Insurance World

Do you love someone enough to spend your hard earned dollars on a life insurance premium — month after month?

Because the real benefit of a life insurance policy isn’t for you. It’s for those you love… but after you’ve gone.

Life insurance is money paid to those who rely on you right now to provide a secure standard of living. They can lose this in a heartbeat.

Life insurance is money when needed the most… with no income tax or publicity.

Buying a life insurance policy is challenging because it isn’t an easy subject matter to begin with.

Most people get confused about how it works and whom they can trust enough to make the purchase.

And there’s a large number of companies and sales agents all clamoring for your attention.

This article will help to clarify a huge misconception about term life insurance. Also, I’ll introduce you to what many knowledgable professionals consider to be the best kept secret in a life insurance policy.

Buy term and invest the difference is a phrase touted by those … including many life insurance agents … who have absolutely no idea how much harm it’s implementation can cause.

The principle theory is you no longer need life insurance when you reach a certain age such as 55, 60 or 65.

Supposedly your kids have finished school and are doing just fine earning their own income. And you and your spouse are living comfortably on retirement savings and social security.

On the surface and to the naive, this might appear reasonable.

Now, it’s easy to pick apart this hypothesis, but let’s focus instead on the real problem with this scenario.

We are living longer than ever before. We may not be enjoying it very much due to poor health but, nevertheless, we’re hanging on.

Life insurance companies know this better than anyone. In fact, most of them now use age 115 has a factor when calculating life insurance policy premiums.

You hear about retirees who are forced to find work at McDonald’s or Wal-Mart. Have you ever joined a seniors chat room on the Internet and witnessed the concerns most of them have about running out of money before they die?

Many of these seniors are frightened to death. And what about the millions of babyboomers right behind them.

An intelligently purchased life insurance policy can be the saving grace for those you love the most.

Now, let me set the record straight. I have nothing against term life insurance. For over 24 years I’ve personally sold millions of dollars worth.

What bothers me … and what I believe to be criminal … is when term life insurance is sold under false pretenses.

Let’s use a simple example.

A 35 year old nonsmoking male in excellent health can buy a $500,000 term life insurance policy for about $700 per year.

The premium is guaranteed to be $700 for 30 years. Some companies will be a little cheaper and some a little more expensive.

The buy term and invest the difference advocate would compare this to a $500,000 whole life insurance policy at $3,650 per year. Once again, some companies will be higher and some lower.

Theoretically, you have $2,950 to invest each year for 30 years. I say theoretically because in the real world you would never consistently invest $2,950 each year.

Not the same way you would commit to a life insurance policy premium.

How do I know this? Call it human nature based on lots of experience.

But, let’s give you the benefit of the doubt and say you actually do invest according to this hypothetical plan. What rate of return are you going to make over 30 years? 5% … 8% … 10 percent?

By the way, this question opens up another can of worms. The psychology of investing. But, we’ll save that controversy for another time.

For arguments sake let’s assume you get an 8% compounded rate of return each year for 30 years. This comes to $360,920.41.

Okay… so now you’re 65 years old and you have $360,920.41. But guess what?

When you reach 66 your $500,000 term life insurance policy will lapse without value because the annual premium becomes $21,180.

Yep, you read that right! It jumps from $700 to over 21 thousand dollars.

At age 70, it’s $31,430. At age 75, it’s $52,970.

There’s no way on earth you’ll pay this premium. Problem is… you aren’t dead yet!

You have paid $21,000 over a 30 year timeframe to have a $500,000 life insurance policy during a period of time when the odds are you would never die anyway.

Under normal circumstances you will die somewhere around age 80 — give or take. Your loved one’s investment account still won’t be worth $500,000.

What’s more, she will have to pay income tax on the investment gains. Remember, life insurance proceeds are income tax free.

Permit me to repeat myself. I am not against term life insurance … as long it’s purchased with an eye towards the reality of future expectations.

If your term life insurance policy is issued by a highly rated company with a broad selection of products, you will have ample opportunity to convert the term into something more permanent over the course of the 30 years in our example.

Keep in mind your age determines the length of time the term policy will have a guaranteed level premium.

You may not be able to get more than a 10 year guarantee if you are over 50 years of age.

