Traditional Level Term coverage is the simplest form of life insurance as it has no moving parts. It offers a fixed benefit amount at a fixed price for a specific number of years. The number of years you select is the term duration. The most common term durations are 1, 5, 10, 15, 20, 25 and 30 years. At the end of the term, the level premium period is over and the price will adjust out of control. This is because all term contracts are what is called “guaranteed renewable” on a year to year basis after the original term expires. Carriers though adjust the premiums to levels that are so high that 99% of policy holders would be “priced out” after just one additional year. This is because you were originally underwritten for a specific number of years of risk and the carrier now wants you out of their portfolio to be re-underwritten based on your current age and state of health so that they can maintain predictable claims paying experience.
Return of Premium Term Life (ROP)
Return of premium term insurance also known as “ROP” works exactly as the title implies. Just like a traditional level term product, you pay a fixed premium for a fixed number of years. ROP Term carries with it a slightly higher premium than traditional non ROP term. This is because at the end of the term period you receive a check back for all of the money you paid into the product. In other words you get a full return of premium.
Guaranteed Universal Life
Guaranteed Universal life insurance is a form of coverage that can be structured in different ways to accommodate different needs. Most basically though GUL is a contract that is structured to provide coverage for as many years as the insured would like (typically age 100) at a level premium requirement for all policy years. Guaranteed Universal life policies are interest rate dependant and are structured to operate on a guaranteed interest rate. The carrier is obligated to pay this specific rate of interest into the contract each year. The amount they pay in conjunction with your level premium contribution is the exact number of dollars required to keep the policy in force for the number of years the contract is structured to provide coverage for.
Current Assumption Universal Life
Current Assumption Universal Life operates on a variable interest rate. The contract is structured in such a way that it has the ability to accumulate cash value. Upon the accumulation of this cash value you can extract the dollars and spend them, or leave them in the contract and pay fewer premiums. The interest rate that gets paid into the contract is a factor of company performance in any given year and the external interest rate environment in general. When this type of policy is originally structured the premium you are assigned is determined by the number of years the policy is structured to remain in force and the current illustrated interest rate the carrier is paying into the product. If moving forward there are more years that the carrier’s paid interest rate is equal to or greater than the illustrated rate then the policy will stay in force without rate increases for the duration of the policy, (typically age 100). Additionally in this scenario there will be an accumulation of cash value. The degree to which the cash can accumulate is contingent on the degree to which the policy over performed the original illustrated rate when it was first put in force. On the flip side of this, the policy can also under perform. In the event that the carriers paid in rate is less than what was originally illustrated for more years than not then the policy will begin to “fall apart” and will begin to require more premiums to keep it in force until that specified age.
Whole life is the most traditional form of permanent insurance. It is structured to remain in force for ones entire life. Whole life insurance has guaranteed cash value accumulation via either an interest rate or a dividend payment made annually by the carrier into the policy. Whole Life insurance typically is structured in such a way that the death benefits and cash value continues to grow over time. The premium for a whole life contract is designed to remain level for the life of the policy. Because Whole Life policies have guaranteed cash accumulation, as the policy matures the cash growth annually can exceed the premium requirement and therefore the insured can have the option to stop making payments if they like.
Typically all Term Life insurance policies have what is known and a conversion privilege. Converting your term contract is simply trading the contract back into the carrier and replacing it with a permanent insurance product (Universal Life or Whole Life) in their current portfolio. A term policy can not be converted or exchanged for another term policy. To be eligible for conversion you simply need to own a term contract that is still within its level premium period, i.e. Years 1-20 of a twenty year term, and the policy holder needs to be under the age of 65 (with most carriers). The value to conversion is that there is no medical underwriting and the carrier must issue your new contract regardless of your current state of health. They must assign to it the same rate class you received on your original term policy and base the premium solely on your current age. This is an excellent option for one who has experienced a decline in insurability during their term policy years and knows they will still need or want coverage beyond the number of years their current term can provide. It is also an excellent way to ensure you have a small permanent “final expense policy”. I.e. you own a 150k 15 year term policy and decide to convert 50k of it into a permanent insurance product. Now you will own 100k of term that is still good until the 15th year and another permanent policy of 50k that can last to age 100.
