As a permanent life product, whole life insurance lets you build cash value. It also offers a guaranteed death benefit, predictable premium payments, and the possibility of dividends that can pay your premiums or provide you with cash.

In later times, you can borrow against the cash value or use it eventually to pay premiums and keep your policy in force. Among the best benefits of whole life insurance are the payment of dividends and the fact that any dividends you earn will most likely be tax-free.

Life insurance policies are either participating or non-participating. A participating policy pays dividends to policyholders. These policies are usually sold by mutual insurance companies (which are owned by policyholders). Non-participating policies don’t pay dividends.

In this article, we will go over some basics of dividend paying whole life insurance so you have a foundation about which you can ask your financial professional for more information.

Basics of Dividend Paying Whole Life

Here are a few fundamentals to keep in mind for dividend paying whole life.

Dividends

In the case of whole life insurance policies, dividends represent a small portion of the issuer’s profits. These dividends are similar to those paid on the profits of a public company. The dividend amount usually depends on the amount paid into the policy.

A $100,000 policy paying 5 percent will pay $5,000 for the year. If the policyholder adds another $5,000 during the following year, the policyholder will receive $5,250 the next year. Eventually, these dividend payments can increase to levels that will offset some of the costs associated with owning the whole-life policy.

Dividends can be guaranteed or non-guaranteed, depending on the policy. Most often, policies that provide guaranteed dividends also have higher premiums. In contrast, non-guaranteed policies have lower premiums but may go years without paying dividends.

If the dividends are important to you, check out the insurance company’s financial rating. A life insurance company with an excellent rating is generally more able to reliably guarantee and sustain dividend payments. If ratings matter to you, then you may want to stick with insurance companies with a rating of A or better.

Using Your Dividends

Once you receive your dividends, you have various options for using them. You can request a check for the dividends and deposit it into your accounts. On the other hand, you can also use your dividends to offset a portion of the premium due or to purchase additional insurance.

You may also leave the dividend with the life insurance company to earn interest. Dividend payments can also reduce the balance of any loans against your policy’s cash value.

Reasons for Dividends

Dividends represent the insurance company’s profits from policy premiums.

Effect on Premiums

You can use your dividends to pay all or part of your premiums. This strategy will reduce the premium you owe on your policy or may eventually pay off the policy in its entirety.

How Do Dividends Work?

At its base, dividend-paying whole life insurance works like all whole life insurance. The policyholder pays premiums for coverage that will last for life and has a cash value component. You can make loans against the policy to access your money. However, any unpaid loans will be deducted from the policy when you pass away.

For a dividend-paying policy, you will receive dividends if the issuer has a profitable year. When considering a dividend-paying whole life policy, your agent or financial professional should give you policy summaries that project how much you can expect from each policy for annual dividends.

Tax Treatment of Whole Life Dividends

Perhaps the best feature of whole life dividends is that they aren’t subject to federal income taxes in many cases. Dividends are treated for tax purposes as a return of premium by the life insurance company and are thus taxed similarly to other distributions.

They will be distributed income-tax-free until your investment of funds in the contract has been reduced to zero. In other words, if you buy a $100,000 whole life policy and over the years you own it, you receive dividends totaling $100,001, that last dollar may be subject to income taxes.

The dividends are a tax-free refund of overpayments of premiums to the extent of how much premium you have paid.

Getting Tax-Free Income from Whole Life

As noted above, dividends aren’t taxable income so long as the total of dividends received doesn’t exceed the cost of your policy.

Because dividends only get paid if your insurance company has a financial surplus, the IRS treats the dividend payout as a refund of excess premium payments. If you leave your dividends with the insurer to earn interest, that interest will get taxed as income.

Questions to Ask Before Buying

Be sure to ask your agent or financial professional these questions before committing to a whole life insurance product.

How Are Dividends Calculated?

The first step in calculating a whole life dividend is determining whether the insurance company experiences financial performance that exceeds its assumptions for that fiscal year. The insurance company considers the assets it needs to maintain its capital position and its overall performance.

Once the company determines that its results support the payment of dividends that year, it will evaluate each individual eligible policy. Certain expenses and credits are applied to the policy to determine is Guaranteed Accumulated Value.

Among these critical statistics are the company’s investment returns and the mortality expense (claims experience) the company has had for the year before. The company then applies the premium percentage to that number.

Are Dividends Guaranteed?

Dividends can be guaranteed or not guaranteed. The former policy will be more expensive because it imposes a higher risk on the insurance company, which must pay the dividend regardless of its financial performance. On the other hand, if receiving dividends is crucial to you, the higher cost may be justified.

Some insurance companies use a dividend scale in conjunction with calculating dividends. This chart is a complete set of dividends on a policy. It will begin with the dividend payable in the current year and then show what the dividends in succeeding years would be if there were no changes in the current calculation factors. The company will prepare and distribute a new divided scale if there are material changes to those expenses.

Effect of a Change in Dividend Scale

For a guaranteed dividend policy, you will always receive at least the minimum dividends so long as you have no loans and promptly pay your premiums. The payment of dividends won’t affect the guaranteed cash value or death benefit of your policy.

On a non-guaranteed policy, your cash value and death benefit can change. If, for example, you received an illustration, that illustration will be based on the dividend scale in effect at the time of the illustration. If it changes, so will the values in your policy.

Effect of Loans on Dividends

Depending on the nature of your policy, an outstanding loan may affect the dividends your policy earns. If your insurance company uses the direct recognition methods to calculate dividends, the insurance company will adjust the policy’s dividends to reflect the funds the company couldn’t directly invest.

Of course, outstanding loans also impact the cash value of your policy and the death benefit payable to beneficiaries.

Does the Life Insurance Company Have a Good Track Record?

Since you are looking for dividend payments over the life of your policy, and these payments are only guaranteed by the claims-paying ability of the issuer, make sure that your insurance company has a solid financial history. Otherwise, you may get to retirement and find you have never received a premium. Or what’s more, the death benefit on your policy may at that point be in question.

Should You Pay Premiums with Dividends?

You can pay your premiums with the dividends, but taking the cash in hand provides the most options. So long as they are likely to be income-tax-free, this latter is probably your best option.

Will You Pay Income Tax on Your Dividends?

So long as your total dividends received haven’t exceeded your total payments for the policy, your dividends will be deemed a refund of excess paid premiums. They therefore won’t be taxable.

Pros and Cons of Dividend Paying Whole Life

If you need whole life insurance and can handle the premiums, owning a dividend paying whole life policy can be beneficial. They can help pay premiums, provide income tax-free cash-flow, and provide a death benefit.

However, dividends shouldn’t be the only factor you consider when choosing life insurance. Think about whether you actually need cash value insurance rather than term life. Also, examine the financial standing of the issuer of any policy you are thinking about. It’s good to keep in mind that your policy is, in the end, only as good as the claims-paying ability of your issuing insurance company.

Another thing is that insurance policies aren’t investments. Their growth potential for money is generally lower than what you can find for products offered in the investment marketplace, such as stocks or mutual funds.

On the other hand, the level of risk faced to have that growth potential is also considerably lower. The critical decision is to examine your entire financial plan and determine the role of various insurance products in your plan.

A licensed insurance professional with broad experience in retirement financial issues can help you make these decisions.