So, exactly what is the best kept secret in a life insurance policy?

It is a universal life insurance policy that guarantees the death benefit regardless of investment performance.

Universal life is the most flexible type of policy on the market. The premium is higher than term, but lower than whole life. There are several on the market, so you must be careful.

If you decide to buy term because of budget constraints, then be certain to buy from a company that also offers universal life.

This gives you the chance to slowly convert the term into universal with the same company over the length of the term guarantee.

As your budget permits convert term into universal.

One word of caution. Long term interest rates are critical to the performance of universal life insurance.

Because they’ve been depressed for several years and will likely continue so, you must get the universal life with an unconditional death benefit guarantee.

Here’s an example using our 30 year old male. The $500,000 universal life insurance policy premium is $2,871 per year. This compares with the already discussed $700 term and $3,650 whole life premiums.

Let’s say you really do decide life insurance isn’t important when you reach 65. By that time, you would have paid $86,130 in total premiums.

Down a rat hole like the term plan? Nope!

The cash surrender value would be at least $85,501. It might well be over $100,000 based on the actual competitive interest rates credited to the policy over the 30 years.

When you buy the right type of universal life you guarantee the death benefit for as long as necessary… plus you have the ability to recover your expense if you wish to cash it in.

You can benefit from the best of both worlds when you use the best kept secret in a life insurance policy.

At last, a real life insurance bargain – but as always there are strings attached!

If you take out a new pension policy after 6 th April 2006 and within the same premium pay for life insurance cover, then you can use your pension contribution tax allowance to reduce the cost of your life insurance. This means if you’re a standard rate taxpayer, you’ll receive 22% tax relief on your life insurance premiums and relief at 40% if you’re a higher rate taxpayer.

The combined premium you pay for your pension and life insurance will automatically be reduced by 22% by the pension provider. But if you’re a higher rate taxpayer, you’ll need to claim the balance to bring your relief up to 40%, on your year-end self-assessment tax return.

But there are three strings attached:

• The pension company must also provide your life insurance and be paid as one combined premium.

• The current value of your pension fund plus the sum insured by your life insurance policy must not exceed Ј1.5 million.

• Your combined annual premium for your pension and life insurance must not exceed Ј215,000.

In practice the savings on your life insurance will not be quite as big as you might otherwise expect. Its because the underlying premium for the life insurance cover will be a bit more expensive than a stand-a-lone policy with the same company and, in all probability, the insurance company providing your pension policy won’t be the cheapest on the life insurance market. Furthermore, you can’t buy a combined pension and life insurance policy online - so you’ll miss out on the Internet’s discounted life insurance prices.

Nevertheless, if you’re a higher rate taxpayer, your tax savings are bound to guarantee that your life cover is a real bargain! If you’re a standard rate taxpayer you’d be wise to do a little homework. Before you buy, you should get an online quote for life insurance to compare against the price you’d pay if you bought it alongside your new pension.

There are some other points you also need to know. Firstly we know you’ll ask whether you can convert your existing life insurance policy into a combined pension purchase. The answer is no! The tax relief is only available if from the outset, you take a pension and life insurance policy as one combined purchase.

Secondly, the life insurance cover can only apply to the owner of the pension policy - you can’t add in anyone else on the life insurance policy. Joint policies aren’t available as a pension/life insurance package.

And whilst many people also add critical illness cover to their life insurance, this is not possible when you have a pension/life insurance package. Critical illness cover pays out a tax-free lump sum if you are diagnosed with a specified serious illness which is listed on your policy. If you want critical illness cover, you’ll have to buy a normal stand-a-lone policy.

Finally, if you’re going to buy a pension life insurance package and replace your existing life cover, a few words of warning. You’ll obviously be older now than when you first took out your existing life insurance policy. This means that the premium rate on your new cover will be higher.

Furthermore, the premium for your new policy could be loaded if you’ve developed any medical conditions since taking out your original life insurance. Remember, even if you’ve simply put on weight, your premium could be loaded. In extreme medical cases, the proposed insurer might even totally refuse to provide life cover. To avoid the possibility of being caught without life insurance cover or being forced to accept a more expensive premium, you should obtain written confirmation from your pension company that they will insure you. You then need to compare their proposed cost, net of tax, with your existing premium.