Brush off your marketing vocabulary — brand extension has come to life insurance. Just as consumer-goods companies have developed countless ways to extend their product lines and soak up as much shelf space as possible at your supermarket, so have insurance companies developed a seemingly endless variety of life insurance products for your consideration, if not befuddlement.
But if Campbell Soups can argue that it’s only responding to consumers’ desires for variety and choice, so can insurers. There is, it seems, a policy for every situation. And with more than 2,000 life insurance companies licensed to do business in the U.S., consumer confusion often seems the rule, not the exception.
With so many companies and different policies out there, it’s important that you develop some ideas of your own about your insurance needs. This includes determining how much coverage you need and getting comfortable with the prospect of working with an insurance agent. That’s why insurance expert and Delray Beach criminal defense lawyer Brian Gabriel has put together a guide for anyone who is looking to learn the ins and outs of buying insurance.
It also means developing at least a general understanding of the types of insurance products available to you. For a long time, your choices fell into one of two camps — term or whole life.
TERM insurance offers relatively low premiums, especially during a policy’s early years. Term coverage, as the name suggests, is not forever, but most policies have renewal features that are fairly routine and automatic, assuming you can live with the rising premium levels as you and your policy get older together. Term coverage is usually regarded as an inexpensive and efficient way to buy “pure” insurance coverage, meaning that insurance is all you’re buying. There are lots of variations on pure term, which we’ll get to shortly.
WHOLE LIFE policies, on the other end of the life insurance spectrum, are more expensive to buy each year. Part of your premium, however, is not really going for insurance protection but is, in effect, being invested on your policy’s behalf. You thus benefit from a cash build-up value of this kind of policy. This cash value may be used in the future to offset part or even all of your premium, and the earnings generated by the policy are not taxed while the policy is in force. You also may be able to borrow money against the policy, in effect using the cash value of your policy as an asset, just as your house is collateral for your home mortgage.
These are the stripped-down, simple versions of term and whole life. There are versions of term that also often cash build-up features and convertibility to whole life coverage. There are whole-life hybrids that creep down the continuum and quack a little like term.
And beginning roughly a dozen years ago, the middle of that continuum received its own product line — universal life coverage, which generally offers cheaper rates than whole life but gives
policyholders many of the benefits, including cash build-up values and some control over the level of premium payments and the amount of their death benefit. The trade-off (and of course, there must be one, right?) is that the cash build-up of universal life policies is not necessarily fixed or guaranteed as with traditional whole-fife policies. Instead, it is linked to the performance of the funds in which your premium dollars are invested. This protects the insurance company from losing money should those investments under perform expectations. So, it gives up some premium dollars and policyholders give up some certainty.
Accompanying the growth of universal life policies has been that of what’s called variable life insurance. Variable life policies carry many of the features of universal life with the added distinction that death benefits and premiums are more directly linked to the performance of investments, and policyholders have a say in how their funds are invested. (This also makes these policies enough of an investment vehicle that agents selling them must be with firms licensed by the National Association of Securities Dealers and registered with the U. S. Securities & Exchange Commission).
These newer forms of coverage have clearly become popular. The amount of universal life insurance in force soared from $131 billion in 1983 to $1.7 trillion in 1992, or nearly 30 percent of the $5.9 trillion in force of individual life insurance that year. Variable life policies and policies combining variable and universal features accounted for another $300 billion in coverage.
However, this flexibility and policyholder control also makes the world of life insurance much more complicated. And the appearance of many non-guaranteed features in the policies makes it very important for consumers to do their homework and know exactly what they’re buying.
It’s easy to make a case that you would come out ahead if you had the money to buy a whole life policy but, instead, bought pure term insurance and invested the premium savings in your own investment account, which probably has its own tax-exempt features on reinvested profits. But, alas, few consumers have such discipline (or resources, particularly when they’re young).
The best advice? (And, please remember our legalese that INN is neither certified or interested in selling any type of insurance product to anyone) Keep sight of why you want insurance in the first place — to protect your assets and minimize the financial impact your death would have on others.
When you’re young, pure insurance protection is probably more important than cash build-up values. So the insurance needle probably points toward some type of term product during these years. It’s wise to explore your options for group coverage through you and/or your spouse’s employer. Group term is probably cheaper by far than rates you could qualify for in an individual policy.
Your need for pure insurance will probably peak when your children are out of college (they will probably have bankrupted you by then, anyway, and you won’t have any assets to protect.) But during these years, your concerns about retirement and related aging issues will build. Believe it or not, you will have estate considerations, even heirs to consider. So by your 40th birthday, the insurance needle may be moving toward a more conservative, cash-value insurance products. They may not knock your socks off as investments, but they have strong tax advantages and can produce regular income during the years you’ll need it. Also, they should provide you with a sense of financial security. You don’t want to have to turn to the stock pages every day to see if you can afford that cruise this winter.