Finding the Right Insurance Professional for Your Goals

If you are looking for an agent or financial professional to assist you, consider working with someone who is independent. In other words, they are someone who isn’t beholden to one or a few insurance companies, but rather can offer products from multiple carriers.

An independent financial professional has more business freedom to research solutions that fit your situation and then recommend them to you. They also don’t have quotas or other business requirements to meet with a parent financial company or insurance carrier, unlike captive financial professionals.

If someone who is independent and experienced in retirement financial services sounds appealing to you, many independent financial professionals are available here at SafeMoney.com. You can get started by visiting our “Find a Financial Professional” page and connecting with someone directly there. Feel free to request an appointment to discuss your goals and situation, and if you need a personal referral, please call us at 877.476.9723.

The post Dividend Paying Whole Life Insurance: How Does It Work? first appeared on SafeMoney.com.

The survivor loses income from a second Social Security benefit. If their spouse had a pension or other benefit that paid income while they were alive, chances are it also goes away. Even so, there are steps you can take to protect against these risks.

One example financial plan with such strategies was once presented by Zach Parker, senior vice president of wealth management and product strategy at The Advisor Group. At one industry event, he showed how a combination of term life insurance and universal life insurance can provide income protection for both spouses.

Life Insurance and Survivorship Strategies

These life insurance concepts were used in a bucketing retirement income strategy, or where you divide your retirement into five-year to ten-year periods. Monthly income during each of those time segments comes from a dedicated bucket of money for each time period.

In Parker’s presentation, a couple falls into the “mass affluent” category. They have $400,000 of retirement savings, of which $340,000 is in qualified plans and accounts. Apart from both having Social Security benefits, the husband has a pension. Both spouses are 60 years old, and the wife expects to continue part-time work in retirement for another 5 years.

This couple could, of course, work for a few more years and delay taking Social Security benefits. That would also increase the amount that the husband will get from his pension.

But the couple asked Parker to see whether he could come up with a plan that will allow the husband to retire now and the wife to work only part-time for another 5 years. They also don’t want to have to tap into their home equity to do this.

The Widow/Widower Dilemma

When a spouse dies, the survivor faces challenges on multiple fronts, including loss of income sources. Since women tend to live longer than men, they often come across this hard situation.

There is the lost Social Security benefit. If the deceased spouse had a pension, a reduced or eliminated benefit payout might apply. Furthermore, leftover retirement savings may be taxable upon withdrawal, so more money is needed to pay for this expense.

These factors combined can often result in an overall reduction in benefits of up to 50% for the surviving spouse. Furthermore, it may happen when the surviving spouse is ‘too old’ to rejoin the workforce – or at least in a full-time capacity.

But proper planning using life insurance in a survivorship strategy can help many survivors avoid these risks. This planning can give a couple the assurance that they will have enough income to at least cover their vital expenses.

Time Segmentation

In the presentation, Parker’s Income for Life Model (IFLM) divides the couple’s lives up into 5-year segments, or income buckets. A segment of the couple’s assets is designated to pay out at each specific bucket.

At the beginning of each bucket period, the assets that were earmarked for that bucket are liquidated and placed into short-term fixed income offerings.

While critics say that a bucket strategy can create timing problems and need ongoing changes, it can help retirees feel more certain about the future with a ‘simple’ strategy. They can rest easy knowing that they have a plan for every stage of their retirement.

Parker’s plan allowed the couple to protect their income with a combination of term policies and a guaranteed universal life policy. The term policies will provide $125,000 of coverage while the universal policy’s death benefit is $150,000.

For the first 20 years of retirement, the wife would receive $275,000 if her husband were to pass away before she did. Then, the term policies would be dropped, and the total amount of coverage would drop to $150,000 from the universal policy after 20 years.

The total cost for these policies comes to about $400 a month, which the couple can afford. Parker had initially recommended that the couple purchase $500,000 of life insurance on the husband.

But the husband had objected to that, saying that the cost of the premiums would be too high. Parker compromised and used the policies described above instead.

Contingency Plans for When the Unexpected Happens

Although a retirement outlook can seem fairly secure on paper, life has a way of throwing us unexpected curveballs that can disrupt even the best-laid retirement plans.

The couple may still need to tap into their home equity to pay for long-term care expenses or else buy some sort of long-term care insurance.

Let’s go back to the life insurance coverage. It may make more sense for them to buy a permanent life policy that has accelerated benefit riders that can be used to pay for long-term care expenses. This way they are guaranteed to get something out of the policy, no matter what happens.

While this rider will come at an additional cost, it can be much cheaper than having to pay for a whole separate long-term care policy. Alternatively, say that they do buy a long-term care insurance policy.

If they never need to use the coverage, then that is money lost that they can’t recoup. But a life insurance policy with those benefit riders is guaranteed to pay back something: the cash value in the policy, the death benefit, or the long-term care benefit.

Accelerated benefit riders allow policy owners to insure themselves against several types of risk, such as disability, long-term care, and death.

Proactive Planning and Guarantees to Beat Back the Uncertainties

Retirement planning today involves dealing with “the known knowns, the known unknowns, and the unknown unknowns” (as a Defense Department official once famously said).

It involves several variables that can’t always be fully counted on. Therefore, it may need to be changed many times over the course of time.

Our example couple still has other issues to consider, such as whether to tap into their home equity, assume a greater level of investment risk in their portfolio, or make other changes that can impact their plans.

Consult your financial advisor today to explore survivorship strategies, and other strategies that can bring you more peace of mind for retirement. Looking for a financial professional to help you with your retirement what-ifs? For your convenience, many experienced and independent financial professionals are here at SafeMoney.com to serve you.

Get started by visiting our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, needs, concerns, and overall situation and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.

The post Using Life Insurance in a Survivorship Retirement Income Strategy first appeared on SafeMoney.com.

What if you are worried about taxes? Then you can opt for a Roth account, in which you put away money on which you have already paid income taxes. The benefit is on the backend, where you can draw it out tax-free in retirement.

The good news is there are other ways that you can have even more tax-free income in retirement. These options can be a good supplement to a Roth account. So long as it’s properly structured and used correctly, an indexed universal life insurance policy can be one such vehicle. An IUL policy lets you build cash value by putting in premiums with after-tax money, then later take out money tax-free.

What’s more, policyholders also have a complete package of insurance benefits on top of their retirement income. Many IUL policies today provide living benefits for critical illness, chronic illness, and terminal illness. These benefits let you use proceeds to cover costly expenses in those health situations.

How Did IUL Insurance Come About?

IUL insurance can essentially be thought of as third-generation life insurance.

First generation life insurance was the traditional whole life insurance and universal life insurance. These kind of life policies paid either a fixed rate or a variable rate that adjusted with interest rates in the economy.

Then variable universal life insurance came along, allowing you to put your premiums into different investment fund options. Over time, variable life policies declined in popularity as strong market volatility arose in the 2000s.

IUL insurance became more prominent as an alternative. You can think of this type of life insurance as a sort of happy medium between guaranteed life insurance policies and variable universal life policies. The guaranteed life insurance policies have relatively low interest rates, and variable universal life insurance policies come with market risk.  

How Does IUL Insurance Work?

With IUL insurance, the cash value in the policy is linked to an underlying financial benchmark index. A common benchmark used is the S&P 500 price index. When the index goes up, the cash value is credited with interest earnings based on a portion of that growth.

