February 07, 2019
Any good wealth management plan involves the periodic evaluation of your financial goals and objectives—and a well-designed approach to help achieve them. Although often overlooked as a planning tool, life insurance can serve a broad spectrum of needs for individuals, families and business owners. Since there are a multitude of policies available, choosing the right life insurance policy and amount of coverage is critical.
Before researching or purchasing a policy for yourself, it’s important to know what you want to accomplish with it—in other words, your near- and long-term goals. You’ll also want to consider the cost and if there’s a maximum premium you’re willing to pay for coverage or a set period over which you’d prefer to pay your premiums. Once you’ve identified your needs and constraints, you’ll be able to select the best policy for your unique circumstances and goals.
Term Life vs. Permanent
The first distinction is whether you want coverage for a specific length of time (term) or indefinite coverage that pays a benefit upon death (permanent). Term insurance is typically the cheapest short-term insurance option; however, if it’s not used before the term ends, your coverage expires or can become cost prohibitive. Typically, term insurance policies have a conversion feature that allows you to convert the policy from term to permanent without having to get recertified as insurable by the insurance provider.
Permanent life insurance, on the other hand, usually requires higher monthly premiums than term insurance, but pays a death benefit regardless of when you die. Additionally, permanent insurance can offer other benefits, including premium flexibility, cash values and tax-deferred investing. The primary types of permanent life insurance policies are universal life, no-lapse guaranteed universal life, indexed universal life, variable universal life and whole life.
UL policies are designed for maximum flexibility. As a policyholder, you can vary your premiums or reduce your death benefit as needed. These policies also offer a cash value, which is the excess of the premiums paid above the current cost of the insurance. The cash value balance earns an interest rate set by the insurer based on the yield of its general account, which is typically invested primarily in high-quality corporate bonds. As the balance accumulates, you can access a portion of your cash value or borrow against it without affecting your guaranteed death benefit.
With a GUL policy, your death benefit is guaranteed provided you pay your premiums on time. These policies are typically less expensive than other permanent life insurance options, as premiums are calculated to maintain a level premium payment until death.
IUL policies are identical to UL policies except the prevailing cash value interest rate is determined by a broad market index such as the S&P 500, subject to a minimum and maximum rate of return determined by the insurer. Since the cash value balance in these policies has the potential to earn a higher rate of return, premiums for IUL policies may be lower than traditional UL policies with the same death benefit. However, you also take on more risk since equity markets tend to be more volatile than high-quality bond investments. Moreover, the insurer can adjust the minimum and maximum rates of return at any time, which may be to your detriment.
The difference between VUL insurance policies and UL and IUL policies is that the cash value is invested directly in investments similar to mutual funds, which determine the rate of return earned on the balance. As the policyholder, you choose your own investments. However, you are also subject to the most performance risk with a VUL policy.
WL policies allow you to pay consistent premiums over the life of the policy and offer a guaranteed cash value accumulation. At the time of maturity, the cash value equals the policy’s death benefit. Like UL insurance, WL policies may allow you to borrow against your accumulated cash value during the life of the policy. The key differentiator is that WL policies typically do not offer the same flexibility that UL policies do regarding premium, cash value and death-benefit adjustments.
After you’ve settled on the best type of policy for your needs, determining how much coverage to purchase is an important question to review with your financial advisor. For example, if you’re the primary breadwinner seeking to provide for your young family in the event of your untimely death, it's important to project your family’s income needs and expenses over time. If you are purchasing life insurance to offset expected federal or state estate taxes, an estate tax analysis can help determine whether insurance is necessary and if so, how much is needed.
Because your life insurance needs can change over the course of your life, it’s important to check in regularly with your financial advisor to make sure you’re properly covered. Of course, it’s typically less expensive to purchase life insurance the younger and healthier you are, so the earlier you’re able to start planning, the better.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on Dec. 5, 2018.
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