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Term vs. Cash Value Life Insurance

Photo courtesy of Pixabay

Prepared by Broadridge Investor Communication Solutions, Inc.

Which type of life insurance is better–term or cash value? Insurance buyers have been asking this question for generations. When choosing between these two fundamentally different alternatives, you’ll need to think about the amount of coverage you need, the amount of money you can afford to spend, and the length of time you need the coverage to continue.

Term insurance

Term insurance is often referred to as pure insurance. Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If you die during the policy period, your beneficiary receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. At the end of the specified policy term, your coverage simply ends. You may be able to renew your policy without a physical exam, but at a much higher premium. Once you reach a certain age (usually 70 and older), you may find it difficult to get term insurance coverage–and if you can, the premiums will be very expensive. There are several variations of term life. You can buy a level death benefit or a decreasing death benefit with premiums that increase annually, or that are level for a period of years (5,10,15, 20, 25, or 30).

Cash value insurance

Cash value insurance, often called permanent insurance, is life insurance that is designed to have you pay a “levelized” premium throughout your life. In some cases, you may fund a cash value policy in a way that the cash values can be used in later years to pay future premiums. As long as you continue paying your premiums by whatever means, cash value life insurance continues throughout your life, regardless of your age or your health. As you pay your premiums, a portion of each payment is placed in the cash value account. During the early years of the policy, the cash value contribution is a large portion of each premium payment. As you get older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow–tax deferred–as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you’ll be entitled to receive the cash value, minus any loans and surrender charges. Many different types of cash value life insurance are available, including whole life, variable life, universal life, and variable universal life.

Note:Variable life insurance and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company issuing the policy. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life insurance policy.

Making a choice

Term insurance coverage typically costs less than cash value insurance coverage when you’re younger, but because the cost of a term policy is based on your age, the cost may eventually exceed that of cash value if you continue to renew your term policy. In contrast, these factors are taken into consideration when cash value insurance premiums are set. As a result, certain cash value policy premiums typically remain the same throughout the life of the policy.

In some cases, the choice may be clear. For instance, your insurance need may be so large that the only way you can afford to meet it is by purchasing lower-premium term insurance. Or, you may need the coverage only for a few years, again making term insurance the logical choice. But if you can afford to pay higher premiums, and you need long-term protection, you may want to consider cash value insurance.

In some cases, you may want to have both types of life insurance coverage. For instance, if you want to have some life insurance at the time of your death, you might consider buying the bulk of your life insurance as term and a smaller portion as cash value. When your need for life insurance decreases, the term policy could be discontinued and the cash value policy kept. It’s also possible to buy a term policy that is convertible to a whole life policy later.

 

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc., Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Registered representatives offer securities and investment advisor representatives offer advisory services through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Mutual of Omaha Advisors is a marketing name for Mutual of Omaha Investor Services, Inc. Mutual of Omaha Investor Services, Inc., Family Wealth Management and Broadridge Investor Communication Solutions, Inc. are not affiliated.

Trading instructions sent via e-mail will not be honored. Please contact my office at the number provided above or Mutual of Omaha Investor Services, Inc. at (800) 228-2499 for all buy or sell orders. Please note that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets.


Life Insurance for Children

Photo courtesy of Pexels

Prepared by Broadridge Investor Communication Solutions, Inc.

If you’re thinking about buying life insurance for your child, consider the decision carefully. The main purpose of life insurance is to replace income lost after someone dies, and there’s little doubt that your income could decrease upon your child’s death, due to lost time at work or lost productivity. However, you should also consider protecting your child’s future by purchasing more life insurance for you and your spouse.

Isn’t it smart to buy insurance now, while the rates are low?

While it may be true that life insurance policies for children are inexpensive, the cost alone shouldn’t be the only consideration. A more important factor is the need for coverage both now and in the future. You might especially consider purchasing life insurance for your child if he or she is at risk for developing a specific medical condition that runs in your family or has a condition that is likely to worsen over time.

 

Isn’t it smart to buy cash value insurance now, to help save for college?

The tax-deferred cash value component of cash value life insurance is sometimes used to accumulate funds to pay for college. You may be allowed to withdraw paid-in premiums with no tax consequences, and borrow against the earnings at low or no interest. (Keep in mind, though, that policy loans and withdrawals may affect the death benefit.)