When the index falls, the cash value simply remains the same. It’s credited zero percent for that period. Your principal and prior interest earnings are locked in. The IUL policy provides guaranteed protection of principal for your money in this regard.

IUL policies won’t have as much growth potential as variable universal life policies over time. But many IUL policies can have growth potential above the rate of inflation.

Your money will also likely earn more interest in an IUL policy than you would in a bank CD or other bank products, which currently pay very little interest.

A Growing Place of Using Life Insurance in Tax Planning

With swelling government debt and spending, tax hikes have increasingly become the talk of the town. Because of that, there is growing interest in IUL policies, and permanent life insurance policies in general, as another source of tax-advantaged income.

Other types of tax-deferred vehicles such as IRAs and qualified plans can be changed according to the whims of legislators in Congress. As these pressures build, they may well seek ways to generate additional tax revenues at the expense of the wealthy. But the taxation of life insurance has been pretty consistent for decades.

Nor is the use of life insurance in this way a new concept. Historical figures such as President John F. Kennedy, President Franklin D. Roosevelt, and even Senator John McCain have used life insurance policies to great financial benefit in different ways.

A Swiss-Army Knife of Benefits

IUL insurance with living benefits can provide value in many respects. You can tap the cash value for tax-free income, and you can also have a good amount of flexibility in how you use the income. This can be attractive as part of a comprehensive strategy to reduce taxes in retirement.

What’s more, IUL also gives you a package of insurance benefits that may be more expensive if they were purchased separately.

One big advantage with an IUL policy is the certainty that the policyholder will receive some sort of benefit from it. Policyholders are guaranteed to get their money out of these policies one way or another.

They may receive proceeds from living benefits if they become disabled or are diagnosed with a major illness. Their beneficiaries have claim to the death benefit should they pass away prematurely.

If none of these things happen, then the policyholder can still access the cash value in the form of tax-free policy loans during retirement.

The downside to this? Of course, these loans do charge interest. Any outstanding loans that have not been repaid by the time the policyholder dies are subtracted from the death benefit. Still, the policyholder is covered no matter which way things turn out.

What Are Some Disadvantages to This?

In most cases, the policyholder will have to make premium payments for at least ten years before the cash value in the policy really starts to grow. This is because the first ten years’ or so worth of payments are used to pay for the insurance benefits.

For this reason, many financial professionals focus on people in their forties or fifties and who can make premium payments over this time. This helps ensure that the cash value will have adequate time to grow before the policyholder retires.

Also, the policy must be structured so that excessive premium payments won’t turn the policy into a modified endowment contract (MEC). An MEC doesn’t have the same tax advantages that a traditional cash value life insurance policy has, so care must be taken in this regard.

Working with an experienced financial professional who understands life insurance and how this works can help you avoid this situation.

Life insurance policies also can have a variety of fees or expenses, so be sure to cover those with your financial professional when exploring different options. There may be certain life insurance contracts that are better for your unique situation.

A Quick Overview of Policy Loans

Another key advantage to IUL policies is their loan provisions. Once you have built up adequate cash value in your policy, you can borrow from the policy on a tax-free basis. You don’t have to repay it if your cash-flow doesn’t accommodate this. Interest will be charged on the loan, and if the loan isn’t repaid, it will be deducted from the death benefit proceeds.

For example, say someone has an IUL policy with $100,000 of cash value built up inside it. Then they take out a loan for $40,000 to buy a new car or make improvements on their home.

If they passed away soon afterward, then their beneficiary would receive a reduced death benefit. But you won’t pay a 10% early withdrawal penalty on your withdrawal if you are under age 59.5 like you would with an IRA or a qualified plan. There is no age limit for taking money from the cash value as there is with most retirement savings accounts.

Should You Use Life Insurance in Your Tax Strategies?

Using life insurance for tax-free income can be beneficial as part of an overall tax planning strategy. Index universal life insurance is popular among high-income taxpayers in many cases because of their ingrained tax advantages. However, growing numbers of other policyholders are also finding value in it.

You might be inclined to explore other permanent life insurance, such as whole life insurance, for your tax planning mix. But, overall, is this strategy for you? Who would be a good candidate for using life insurance in a tax planning strategy?

Those who are in their mid-career and have consistent income earnings per year are one. Since the cash value takes time to grow, it’s important to have a long enough timeline for that before retirement. You also want to be able to keep up the premium payments over the years so your cash value can grow.

Your financial professional can walk you through the pros and cons, as well as other details relating to your situation. Don’t hesitate to ask questions or seek clarity if something doesn’t make sense. This is your money, and you want it to work well for you now and in retirement.

Taxes Are Just One Part of Retirement Planning

Of course, taxes are just one part of the retirement financial picture. You should also have enough income for your desired lifestyle in retirement, not to mention have financial resources in place for other situations like healthcare needs.

If you are looking for a financial professional to help you with this, many independent financial professionals are available at SafeMoney.com. They understand retirement and its unique opportunities, challenges, and nuances.

Get started by visiting our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and personal situation. Should you need a personal referral, please call us at 877.476.9723.

The post A Closer Look at Using Life Insurance for Tax-Free Income in Retirement first appeared on SafeMoney.com.

No question about it, everyone’s retirement will be different. However, health costs may be a substantial expense for many households, as research shows. And while we all hope to get lucky and be like those octogenarians who take up running and finish a marathon, reality (and statistics) suggests we should be ready for the alternatives.

There’s good news. Consumer demands and care needs have evolved. In response, life insurance companies have come out with new-generation life insurance products – “hybrid” policies that have a death benefit, but that also let you accelerate those benefit proceeds for qualifying health situations.

Introducing Living Benefits Offered with Life Insurance

Those benefits are called “living benefits.” They may come as optional life insurance riders, or some living benefits may be already built into a life insurance contract at no additional cost.

Policyholders may use their living benefits for a number of qualifying situations. That can include certain long-term care needs, terminal illnesses, chronic illnesses, and/or critical illnesses as well as critical injuries. Certain conditions must be met, including certification of health status by a physician, a minimum waiting period for a policy to be held, and the specifics of your health situation.

Apart from living benefits with a life insurance policy, there will probably be other options available: long-term care insurance, disability insurance, and health savings accounts, to name a few.

No matter what tools you use to help pay for health costs in retirement, the importance of planning for them can’t be overstated, given how lifespans are increasing.

Longer Lives, More Years to Plan For

When you begin the process of planning for retirement, you look at your potential lifespan and will most likely seek out solutions that will generate lifetime income no matter how long you may live. Live for 30 more years? So will your income payments. Live for 40 more years? No worries, if you have appropriate, long-term income streams ready, that income still comes streaming in.

What could throw this ideal scenario off track? The variable that challenges us all in retirement. Our health… and the ever-rising costs of medical and long-term care. If you feel like you are in pretty good health as retirement approaches, just how much could that really be?

Brace For Impact

According to the new Fidelity Retiree Health Care Cost Estimate, a couple age 65 retiring in 2018 may need approximately $280,000 saved (after tax) to cover health expenses in retirement.

As Fidelity points out, this amount can vary depending on:

• When you retire
• Where you retire
• How healthy you are
• How long you live

If you retire before Medicare eligibility, for example, and face a medical challenge, that would require greater out-of-pocket spending you likely hadn’t planned for.

The amount you need will also depend on which accounts you use to pay for healthcare—e.g., 401(k), HSA, IRA, or taxable accounts, as well as your tax obligations in retirement and potentially even your gross income.

