-6(10) |
| Under either Cash Surrender or Cash Surrender Value, there should be a statement that if the policy is surrendered within thirty (30) days of a policy anniversary, the cash surrender value will not be less than the cash surrender value on that policy anniversary. (Does not apply to individual variable or universal policies) |
|
IC 27-1-12-7(b) |
| Company may not prohibit loans in the first policy year, they may not have a minimum loan amount or limit the amount of the loan to a certain percentage of the cash value. The loan value is the cash value minus the cost of insurance and the loan interest rate to the next anniversary. (Note: The exception is on variable universal life insurance, it may have a minimum loan amount and the loan value may be up to 90% of the cash value). |
|
IC 27-1-12-6(8) |
| The limit on incontestability is two (2) years maximum. |
|
IC 27-1-12-6(3) |
| Misstatement of Age should state that the proceeds will be what the premium received would have purchased at the correct age or sex. |
|
IC 27-1-12-6(4) |
| There should be a grace period provision of thirty (30) days. |
|
IC 27-1-12-6(2) |
| There must be a provision that interest will be paid if payment is not received in thirty (30) days. Interest will be from the date of death to the date of settlement. |
|
IC 27-1-12-35(a)(b) |
| |
|
|
| 5. Group Life |
|
|
| Under the "Free Look" provision the insured may return the policy to the insurer (the company), the agent who sold the policy, or to any other agent of the insurer. The free look provision must be on the front cover of the policy. All of the premium received must be refunded. |
|
IC 27-1-12-43 |
There must be a provision that settlement will be done within two (2) months of receiving a death claim.
|
|
IC 27-1-12-6(10) |
| Company may not prohibit loans in the first policy year, they may not have a minimum loan amount or limit the amount of the loan to a certain percentage of the cash value. The loan value is the cash value minus the cost of insurance and the loan interest rate to the next anniversary. (Note: The exception is on variable universal life, it may have a minimum loan amount and the loan value may be up to 90% of the cash value). |
|
IC 27-1-12-6(8) |
| The limit on incontestability is two (2) years maximum. |
|
IC 27-1-12-6(3) |
| Misstatement of Age should state that the proceeds will be what the premium received would have purchased at the correct age or sex. |
|
IC 27-1-12-6(4) |
| There should be a grace period provision of thirty (30) days. |
While increasing life insurance premiums with increasing age is an
unavoidable fact of life, your health status is another matter
entirely. It's not predictable, nor is it completely within your
control. (But you really should eat more leafy greens.) If you develop
certain medical conditions, life insurance suddenly becomes
prohibitively expensive, if you can get it at all. For good reason,
then, people seek insurance that can be renewed regardless of any
changes in health.
The option to renew a term life insurance policy without a
medical exam may be the single most important component of a term life
policy. This is especially true if the policy term won't take you close
to retirement age.
So, if you are likely to buy another policy
when this one expires, be sure to get a "renewable" term policy, and be
sure that this means you can renew without a medical exam. Some
"renewable" term policies just make it easy to renew, but require a
medical exam, leaving you exposed to big problems should health issues
surface later.