Remember the bottom line: your decision to purchase life insurance should center first on the death benefit. Buy life insurance because you need the financial protection it offers, not only as an investment alternative.

 

What you can do instead

When deciding which family members to insure, and which life insurance policies are appropriate, consider how your family’s income might be affected. To specifically protect your child, you may want to purchase additional coverage on your own life and on your spouse’s life. Since you and/or your spouse support your family financially, your child’s financial future would be profoundly affected if you died. Make sure that the coverage on both parents’ lives ensures that there will be enough money for day-to-day living as well as for college expenses, even if something happens to one of you.

 

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc., Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Registered representatives offer securities and investment advisor representatives offer advisory services through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Mutual of Omaha Advisors is a marketing name for Mutual of Omaha Investor Services, Inc. Mutual of Omaha Investor Services, Inc., Family Wealth Management and Broadridge Investor Communication Solutions, Inc. are not affiliated.

Trading instructions sent via e-mail will not be honored. Please contact my office at the number provided above or Mutual of Omaha Investor Services, Inc. at (800) 228-2499 for all buy or sell orders. Please note that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets.


Types of Life Insurance Policies

Prepared by Broadridge Investor Communication Solutions, Inc.

You know that you need life insurance. However, with the wide variety of insurance policies available, you may find choosing the right one difficult. It’s really not as confusing as it seems, however, once you understand the basic types of life insurance policies.

Term life insurance

With a term policy, you get “pure” life insurance coverage. Term insurance provides a death benefit for only a specific period of time. If you die during the coverage period, your beneficiary (the person you named to collect the insurance proceeds) receives the death benefit (the face amount of the policy). If you live past the term period, your coverage ends, and you get nothing back.

Term insurance is available for periods ranging from 1 year to 30 years or more. You may be able to renew the policy for a new term without regard to your health, but at a higher rate. Your premium goes toward administrative expenses, company profit, and a reserve account that pays claims to those who die during the term period. As you get older, the chance that you will die increases. To cover this increasing risk, your premiums will likewise rise at regular intervals. For this reason, premiums that were quite inexpensive at the time you initially purchased your term policy will become much more expensive as you get older. Most term insurance also has a conversion feature that allows you to switch your coverage to some type of permanent insurance without answering health questions.

Traditional whole life insurance–guaranteed premiums

Whole life insurance is a type of permanent insurance or cash value insurance. Unlike term insurance, which provides coverage for a particular period of time, permanent insurance provides coverage for your entire life. When you make premium payments, you pay more than is needed to pay for the current costs of insurance coverage and expenses. The excess payment is credited to a cash value account. This cash value account allows the insurance company to charge a level, guaranteed premium* and to provide a death benefit and cash value throughout the life of the policy.

As you make payments, the cash value account grows. With traditional whole life insurance, the cash value account is guaranteed* and held in the insurance company’s general portfolio–you don’t get to choose how the cash value account is invested. However, the cash value can potentially grow beyond its guaranteed amount through the payment of dividends (profits earned by a “mutual” insurer). The cash value grows tax deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. It is important to note, however, that a policy loan or partial surrender will reduce the policy’s death benefit, and a complete surrender will terminate coverage altogether.

If you live to the policy’s maturity date, the policy will “endow,” and the insurance company will pay the accumulated cash value (equal at maturity to the death benefit) to you.

Universal life–openness and flexibility

Universal life is another type of permanent life insurance with a death benefit and a cash value account. Like whole life insurance, the cash value is held in the insurance company’s general portfolio–you don’t get to choose how the account is invested. Unlike traditional whole life, universal life insurance allows you flexibility in making premium payments.

A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. Reducing or increasing premiums will impact the growth of the cash value component and possibly the death benefit. You are also free to change the policy’s death benefit directly (again, within the limits set out by the policy) as your financial circumstances change. Be aware, however, that if you want to raise the amount of coverage, you’ll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase.

Universal life policies reveal all aspects of the policy’s cost structure, including the cost of insurance (the portion set aside to pay claims) and expenses. This information is not always available with other types of policies. Another feature of universal life is the option to add the cash value to the face amount when the death benefit is paid. For example, say you die when you have $200,000 of cash value within your $1 million policy. If you chose the enhanced benefit option, your beneficiary receives $1.2 million. Keep in mind, however, that nothing is free–the increased benefit is reflected in premium calculations.