This estimate of $280,000 per couple may be shocking, but don’t forget long-term care. According to Genworth, in 2017 the median cost for long-term services varied from $46,332 to $92,378, depending on the service needed.

Flexible Living Benefits Offer Valuable Flexibility

Fortunately for retirees and working-age adults, there are solutions to this potentially budget-busting retirement challenge. Insurance companies have developed numerous product offerings that can be tailored to an individual policyholder’s desired level of preparedness.

Many people initially think of long-term-care insurance when they investigate how to cover medical costs in retirement. But concerns over paying for benefits they may not use or being faced with rising premiums give others pause.

For retirement savers with these concerns, life insurance policies with living benefits may be of interest. The proceeds may either be accelerated for costly health needs, or the death benefit can be paid out to beneficiaries upon the policyholder passing away.

If you are facing a qualifying health or care situation, proceeds from your policy’s death benefit can be used to help cover expenses related to that event. And it’s more than just terminal illness or confined care in a nursing home facility that may qualify.

When a Hybrid Policy Helps Out

The benefits of these insurance policy riders are considered flexible because you have the choice of:

1. Fully accelerating your benefit to cover qualifying medical costs;
2. Leaving a portion of the policy’s death benefit intact, only taking out a partial benefit; or
3. Leaving the entire policy for your beneficiary.

Critical illnesses and critical injuries are medical events that can be addressed by living benefit riders.

Among covered critical illnesses, many of which are the leading causes of disability to our aging population, may be:

• ALS (Lou Gehrig’s disease)
• Cancer
• Heart Attack
• Heart Valve Replacement
• Major Organ Transplant
• Stroke

And qualified critical injuries may include:

• Coma
• Paralysis
• Severe Burns
• Traumatic Brain Injury

With a long-term care event averaging about 4.4 years for women and 3.2 years for men, according to a 2016 Department of Health and Human Services study, costs can really add up. The national median cost of a semi-private nursing home room is roughly $86,000 per year or $236 per day, the insurance company Genworth reported in its most recent annual national survey. Doing the math, women could face a $344,000 expense for care while men would average $275,000 for the duration of their care.

Clearly, life insurance policies with living benefit riders need deserve a place at the forefront of any retirement income planning conversations.

It’s better to start planning for these costs now, before they pop up in retirement, and well before they could potentially erase a substantial portion of a retirement budget.

Need Help Exploring Your Options for Living Benefits?

Of course, a life insurance policy with living benefits is just one option. There are many choices to consider as part of a retirement income plan. If you could benefit from the help of an insurance or a financial professional in exploring these potential strategies for your needs, financial professionals at SafeMoney.com can help you.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723. 

The post How Living Benefits can Help You in Retirement first appeared on SafeMoney.com.

According to the College Board’s “Trends in College Pricing 2017” report, students at public four-year institutions paid an average of $3,190 in tuition for the 1987-1988 school year, with prices adjusted to reflect 2017 dollars.

Fast-forward 30 years and that average is $9,970 for the 2017-2018 school year. If you weren’t a math major, don’t worry, we have a calculator. That’s an eye-popping 213% increase. And that is not even taking into consideration the increased cost of room and board, not to mention everything else that causes the college cash register to keep ringing.

Every Option on the Table

It’s no surprise then that families looking to help their college-bound kids fund higher learning consider all tools at their disposal. Naturally, scholarships are at the top of any parents’ wish list.

According to a 2017 survey from Sallie Mae, close to half of students received some kind of scholarship in 2016. The report says that scholarships and grants, which do not have to be repaid, covered about 35% of the college bill for the average family.

And colleges and universities aren’t the only sources for scholarships. While 87% of students received their 2016 scholarship from their college, 75% cited private sponsors and community groups. Meanwhile, 65% said they received money from a state program.

In addition to scholarships, loans, income, and savings were the most common sources of college funding.

529 Plans Give Two Options

The best-known college savings vehicle is the 529 plan. Similar to how qualified retirement plans are treated, a 529 account is a tax-advantaged savings plan designed to encourage saving for future college costs, according to an introduction published online by the U.S. Securities and Exchange Commission.

Legally known as “qualified tuition plans,” they are authorized by Section 529 of the Internal Revenue Code. They are sponsored by states, state agencies or educational institutions.

There are two types of 529 plans: prepaid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. 

What About Cash Value Life Insurance?

Cash value or permanent life insurance policies may be mentioned in the mix as a strategy for college funding. With permanent life insurance, the cash value of a policy grows tax-deferred and, once it has grown, money can be taken on an income-tax-free basis from the cash value via policy loans.

Loans do have to be repaid with interest, but some insurance companies allow for outstanding loans to be covered by benefit proceeds upon the policyholder’s death. 

You don’t need to be related to the recipient when using cash value life insurance, as it gives you the flexibility to save for any person, business, or charity. More than one college-bound kid? You can choose multiple beneficiaries, dividing the proceeds at whatever percentage you select. College savings plans, by contrast, generally limit beneficiaries to family members and close friends.

Cash value life insurance may offer the feature of financial flexibility as the cash value may be accessed for other needs beyond college funding.

Another feature of this life insurance strategy? The formulas used for determining financial-aid needs do not include cash value life insurance.

It’s important to note that this may not offer much benefit to a high-income household with an EFC, or Expected Family Contribution, that is too high to qualify for need-based financial aid. An EFC is not the amount of money a family pays for college. It’s also not the amount of federal student aid that could be received. It’s a figure used by a college or university to calculate the amount of federal student aid a student is eligible to receive.

Who can Benefit from This Strategy?

How a cash value life insurance policy can be used is heavily dependent on a family’s complete financial picture. It should be evaluated on a case-by-case basis.

The younger you are when you buy a cash value life insurance policy, the more time it has to grow. From an actuarial perspective, it should cost you less because there is a lower probability of mortality. Those of older age may not be able to leverage the full benefit of a cash value life insurance policy than in their youngers years, though. This is due to the cash value not having as much time to grow. There is also a greater mortality risk to the insurance carrier covering the death benefit, which may increase the cost of insurance.

Any recommendation for college funding using cash value life insurance should take place on a best-interest-of-the-client standard basis, looking at the potential policyholder’s complete financial picture. Factors to go over include: 

• Age
• Spouse’s age
• Age of the college-bound children
• Household income
• How much other assets exist
• The values of those other assets
• Sources of policy funding
• Any potential tax effects and fiscal implications from the source of funding
• Other college funding options available

A complete, honest, objective analysis of a client’s financial picture is the first step to determining if college funding using cash value life insurance is an appropriate strategy.

Along with a full financial evaluation, consider opinions from other college funding and financial professionals. If other options are at your disposal and they are financially advantageous, it might be better to tap those options for paying for post-secondary education.

Need Help with Your Money Questions?

If you need help with getting on the right foot for your financial goals, financial professionals at SafeMoney.com can help you. They have helped many families and retirement investors to be better prepared to achieve their objectives.

Use our “Find a Financial Professional” section to locate someone and connect with them directly. Should you need a personal referral, call us at 877.476.9723.

The post Using Life Insurance for College Funding first appeared on SafeMoney.com.

Depending on your goals, life insurance comes in many forms, and one is Single-Premium Indexed Universal Life Insurance. It’s also known as “Single-Premium IUL,” or even just “SPIUL.” Let’s take a closer look at this universal life insurance option and what it might have to offer.