Long Term Disability Insurance (LTDI)
Long term disability insurance, is a form of insurance that continues to pay to a percentage (typically 70%) of your current income in the event you become disabled and are not able to go back to work. LTDI is a very important form of individual insurance coverage as the US Census Bureau estimates that 1 in every 5 Americans will become disabled at some point in their life. Additionally, the average duration of a long term disability is 2.5 years. Most individuals would not be able to maintain a suitable quality of life if their income were to stop for 2.5 years. It is the job of a LTDI policy to pick up at the point where Short Term Disability benefits end which on average between 3 and 6 months. In the event you become disabled and after going on claim are eventually able to then return to work on a part time basis, say 50%. Your LTDI policy can be structured to continue to pay you 50% of your benefit. There are various additional features and benefits to this product allowing a policy to cater to the unique needs of different individuals in different occupations and with varying degrees of severity to their disability.
Long Term Care Insurance (LTCi)
Not to be confused with health insurance and Medicare or Medicaid benefits, LTCi is a specific form of individually owned insurance that is meant to pay a specified daily benefit in the event that you lose two or more ADL’s “activities of daily living” i.e. the ability to independently go to the bathroom or bath your self etc… The LTCi benefit is intended to pay the costs associated with the following:
- Home care including the cost of nurses/therapists, home health aides, personal care, homemaker and chore services Hospice Care
- Adult Day Care
- Facility Care (Includes nursing homes and assisted living facilities)
- Caregiver Training (pays to train a friend or family member to provide care)
- Respite Care (pays for the insured to stay in a facility while the primary family caregiver is out of town or needs a break)
- Supportive Care Equipment (Pays the cost of home modifications such as ramps and grab bars)
- Alternative care (Pays for other services not specified in the policy, if agreed upon by the insured, doctor, owner and the company
Life Insurance with LTCi Rider
This product is quickly becomes a popular alternative to traditional stand alone long term care policies. What it does is offer a Permanent Universal Life Insurance contract that can be guaranteed to provide coverage at a level premium for all policy years and attaches to it a Long Term Care Insurance benefit rider. The way the rider works is simple, if your doctor stipulates that have temporarily or permanently lost 2 or more ADL and require Long Term Care Services; you simple notify the Life Insurance Carrier and they will begin to release to you a percentage (typically 4%) of your total death benefit on a monthly basis for as long as you have the long term care need. For example, if you have a 500k Universal Life policy with an LTCi rider attached and you have a long term care need, after notifying your carrier they will immediately send you a check for 20k and your death benefit will then become 480k. If the 20k becomes used up and you require another dispersement they will release another 4% etc… The main benefits to combining your Life and Long Term Care insurance coverage’s are:
- It costs significantly less than owning each type of policy separately.
- The cost is based on the price of the life insurance contract and the LTCi rider only adds a negligible amount of cost.
- In the event you grow old gracefully and never need to use your long term care benefits, all of the premiums you would have paid into a stand alone Long Term Care insurance policy are not wasted, done this way you still have a 500k benefit that will be paid to your beneficiaries at the time of your passing.
- Long Term Care Insurance policies are subject to rate increases. Rates for a Life contract with this type of rider can be level for all policy years, meaning the price will not change.
Fixed annuities are insurance contracts that work to guarantee a fixed stream of income regardless of market performance. The amount of the payment is a function of the lump sum amount of money put into the annuity and the age of the annuitant when the payments start. The insurance carrier is obligated to pay a fixed dollar amount to the annuitant on a regular schedule for the duration of the agreement, typically the annuitant’s entire life. The insurance company will guarantee both the principal and the interest earned. These instruments can be either “immediate” or “differed”. The immediate version starts making payments on a regular schedule immediately after funding the contract. The differed variety accumulates specified rates of interest and begins making payment to the annuitant at the time of their choosing. Fixed annuities are attractive investment vehicles for retirees because of their simplicity and the dependability and predictability of their payment, guaranteeing an income stream for the duration of your life.
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