Index universal life is a type of universal llife insurance. Index  universal life insurance credits interest based on the performance of an equity index, such as the S&P 500.

Variable life–you make the investment decisions

Like other types of permanent life insurance, variable life insurance has a cash value account. A variable life insurance policy, however, allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, known as subaccounts, that are professionally managed to pursue a stated investment objective. Choices can range from a fixed interest subaccount to a highly volatile international growth subaccount. Variable life insurance policies require a fixed annual premium for the life of the policy and may provide a minimum guaranteed death benefit*. If the cash value account exceeds a certain amount, the death benefit will increase.

Variable universal life–the ultimate in flexibility

Variable universal life combines all of the options and flexibility of universal life with the investment choices of a variable policy. It is a true hybrid product, and you make most of the policy decisions. You decide how often and how much your premium payments are to be, within guidelines. With most variable universal life policies, you get no guaranteed minimum cash value or death benefit. Your premium payments in excess of administrative costs and the cost of insurance are invested in the variable subaccounts that you choose.

As with both variable and universal life insurance, your policy may lapse if the cash value account falls below a certain level. Low-interest loans can be taken against your cash value account, and cash withdrawals are available. However, keep in mind that your policy’s face amount is reduced by the amount of a policy withdrawal, and withdrawals may be taxable. You have the option of choosing a fixed or enhanced death benefit. Today, most variable universal life policies offer a rider that guarantees the death benefit at a certain level regardless of the performance of the subaccounts, provided that a stated minimum premium is paid for a predetermined number of years*.

Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

*Any guarantees associated with payment of death benefits, income options, or rates of return are subject to the claims-paying ability of the insurer.

Joint or survivorship life for you and your spouse

Some married couples choose to buy insurance together within the same policy. These policies take the form of either a joint first-to-die or a joint second-to-die (survivorship) design. With first-to-die, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased. Second-to-die policies are commonly used in estate planning to create a pool of funds to pay estate taxes and other expenses due at the death of the second spouse. Joint and survivorship policies are generally available under any type of permanent life insurance. Other than the fact that two people are insured under one policy, the policy characteristics remain the same.

 

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc., Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Registered representatives offer securities and investment advisor representatives offer advisory services through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Mutual of Omaha Advisors is a marketing name for Mutual of Omaha Investor Services, Inc. Mutual of Omaha Investor Services, Inc., Family Wealth Management and Broadridge Investor Communication Solutions, Inc. are not affiliated.

Trading instructions sent via e-mail will not be honored. Please contact my office at the number provided above or Mutual of Omaha Investor Services, Inc. at (800) 228-2499 for all buy or sell orders. Please note that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets.


Comparing Life Insurance Policies

Photo courtesy of Pixabay

Prepared by Broadridge Investor Communication Solutions, Inc.

Like anyone else, you want a life insurance policy that meets your needs and budget. But how do you find the right policy when there are so many to choose from and many of them seem so similar? The key is knowing how to compare policies and evaluate the results.

Know what you want–and compare apples to apples

Your first step should be to assess your life insurance needs. For instance, do you need $100,000 of coverage or $250,000? Would you be better off with term life or a cash value policy? If you’re buying term life, how many years of coverage do you want? Are there any special features that you want in a policy? How much can you afford to pay in premiums? If you haven’t answered questions like these yet, you probably should before you start comparing policies. Otherwise, you may end up comparing apples to oranges. For example, if you’re torn between a term life policy and a cash value policy, the decision you face isn’t really about two particular policies–it’s more about which type of insurance is best for you.

Detailed policy comparisons make the most sense when you know exactly what you’re looking for. This makes your job easier, because you can narrow your choices down to policies that provide the same type and amount of coverage. The more similar the policies you’re comparing, the more accurate and useful your results will be.

Try to get the most bang for your buck

Don’t make the mistake of comparing only insurance companies and not policies. Instead, choose a few reputable companies and get price quotes for the coverage you want. Premiums may vary widely among companies for comparable coverage, and even the same company may offer very similar policies at different prices. Should you buy the policy with the lowest annual premium? It depends. When comparing term policies that provide the same amount of coverage for the same period, a simple comparison of premiums may be sufficient. But this is the exception, not the rule.