Passing on a Tax-Free Legacy

When searching for a strategy to pass on a death benefit to your heirs tax-free, both whole life policies and IUL policies may make your short list. Depending on your unique needs, such as your age and the length of time you have to defer, you might want to give SPIUL insurance a closer look.

Why? Because some SPIUL policies provide a death benefit, along with a “face” amount of coverage. The “face” amount is a guaranteed death benefit to the age of 120. “Wait, age 120?” you ask. “Will I really live that long?”

In May of 2013, National Geographic’s cover featured a photo of a cute baby (four different covers with four different babies, to be exact) and this headline: “This baby will live to be 120.” Then, on its February 23, 2015 cover, Time Magazine featured another cute baby pic with its own headline: “This baby could live to be 142 years old.”

The point is that with modern-day lifestyle enhancements, technology, and medical advances, people are living longer. Not knowing your exact genetic makeup or your personal longevity profile, if you want your policy to be in force upon death — whenever that may be — a guarantee to age 120 should be considered.

Single Premium Lets You Set It and “Forget It”

Why choose the single-premium feature instead of paying premiums to your policy over time? Here are some advantages to providing a lump-sum start to your policy:

• Less hassle without budgeting for recurring premium payments.
• Mitigating the risk of defaulting on your life insurance because of a missed payment.
• Fewer components of the policy to monitor and manage

These potential advantages are just a few factors to think about. Guidance from a knowledgeable life insurange agent or another financial professional acting in your best interest may help you further.

Indexing is What Differentiates SPIUL

As in indexed universal life insurance, SPIUL allows you to put cash value amounts into a “fixed” component, giving you the opportunity for growth potential linked to a specific index. The cash value grows inside the policy as a result of changes within an index.

The S&P 500 price index is common in many IUL policies. However, there might be other broad index choices, including the Dow Jones Industrial Average or the Nasdaq 100.  

Here’s how the cash value may grow:

• The insurance company credits interest to your policy cash value based on the activity of the correlating index.
• Your premium dollars aren’t invested directly in the market.
• When the index goes up, the cash value may earn interest that is calculated based on a portion of the index’s growth.
• If the index goes down, your cash value doesn’t drop in value.
• An IUL policy comes with a “floor,” or protection against index declines that assures the policy won’t be credited negative interest.
• Many policies come with a floor of 0%, protecting your policy from losing value as a result of index declines.
• If the policy has optional rider fees or you pay a surrender charge for early withdrawals, your policy cash value may decrease in the times of zero or low interest.
• The flip-side of the protection against losses is capped growth potential.
• Indexed universal life insurance may come with certain growth limits, including caps and participation rates.

So, say your policy had a “cap” of 10 percent. If the index shot up 12 percent, the cash value would be credited just up to the cap of 10 percent.

These products may have attractive caps and participation rates. Keep in mind, though — the insurance carrier has the ability to change these rates during your ownership of the policy. That being said, here’s a potential benefit to the client’s beneficiaries.

If the death benefit grows, as it is likely to do, upon death, whichever is greater, the face value or the death benefit, is what will be paid out. Not all life insurance contracts have this benefit, so make sure you confirm what benefit may be available upon deceasement.

Depending on the policy, an accelerated benefit rider may be available. This rider typically provides payouts to cover your terminal illness, as well as chronic and critical illness. Therefore, should you need these benefits, you can have them in place for a worst-case scenario.

Illness Coverage in Case Your Need It

Whatever you don’t use is still passed on tax-free. The benefit amount that you accelerated and used will be deducted from the death benefit. Depending on your age at issue, these benefits can be quite attractive and come in very handy later in life when health issues may arrive.

This accelerated benefit rider is typically triggered by the inability to perform two of the six Activities of Daily Living or ADLs. The basic ADLs are self-care activities everyone must perform to lead a normal, independent life.

Those ADLs may include:

• Eating
• Bathing or hygiene
• Dressing
• Grooming
• Mobility
• Toileting

Qualified Money May Be Used

Using pre-tax dollars to purchase an asset that provides for a tax-free benefit has many potential benefits. That can include making the cost of life insurance protection much more affordable. It’s important to understand the different tax treatments that may apply to life insurance when it is purchased with money from qualified sources of funds, or in other words, with pre-tax dollars.

Moreover, there are strict rules and limitations for life insurance and qualified plans. This makes it essential that you work closely with a financial professional who has all the facts in order to ensure that your SPIUL strategy is a success.

Using this strategy allows you to cover the taxes over a three-year, five-year or 10-year period. You may look at using a three-year or five-year period with qualified money, as the benefits may be more attractive. Consult with a knowledgeable financial professional for personal help and guidance.

Need Help with Exploring Your Insurance Options?

Ready for personal attention as you consider different life insurance options? A financial professional at SafeMoney.com can assist you.

Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.

The post A Closer Look at Single-Premium Indexed Universal Life Insurance first appeared on SafeMoney.com.

If you find yourself in these shoes, you aren’t alone. According to a study by Life Happens and LIMRA, 40% of people haven’t bought life insurance, or more of it, because they are unsure of how much or what type to buy.

Whether you are retired or still working, life insurance can help solve for many issues. For young to middle-aged couples with dependents, it may be a source of financial protection, income replacement, or supplemental liquidity.

And for households of retirement age? Life insurance can let you enjoy tax-advantaged income, pass a legacy to heirs in a tax-efficient manner, mitigate tax burdens upon death, and even provide much-needed liquidity for post-death expenses.

Here are some helpful basics to consider as you research how much life insurance may be right for you.

How Much Life Insurance Do I Need?

Ultimately, it depends on a few factors:

• Your age
• Whether you have a partner, and their age
• Your human capital and earning potential at that time
• Your partner’s ability to earn income
• Your partner’s human capital and earning potential at that point
• Your specific goals for any potential life policy
• How much you have in other assets
• How much you have in savings
• The particular role that life insurance may play in your plan
• Whether other assets or instruments can already fulfill that purpose

How much coverage you may need can vary greatly. For example, policyholders needing life insurance for dependents will need to evaluate: how much annual income they should protect, how long those year-to-year income needs will be covered, and a total lump sum to meet those numbers.

On the other hand, people with legacy goals may have interest in certain coverage amounts, depending on how much they wish to leave. Many post-retirement age policyholders buy life insurance for legacy wealth transfers, according to retirement speaker Tom Hegna.   

All that being said, here’s a general rule of thumb when shopping for life insurance for dependents.

General Rule for Life Insurance Needs for Dependents

A good back-of-envelope calculation strategy is to purchase at least $1 million of life insurance for every $50,000 worth of annual income you must protect.

Why this, you may ask?

Currently we are in a low interest-rate environment. Interest rates have been compressed for more than a decade. And while they have been on the rise, interest rates may continue to remain low for some time. Even though the Fed is indicating plans for rate hikes, they have to be careful not to be too aggressive in trying to “normalize” interest rates.

In a 1% interest rate environment, you would need $5 million to generate $50,000 each year. The “payback,” after all, would be 1%, and when considering the question of income replacement, it’s prudent to look at a 20-year window for how the proceeds will be invested and tapped as income.

Many households would be out of the running for that. So, thinking of the coverage need for $50,000 with a 5% rate on proceeds (and that’s reasonable), we would be looking at $1 million of insurance coverage. Again, that is to generate $50,000 of income from that bucket of money each year.

