Exploring Life Insurance & Financial Planning
The Three Risks
People face three major financial concerns, commonly referred to as the “Three Risks” in financial planning.
These are:
Premature Death (Die Too Soon)
This concern focuses on the financial impact on dependents if the primary income earner dies unexpectedly
The key question is whether the dependents will be financially protected in such a scenario.
- Solution: Life insurance is typically used to address this risk.
- By purchasing a life insurance policy, you can ensure that your dependents receive a financial benefit to cover expenses and maintain their standard of living in the event of the policyholder's death.
Disability or Critical Illness (Become Ill)
This concern involves the risk of losing income due to an illness or disability that prevents the individual from working.
The question here is whether you have enough resources to cover their expenses if you become ill or disabled.
- Solution: Disability insurance and critical illness insurance are designed to provide financial support in these situations.
- These types of insurance can replace a portion of lost income and help cover medical expenses, ensuring that you can continue to meet your financial obligations.
Longevity Risk (Live Too Long)
This concern addresses the risk of outliving one’s savings during retirement.
The central question is whether you have saved enough to sustain your lifestyle throughout your retirement years.
- Solution: Retirement planning, including investments in retirement accounts (such as 401(k)s, IRAs), pensions, and annuities, helps mitigate this risk.
- By planning and saving adequately, you can ensure you have a steady income stream to support yourself throughout your retirement.
In summary, these three risks—premature death, disability or critical illness, and longevity—are crucial considerations in financial planning.
By addressing each with appropriate insurance products and savings strategies, individuals can better protect themselves and their dependents against these uncertainties.
Through permanent life insurance with optional riders, we can provide one solution for multiple risks.
Where will the money come from to provide survivor benefits?
Life Insurance is the only financial product that, at the death of the insured, provides an immediate tax-free reservoir of funds that exceeds premiums paid.
Are you concerned about having enough savings to carry them through two or more decades of retirement?
Most people buy life insurance to protect against the risks of dying too soon….life insurance can also protect living too long.
The Lifetime Income Benefit Rider
offers lifelong benefits to the insured if specific conditions are met.
These conditions include, but are not limited to, the insured being between the ages of 60 and 85 and the policy being in force for at least 15 years.
What can be more costly than an unexpected death? Surviving an illness.
With today’s medical and technological advances, people can live longer lives with long-term illnesses, which comes with a cost.
Life insurance can provide living benefits to help with the expenses of a long-term illness.
Two basic Types of Life Insurance
- Term Life
- Permanent Life
Term Life
- Guaranteed coverage for a set time
- Ideal for those with short-term life insurance needs
- Does not accumulate cash value
- Frequently, the most affordable type of coverage due to the short-term coverage period
Permanent Life
Unlike Term Insurance, with Permanent Life Insurance, a portion of the premium goes to the cash value within the policy:
Cash Value that you:
- Doesn’t have to pay current income taxes on
- May be able to access on a tax-advantaged basis
- It can be used during your lifetime for:
- Unplanned expenses or to meet short-term income needs
- Supplementing retirement income
Cash value grows tax-deferred and may be accessed in the future on a tax-advantaged basis.
The policy’s cash value belongs to you, and after the first policy year, you may access it at any time for things such as:
- Unplanned expenses
- Meeting short-term income needs
- Supplementing future retirement income
Other than a minimum dollar amount for withdrawals or loans, there are no requirements to be eligible to withdraw or loan money from the policy and no restrictions on how the funds are used.
You should note that although you are not required to repay the funds, loans, and withdrawals from the policy will reduce the cash value and death benefit and may affect required future premiums to keep the policy in force.
Whole Life
For those who want lifetime coverage with:
- Guaranteed fixed premium
- Guaranteed death benefit
- Policy guaranteed to build cash value
Whole Life Insurance is the only life insurance policy that can offer all of these guarantees.
Whole Life insurance is known as “permanent” insurance because it remains in force for life, as long as premiums are paid as scheduled.
Whole Life not only offers fixed premiums but also a guaranteed death benefit and the guarantee of building cash value within your life insurance policy.
Additionally, each premium payment provides a piece of paid-up insurance. This means that in the future, should you decide you don’t want to pay any more premiums, you will still have some insurance protection that is guaranteed never to lapse once you stop paying premiums.
Whole Life is also the only type of policy that can be paid up in advance on a guaranteed basis – no other permanent life insurance policy has this feature.
Whole Life makes the most sense for those who want guaranteed coverage for the rest of their life at a set price that will not change.
Universal Life
Considered to be the most flexible type of life insurance:
- Premium flexibility
- Death benefit flexibility
- Cash value accumulation and accessibility
The total premium outlay may be lower than that of whole life insurance but is dependent on future interest rate credits.
Life is full of unexpected changes, and Universal Life is the ideal product to keep pace with those changes.
Considered the most flexible type of life insurance, Universal Life allows you to adjust your policy’s face amount and premiums as your life needs change, all within one policy.
You also have the potential to build cash value in your policy. You can pay additional premiums to build even greater policy value.
The objective of Universal Life insurance is to utilize interest credits along with premium payments to build policy values, providing you with enhanced flexibility within your policy.
For example, higher policy values offer you greater opportunities to:
- Increase the face amount
- Skip premium payments
- Use policy values to pay future premiums
- Take larger loans and withdrawals from your policy
If you are willing to give up some of the guarantees that Whole Life offers in exchange for a potentially lower out-of-pocket cost insurance policy, they may want to consider Universal Life.
Some of the most popular types of Universal Life are:
- Fixed Universal Life
- Indexed Universal Life
Fixed Universal Life (FUL)
Main Difference: The cash value in a Fixed Universal Life policy grows at a fixed interest rate determined by the insurer.