The premium is an important factor when comparing policies, but often it doesn’t tell the whole story. What you really want is the best overall value for your money. To determine a policy’s true value, you have to dig a little deeper. Carefully read the fine print of each policy you’re considering, and ask lots of questions during sales presentations. A closer look at two or more policies may reveal key differences that would have gone unnoticed. Here are some things to look for and ask about:

  • Do policy premiums or benefits vary from year to year? If so, what part of the premiums or benefits is guaranteed, and what part is not?
  • If a cash value policy, what are the company’s projections of future cash value? How do those projections stack up against other cash value policies? Are the assumptions in those projections realistic?
  • Can you access the cash value through a withdrawal or loan? What restrictions apply? What is the loan interest rate?
  • If applicable, is there a guaranteed minimum interest credited on cash values? (Keep in mind that guarantees are subject to the claims-paying ability of the issuing insurance company.)
  • What charges and fees are associated with the policy? For example, what surrender charge will you pay if you give up a policy and take out the cash value?
  • Can you customize the policy to your needs with options or riders, and at what additional cost? For example, how much extra will you pay for a “waiver of premium in the event of disability or accidental death benefit” rider?

If a more expensive policy has features and provisions that are more favorable to you, it may sometimes be more cost effective to pay the higher premium. Of course, comparing policies to find a good value is also important when the policies you’re looking at all have roughly the same premium.

Run some numbers

Depending on how far you’re willing to go, comparing life insurance policies can become a complex numbers game. Insurance professionals use a number of methods to mathematically compare and evaluate policies. Most of these methods are designed to measure the true cost or value of a policy by taking into account factors other than premiums. These may include surrender charges, sales and administrative expenses, taxes, rates of return on cash values, policy dividend projections, and the cost per $1,000 of pure protection, both guaranteed and projected.

Two cost-comparison methods are widely used in the industry: the net payment cost comparison index and the surrender cost comparison index. The National Association of Insurance Commissioners, a group of state regulators, adopted these indexes to help consumers compare life insurance policies. Most states require insurance sales professionals to run these numbers for you, so be sure to ask for this service if it’s not offered to you. However, these indexes will produce useful results only when you’re comparing similar types of policies.

The advantage of any comparison method is that it can help take some of the subjectivity out of comparing policies. But all of these methods have shortcomings and limitations. Most of them rely on the assumptions and projections of the company that wrote the policy. Some of them apply only when you’re comparing policies with the same premium outlay. Finally, no index tells you everything you need to know about a particular policy. Use the results only to supplement what you learn from reading the policy, from sales presentations, and from other sources.

Get professional help–you’ll be glad you did

As you can see, comparing life insurance policies is not for the faint of heart. Doing it properly takes a combination of patience, persistence, and industry knowledge. Few consumers have the resources or expertise to do the necessary work on their own. In fact, it would probably take a full-time staff of experts just to compare and evaluate all of the life insurance policies on the market!

Obviously, such large-scale comparisons are not realistic, but having even one professional on your side can make a big difference. A qualified insurance professional can assess your insurance needs, make sense of complex sales illustrations, and conduct a cost-benefit analysis of similar policies. But don’t just pick any name out of the phone book–shop around for someone who’s qualified and trustworthy. With the right person working for you, you’ll be well on your way to finding a suitable policy that won’t break the bank.

One final word of caution about policy sales illustrations: It’s important to ask lots of questions about these illustrations because some of them can be misleading. For example, the illustrations of some companies are based on unrealistic assumptions about a policy’s future cash value.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc., Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Registered representatives offer securities and investment advisor representatives offer advisory services through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Mutual of Omaha Advisors is a marketing name for Mutual of Omaha Investor Services, Inc. Mutual of Omaha Investor Services, Inc., Family Wealth Management and Broadridge Investor Communication Solutions, Inc. are not affiliated.

Trading instructions sent via e-mail will not be honored. Please contact my office at the number provided above or Mutual of Omaha Investor Services, Inc. at (800) 228-2499 for all buy or sell orders. Please note that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets.

 


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This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. Registered representatives offer securities through Mutual of Omaha Investor Services, Inc. Member FINRA/SIPC. Investment advisor representatives offer advisory services through Mutual of Omaha Investor Services, Inc. Family Wealth Management and Mutual of Omaha Investor Services, Inc. are not affiliated.

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