When it comes to life insurance coverage, the biggest mistake is underestimating needs. Be sure to carefully consider your needs and financial picture before committing to a life policy purchase — if you can, with guidance from a financial professional.

Life Insurance for Post-Retirement Goals

In post-retirement life, life insurance often isn’t needed anymore for the financial protection of dependents. That being said, life insurance coverage may have its place in a survivorship plan — the timing of how the surviving member of a couple may need the income when their spouse passes on.

As you consider these things for your post-retirement life, here are some questions to ask:

• Do you have any outstanding debts that it would be good to have covered for your loved ones?
• Do you have a mortgage that still needs to be paid off?
• What financial resources do you have for health and long-term care expenses?
• How much might funeral costs and other post-death expenses be?
• How much will burial expenses be?
• Will you be giving financial support to loved ones, like college tuition assistance or big-ticket purchases?
• Do you have aging parents who will need your financial support? How does that affect the rest of your financial plan?
• Will you have any potential tax burdens to offset?

Answering these questions is a good starting point for coming up with a lump-sum figure for what your life insurance coverage may be. If you don’t have financial resources in place for healthcare and long-term care expenses, many life insurance policies come bundled with “living benefit riders” that can provide cost relief for those needs.

Apart from these questions, some retirees may use permanent life insurance for supplemental, tax-advantaged income in retirement. If you are considering this in your retirement plan, your life policy will need to be coordinated with your other assets, savings, and investments. 

It’s prudent to take a look at your existing financial plan, and see where potential income as well as insurance gaps may be. Of course, any consideration of a life policy, in a retirement strategy, should be only after a careful evaluation of your financial picture has been done and whether a life policy makes sense for you.

Working with a financial professional can help you answer these questions proactively. 

Some Final Thoughts to Consider 

An estimated one in three households would have immediate trouble paying living expenses if the primary wage earner died, according to the same LIMRA study. And if you consider those online pleas to help people pay for funeral expenses — not to mention other forms of request — you begin to see very real examples of families that were financially unprepared for the loss of their breadwinner.

There are other reasons Americans say they are not purchasing life insurance, according to LIMRA:

• They think it is too expensive
• They have other financial priorities: paying living expenses, building savings, managing debt, and/or saving for retirement
• 25% of Americans believe they would not qualify for insurance

Studies have shown that Americans may overestimate the cost of life insurance by as much as 300%. This leads to many households being underinsured, despite the fact that having good coverage would help them solve for many issues in their financial plan.

Need Help with Determining How Life Insurance May Fit Into Your Plan?

As you make decisions about life insurance and other parts of your financial plan, it’s helpful to seek professional guidance. A knowledgeable financial professional can help you evaluate how things have been in the past, where you are at now, and where you could be. If you are ready for one-on-one expert assistance, financial professionals stand ready to help you at SafeMoney.com.

To get started with a no-obligation consultation, use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

The post How Much Life Insurance Do I Really Need? first appeared on SafeMoney.com.

Even if you are in your golden years or not quite there, the good news is you do have choices. For example, there are some life insurance policies that may be bought up till age 90. That isn’t the most frequent age to get life insurance for seniors, but it’s helpful to know there are options for just about any life-stage. Some insurance options might also be available for those who may not be in the best health.

Why Do Seniors Get Life Insurance?

There are several reasons seniors seek life insurance. Some want life insurance to help pay for their final medical expenses and burial costs. They seek to protect their grieving families from enduring a financial burden. Others may be business owners who want the life insurance proceeds to ensure their company continues operating smoothly after their passing. 

Life insurance is also valued by seniors who purchase a policy to help their heirs cover estate taxes. And, of course, there is the traditional motivation for obtaining life insurance… to leave a financial legacy for loved ones.

According to LIMRA, more Americans also view life insurance as a good vehicle to supplement retirement income. In 2011, only 38 percent of Americans said their life insurance would supplement their retirement income, compared with 52 percent today.

What are Your Life Insurance Options?

Two forms of insurance available to senior buyers are term life insurance and permanent life insurance.

Term Life Insurance for Seniors

For seniors with short-term needs, term life insurance will likely be a better solution. For people of senior age, the coverage period tends to last up to 20 years. Many term policy options are available, including those for 10-year and 15-year coverage periods.

If you are age 70 or older, you will have an established medical history. You may also have medical conditions, or you may be taking medications for personal health reasons.

While these situations would be considered “high risk” insurance cases, there may be options. Working with an independent financial professional will help you narrow down life contracts that fit your needs and unique circumstances.

Some important things to remember about term life insurance are:

• Term insurance provides a guaranteed death benefit, but no cash value
• Premiums stay level throughout the coverage period
• After the period ends, premiums will go up because your age and other variables used to calculate your premiums have changed
• If you stop paying premiums, the insurance coverage ends

As for health-related and care-related concerns, term life insurance does give some benefits. These include “living benefit riders” for terminal illness or even some long-term care costs. A financial professional can help you identify those contracts if this feature is important to you.

Permanent Life Insurance for Seniors

Seniors can also purchase permanent insurance, including whole life insurance and universal life insurance. Generally speaking, as long as premiums are paid, a permanent policy will give lifelong coverage.

In the short run, term insurance tends to be less expensive than permanent insurance. But as people age, insurance carriers take on more risk with the life policies they provide. If, by chance, you may be looking at term insurance coverage also down the road, bear in mind it could prove costly over the long haul.

Not all permanent insurance comes with a cash value. It’s good to consider guaranteed universal life insurance, or GUL insurance, if you only need coverage for death benefit protection.

This universal life insurance can provide the lifelong protection someone needs, with policy guarantees lasting up to age 90, 95, or even 100. Sometimes it’s at lower cost than other permanent insurance.

Want More Than Lifelong Coverage?

On the other hand, many seniors want more than just long-term protection. The cash value of a permanent policy might figure into tax-advantaged income, high-ticket purchases, or other goals needing liquidity. If that’s the case for you, premiums you pay go towards maintaining lifelong coverage and building up the cash value. Should you stop premium payments and end your policy, you would get the cash surrender value of your policy contract at that point.

Also, it takes time to build the cash value, sometimes as long as 10 years or greater. Be sure to discuss the details behind any cash value growth with a financial professional before committing to any life insurance purchase.

How the Underwriting Process Works

Your age and health are the two main factors that determine the cost of life insurance premiums. As you might guess, the older you are, the more expensive life insurance can be. If you are in good health, you will have more options for coverage than if you have medical conditions.

Term life insurance is generally designed for seniors in good health. Before you can purchase term life, you must meet the insurer’s specific underwriting requirements and standards. The company typically examines a number of risk factors, including:

• Current health, physical condition, and height/weight
• Personal health history
• Hazardous occupation
• Personal habits (tobacco, alcohol or drug use)
• Age
• Factors including military status, driving record, financial status and hazardous hobbies (think skydiving)

When it comes to underwriting guidelines, every insurance company is unique. One might not accept you if you are taking blood pressure and cholesterol medications, even if you have these conditions under control and are otherwise in good health. Another company might classify that person at their best rate.

Medical Exam vs. “No Medical Exam” Policies

It’s possible your carrier will request a complete a paramedical exam that often includes an EKG. And after age 70, many carriers will include a cognitive and physical function test.