Pros:
Stable Growth: The fixed interest rate provides predictable and stable growth of the cash value.
Lower Risk: Since the interest rate is fixed and guaranteed by the insurer, there is less risk compared to market-linked products.
Flexibility: Policyholders can adjust premiums and death benefits within certain limits.
Stable Growth: The fixed interest rate provides predictable and stable growth of the cash value.
Lower Risk: Since the interest rate is fixed and guaranteed by the insurer, there is less risk compared to market-linked products.
Flexibility: Policyholders can adjust premiums and death benefits within certain limits.
Cons:
Limited Growth Potential: The returns are typically lower compared to indexed or variable life policies because the interest rate is fixed.
Inflation Risk: The fixed rate may not keep up with inflation, potentially reducing the real value of the cash accumulation.
Limited Growth Potential: The returns are typically lower compared to indexed or variable life policies because the interest rate is fixed.
Inflation Risk: The fixed rate may not keep up with inflation, potentially reducing the real value of the cash accumulation.
Indexed Universal Life (IUL)
Main Difference: The cash value in an Indexed Universal Life policy is tied to the performance of a stock market index (such as the S&P 500), offering the potential for higher returns based on market performance.
Pros:
Higher Growth Potential: The cash value can grow more significantly if the underlying index performs well.
Downside Protection: Many IUL policies have a guaranteed minimum interest rate, protecting against market downturns.
Flexibility: Policyholders can adjust premiums and death benefits within certain limits.
Higher Growth Potential: The cash value can grow more significantly if the underlying index performs well.
Downside Protection: Many IUL policies have a guaranteed minimum interest rate, protecting against market downturns.
Flexibility: Policyholders can adjust premiums and death benefits within certain limits.
Cons:
Market Risk: While there is potential for higher returns, the growth is still tied to market performance, which can be unpredictable.
Complexity: IUL policies are often more complex than FUL policies, with features like caps, participation rates, and floors that can affect returns.
Potential Fees: These policies can come with higher fees and charges, which can impact the overall returns.
Market Risk: While there is potential for higher returns, the growth is still tied to market performance, which can be unpredictable.
Complexity: IUL policies are often more complex than FUL policies, with features like caps, participation rates, and floors that can affect returns.
Potential Fees: These policies can come with higher fees and charges, which can impact the overall returns.
Summary
Fixed Universal Life offers stability and predictability with lower risk and lower growth potential.
Indexed Universal Life offers higher growth potential linked to market performance with some downside protection but with added complexity and potential fees.
Fixed Universal Life offers stability and predictability with lower risk and lower growth potential.
Indexed Universal Life offers higher growth potential linked to market performance with some downside protection but with added complexity and potential fees.
If you are looking for life insurance protection with the ability to grow tax-deferred cash value for future income needs, you may want to consider an Indexed Universal Life policy.
Beyond the basic death benefit protection and the ability to accumulate cash value, additional protection is available through optional riders. Some common riders include:
Accidental Death Benefit Rider: Provides an enhanced benefit if death results from an accident.
Accelerated Benefit Riders: Offer funds in the event of a chronic, terminal, or critical illness.
Other Insured Rider: Provides death benefit protection for another insured person, such as a spouse, child, or business partner, under one policy.
Waiver of Specified Premium Rider: Waives the premium if the insured becomes disabled.
Accelerated Benefit Riders: Offer funds in the event of a chronic, terminal, or critical illness.
Other Insured Rider: Provides death benefit protection for another insured person, such as a spouse, child, or business partner, under one policy.
Waiver of Specified Premium Rider: Waives the premium if the insured becomes disabled.
Life Insurance Product Overview
| Feature | Term Life | Whole Life | Universal Life | Indexed Universal Life |
| Death Benefit | Fixed | Some Flexibility | Very Flexible | Very Flexible |
| Premium | Level or Increasing | Fixed | Flexible | Flexible |
| Cash Value | None | Guaranteed cash value growth. Possible dividends paid by the company. | Current interest rate set by the company. Guaranteed minimum interest rate. | Interest credits based on the changes in a major market index. Downside protection with upside potential |
College Education Expenses
Here are three reasons your clients might consider an Indexed Universal Life (IUL) policy for college education expenses:
Tax Advantages: The cash value portion of an IUL policy grows tax-deferred as long as the policy remains funded. Additionally, policy withdrawals may be considered tax-free if they are made from the contributions to the cash value.
Loan distributions taken out on the cash value are also typically tax-free, though the loan must be repaid over time to avoid reducing the death benefit by the outstanding loan balance.
Lower Investment Risk: An IUL can be used to fund college expenses without diminishing the death benefit. Part of the policy premium goes toward building cash value, while another part covers the death benefit.
The cash value will continue to earn a guaranteed minimum interest rate, even if the indexed performance falls short, offering your clients peace of mind amidst market volatility.
Impact on Financial Aid: Assets are factored into the calculation when determining financial aid eligibility.
The advantage of an IUL is that life insurance policies are generally not counted as assets, meaning they won’t negatively impact the financial aid analysis or the amount of aid awarded.
Early Retirement
IUL as an Early Retirement Tool
Indexed Universal Life (IUL) insurance can be a tool for early retirement planning.
- Determine Your Retirement Goals: Assess your financial needs and retirement goals.
- Understand how much income you will need and at what age you plan to retire.
- Plan for Loans/Withdrawals: Strategize how and when you will take loans or withdrawals from the cash value to support your retirement income needs. Ensure that you understand the impact of these withdrawals on the policy’s death benefit and overall performance.
- Using IUL insurance as a tool for early retirement can be a viable strategy, especially for those looking for tax-advantaged growth and flexible access to funds.
- However, it requires careful planning, management, and a thorough understanding of the policy's terms and conditions.