The insurance company pays for these in-home exams to measure your current health and determine your longevity. The longer they expect you to live, the lower your premiums.

Maybe you have heard of “no medical exam” coverage and you want to pursue it so you don’t have to ‘fess up to any medical issues.

Even if you are not filling out a medical questionnaire, insurance companies routinely check such sources as your Medical Information Bureau (MIB) report, a pharmacy report and your motor vehicle report. And these “no medical exam” policies will have higher premiums because the insurance carrier is having to account for not having your complete health picture.

If you have serious health issues, a good option may be a “graded life insurance plan.” With this type of policy, full death benefits may not be available for the first two to three years, giving you the potential for coverage, just not in the near term.

Finding the Life Insurance That is Right for You 

In general, it’s a good idea to shop around and understand the variety of options available to you. Working with a knowledgeable financial professional can greatly help you.

If you are ready for personal guidance with your life insurance research, use our “Find a Financial Professional” section  to connect with someone. And call us at 877-476-9723 for a personal referral, if you need one.

The post Life Insurance for Seniors first appeared on SafeMoney.com.

Some riders are automatically included in a policy at no extra cost. Other riders will require additional premium cost. Life insurance rider benefits are available for many needs, from terminal illness and long-term care costs to term insurance coverage of children or of a spouse. With that said, you must meet the conditions outlined in the rider to enjoy its particular benefit.

In some policies, you may blend different riders together, at additional cost. The riders you choose, whether included in the policy or purchased at additional cost, may be used for current or future insurance needs.

Since many life insurance riders mean additional premium to be paid, it’s prudent to be sure you don’t get too much insurance. Knowing the basics of different riders and what they offer is a good starting point. Let’s go more into that now.

Common Life Insurance Riders – What You Should Know

Here are some of the most common life insurance riders you will find. Keep in mind that rider options will vary among policy contracts and insurance carriers. Some rider benefits also vary by state, and in some cases they may not be available for purchase.

Guaranteed Insurability Rider

With this rider, you may purchase additional coverage with no more medical checkups. This rider is also known as a “renewal provision.” The rider will state a specified period in which additional insurance must be bought. One upside of this rider is tied to people aging. As we get older, our health condition is likely to decline. This rider will enable someone to get more coverage without having to show evidence of insurability.   

People who have seen big life changes, such as getting married, having kids, or enjoying greater income, may also benefit from this rider. In some cases, a guaranteed insurability rider will renew your base policy when its term is over. Something important to keep in mind is this rider may cease upon reaching a specific age.

Accidental Death Benefit Rider

This rider gives a larger death benefit payout if someone dies due to an accident. The insured must have passed away within a specific period of the accident date. Some insurance carriers specify a 90-day span, but that can vary.

Generally, this rider pays out an additional benefit, upon the insured’s death, that is equal to the policy face amount. That means that the death benefit payout is effectively doubled. With that said, typically this rider isn’t available with certain health conditions or certain hazardous sports. Many insurance companies carry a limited definition of the term “accident” in their contracts. So, be sure you understand what that entails before you purchase this policy rider. This type of life insurance rider may be a good option for households with one primary income earner, or for situations with a group of dependents relying on one income earner.

Children’s Insurance Rider

This rider enables you to add term life insurance coverage on all your children. They may be natural or adopted members of your family. This rider is added onto a base policy at additional cost. The children who would be covered must meet certain age requirements.

Some insurance carriers specify that this rider is available for kids who are at least two weeks old, but less than 20 years old. Be sure to check the rider conditions and consult with your life insurance broker for details. In many cases, the coverage can be coverted to permanent insurance coverage once an insured child reaches maturity.

Spousal Insurance Rider

Just like with the children’s insurance rider, this rider offers term insurance coverage for a spousal partner. It is added onto the base policy at additional premium cost. The rider may end when the insured reaches a certain age. Some riders and some insurance companies specify at age 70. Be sure to check the rider conditions and with your life insurance broker for details.

Accelerated Death Benefit Rider

This rider may allow you to access part of the death benefit. If someone qualifies, they can use a portion of the policy death benefit for living expenses, under certain conditions. An accelerated death benefit rider may be purchased for additional cost. In some life insurance products, this rider is provided at no extra cost. Some insurance companies offer this rider for situations in which a terminal illness will greatly reduce someone’s lifespan.  

In the event of a terminal illness, the policyholder may use part of the death benefit proceeds to cover expenses. The trade-off is the insurance company will deduct the amount of the proceeds taken from the death benefit for beneficiaries. It may also charge interest. How “terminal illness” is defined tends to vary among insurance companies. So, be sure you understand how the term is defined in any rider you may be considering.   

Long-Term Care Benefit Rider

Just like with the accelerated death benefit rider, this rider allows you to “accelerate” some death benefit proceeds toward long-term care costs. Should an insured need home care or be confined to an assisted care facility, the rider will give payments, often monthly, for expenses. In turn, the payments are treated as policy debts and subtracted from the death benefit that will be given to beneficiaries.

Waiver of Premium Rider 

With this rider, future premiums are waived under certain qualifying conditions. This rider may apply if someone becomes permanently disabled, or sustains income losses due to a qualifying illness or injury. If one of these situations do arise, the insured won’t have to pay premiums on the base policy until they are able to work again. Another similar rider is the “waver of monthly deductions rider.” Under this rider, monthly rider charges and fees are waived if the insured becomes disabled for a certain period of time.

These rider options may be worth consideration if your premium amounts are high. In times of financial hardship, a policy may lapse should premium payments prove too costly to keep up. Just like with other health status-related riders, definitions of becoming “disabled” and other qualifying conditions can vary. Be sure you understand what’s involved before any purchase.

Return of Premium Rider

With this rider, you can receive back most of the premium put into your life policy. You pay a marginal premium, and at the term end, premiums are paid back to you in full. Should the insured pass away, their beneficiaries will receive the paid amount. Insurance companies offer many kinds of this rider option. So, just like with any other rider you may be considering, consult with your life insurance broker and make sure you understand them well.

Final Thoughts

This is just a quick overview of common life insurance riders you can find on today’s market. While they can help fulfill many needs at different life stages, any policy rider benefits should fit well into the scope of your overall financial plan. Working with a financial professional can help you clarify whether any rider benefits may make sense for you. 

If you are ready for personal guidance with your life insurance coverage, financial professionals stand ready to help you at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.

The post What are Life Insurance Riders? first appeared on SafeMoney.com.

As you consider different selections, it’s important to understand how these types of insurance differ from another. Among permanent life insurance, two widely-purchased options are whole life insurance and indexed universal life insurance.

While term life insurance is the most straightforward, it covers you only for a short-term period. Conversely, whole life and indexed universal life policies give lifelong coverage, so long as a policy remains active.

But they are more complex, tend to cost more than term coverage, and can be better-suited for long-term objectives. With that said, the cash value component of permanent insurance may be attractive for a number of reasons, including for efficient legacy planning, tax-advantaged wealth building, and tax-deferred retirement saving.

If you’re exploring term life insurance versus whole life insurance and indexed universal life insurance, it’s prudent to be diligent. You will want to research and consider your options carefully, and to help you get started, here’s a quick guide on the differences between these life insurance types.

What to Consider When Buying Life Insurance

When it comes to life insurance, people often focus on two things: length of coverage and price. Chances are you have heard of trendy sayings like “term over perm” or “buy term and invest the difference.” But the question of what life insurance someone needs isn’t an “either-or” situation. Nor is term insurance the “best” option by default.

Sure, term coverage may be purchased at the lowest initial cost. But when you need to renew your policy, term rates often increase substantially. You may also find that you actually need more than one type of life insurance policy.

So, any life insurance purchasing decision should include a vigorous fact-finding and analysis of your personal and household financial needs. In fact, some other variables to consider are:

• Your risk tolerance
• Your age
• How your number of dependents might change
• Your health status
• Your time horizon before retirement
• Whether your needs extend beyond just protection

Depending on your circumstances, you may want to consider permanent as well as term life insurance for your portfolio. Now, let’s go back to the overview of term and permanent life insurance options.

Term Life Insurance

Compared to whole life and indexed universal life, term insurance provides the simplest coverage. The policy owner holds the guarantee of a death benefit for a certain period. That can last anywhere from 10-30 years, with most term policies lasting for 20 years.

When a term policy expires, that’s it. Your loved ones won’t receive any payouts since the policy has ended. You may be able to renew your term policy, but your new rates will be based on your current age and the actuarial risks that come with it (for example, heightened health risks, shorter life expectancy, so on).

The benefits of term life insurance are:

• Premiums stay fixed
• Simplest form of life insurance coverage you can purchase
• Available at lower cost than whole life and IUL, at least initially
• Provides a straightforward, guaranteed death benefit for a preset duration
• May come with ability to convert to a permanent policy
• Some policies include riders for healthcare and long-term care costs
• Flexible, short-term protection when people need it

Some downsides tied to term life insurance are:

• Policy may lapse if premium payments are late or missed
• No death benefit provided upon expiration
• Renewal rates can be far more costly than your initial rates
• No cash value included in the policy
• For some people, no “return benefit” for potentially decades of premium payments can be hard to stomach

Because its coverage is temporary, term life insurance can be a better option for those with temporary financial needs. People who find themselves in the following situations may want to consider this type of coverage:

• Creating protection for households in high-need years, such as when they first have children
• Providing immediate financial resources if a primary income earner dies unexpectedly
• Covering the economic value of a homemaker should they pass away
• Giving coverage for debts or expenses, like a mortgage, if an income earner deceases

In short, term insurance is a short-term, economical way to insure a large amount of money, or the income stream that a wage earner brings home. Those looking for lifelong coverage or needing efficient legacy planning vehicles may be better-served by permanent insurance options.

Whole Life Insurance

Whole life insurance has been around for decades. It is the most basic form of cash value life insurance.  A whole life insurance policy comes with predictable premiums that don’t rise with age. It also confers guaranteed benefits.

Whole life insurance comes with a cash value, which can be accessed in later years. When comparing whole life – and other cash value insurance for that matter – to term life, it’s similar to buying versus renting a home. Sure, renting will be less expensive in the short run. But over the long term, it may prove to be the most costly. In contrast, buying a home enables someone to build up home equity over time – not to mention it may be potentially lower cost over time.

Whole life is like owning a home that has a corresponding equity component. Over time, this equity component, or the cash value grows tax-deferred, and your premiums don’t increase. With that said, whole life insurance does come with more costs to cover, including management fees.

The benefits of whole life insurance are:

• Premiums stay fixed, don’t rise with age
• Comes with guaranteed benefits
• Simplest form of cash value life insurance
• Ability to pay up policy face value in 10-20 years, or at age 65
• Can access cash value via loans or withdrawals later on
• No age 59.5 withdrawal rules, so long as the policy doesn’t become a Modified Endowment Contract
• Cash value grows on tax-deferred basis and money can be taken out on a potentially tax-free basis
• Insurance company may pay dividends to policy owner

Some downsides of whole life insurance are:

• Often the interest rate is not guaranteed
• Comes with more costs to pay than term insurance
• Premium payments aren’t flexible
• Premiums must be paid consistently or policy will lapse
• Likely to earn lower interest
• Policy lapse may trigger taxable event
• Most whole life policies don’t build cash value early on

Whole life insurance may be a good option for those wanting lifelong coverage and more straightforward cost of insurance than with other cash value insurance products. It can also be a better fit for retirement savers looking for alternatives to the meager interest rates of CDs or bank saving accounts.

Indexed Universal Life Insurance

Index universal life insurance, or “IUL,” can enjoy stronger opportunities for cash value growth than whole life insurance. Its interest-earning potential is tied to an index, like the S&P 500 price index. Unlike whole life insurance, IUL does offer flexibility in premium payments, with certain conditions. The cash inside an IUL policy grows tax-deferred, just like with whole life, and the cash value can be tapped for premium payments.

While the growth potential may be more substantial, indexed universal life insurance is a newer innovation in the insurance marketplace. Your premiums may increase over time, as the cost of insurance may rise. Insurance carriers may hold derivatives as underlying investments in IUL policies, which can make these policies even more complex.

While IUL does let you enjoy growth potential tied to an index, it comes with limits. IUL insurance carriers “cap” the growth potential at certain predetermined rates, and likewise they may protect against negative index changes with a “floor.” While many IUL policies have a floor of 0%, or your cash value doesn’t drop in value when the index goes down, this applies to when the insurance carrier credits interest to your policy. In fact, your policy may lose value due to policy costs you have to pay, should you earn no or low interest at a given point.

If a policy owner relied on high interest-earning years to fund the cash value, it could lead to a policy lapse in later years, should the policy get low interest in later times. Likewise, taking policy loans and paying loan interest can be risky if earned interest doesn’t surpass the costs of the loan.

Some of the benefits of indexed universal life insurance are:

• Guaranteed benefits, though fewer than whole life insurance
• Ability to obtain a bigger death benefit than with whole life
• Flexible payments for premiums possible
• Potential to receive more interest than whole life insurance
• Cash value can be accessed via loans or withdrawals
• No age 59.5 withdrawal rules
• Tax-deferred retirement money growth potential
• Ideal vehicle for supplementing income or maximizing an estate for beneficiaries

Some drawbacks of IUL can include:

• Premiums may increase over time
• Opportunity to earn interest depends on index performance
• Interest-earning potential “capped” by insurers
• Policy may lose value when costs outpace low interest

Overall, people looking for safer alternatives to stock market volatility may want to consider indexed universal life. Likewise, individuals looking to maximize legacy assets for heirs or provide a tax-efficient estate transfer to their loved ones may look into this insurance type. IUL can also offer another vehicle for supplemental retirement income when retirement savers have maximized contributions to IRAs, 401(k)s, and other savings plans.

While indexed universal life insurance may be a solid retirement planning vehicle, it is more complex than other cash value life insurance. Working with a qualified financial professional to properly structure a policy, according to your needs and goals, is a prudent strategy.

Final Thoughts

While this overview showcases some of the critical differences of IUL, whole life, and term life insurance, it’s by no means exhaustive. If you are considering life insurance as part of your financial strategy, especially permanent insurance, be prudent.

Conduct a careful due diligence and consider guidance from a financial professional who acts in your best interest. And when planned and implemented properly, a life insurance policy can go a long ways to bringing you more financial security and peace of mind.

Ready for personal attention as you consider different insurance options? A financial professional at SafeMoney.com can assist you. Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.

The post Term Life Insurance, Whole Life Insurance, and Indexed Universal Life Insurance: What’s the Difference? first appeared on SafeMoney.com.