Are There Alternatives to an Indexed Universal Life Policy? Part 2

This article continues from Part 1 which introduces the concept of "Buy Term and Invest the Difference".

In case you have been caught, I'm here to help. Often, when whole life insurance is discussed, several scenarios are discussed so quickly it is difficult to keep track of all the options. Here is a simple chart to compare a few scenarios:

Buy Term and Invest the Difference	Whole Life
A person purchases cheap term life insurance instead of expensive whole life insurance and invests the difference into mutual funds.	A person purchase whole life insurance for both life insurance and investment purposes.
A person owns term insurance but no has investments.	A person owns whole life insurance and has taken out loans on their policy.
A person owns term insurance and invests into an indexed annuity.	A person owns an indexed universal life insurance policy.

If someone does not have enough discipline to invest money on a regular basis, they will also not have enough discipline to avoid taking loans out from their whole life insurance policy. In this case, they are better off just purchasing cheap term insurance because there will be higher costs in the whole life insurance policy.

Likewise, if someone wants the guarantees provided by a life insurance company, that person is better off investing a portion of their portfolio in an indexed annuity offered by the life insurance company with similar guarantees. There are three main reasons:

• There is flexibility to discontinue insurance coverage but keep the investment.
• It is easier to allocate a specific amount rather than put all your eggs into one basket.
• There are typically higher costs associated with a permanent life insurance policy.

For more ideas about what you should be looking for, check out 25 Questions You Should Ask Before Purchasing a Permanent Life Insurance Policy.

This post was reposted from http://finlit.biz/life-insurance/are-there-alternatives-to-an-indexed-universal-life-policy-part-2/, originally written on March 14th, 2013.

Are There Alternatives to an Indexed Universal Life Policy? Part 1

Smoke and mirrors surround much of the complex life insurance policies and stock derivatives out there today.  My philosophy is if you can't understand it, you probably shouldn't be doing it.  As society becomes more complex, you should probably be asking yourself, "Who benefits from this added complexity?"

The traditional philosophy of "Buy Term and Invest the Difference" is still the same simple concept it was many years ago.  Purchase cheap term insurance to cover a vulnerability for a young family and make diversified investments into solid companies.  Don't get caught up feeling bad when someone says, "Oh you still believe in that age old philosophy" with a disgusted look on their face.  Isn't it true that the best principles for managing your money are actually thousands of years old?

Recently, a small business owner shared this story. From the business owner's recollection, they placed $1,800 per month into a permanent life insurance policy over a ten year period. This is $216,000 total ignoring the fact that the business owner could have been making interest during the ten years. After about ten years, the business owner cancelled the policy and was given $40,000. After telling the story, there were ramblings like "he said I would get interest", "called the company and they told me I had to pay for my entire life", "told me it was my fault for not reading my policy", etc.

Continue reading for Part 2.

This post was reposted from http://finlit.biz/life-insurance/are-there-alternatives-to-an-indexed-universal-life-policy-part-1/, originally written on March 14th, 2013.

6 Names Associated With Whole Life Insurance

Have you ever asked yourself, why there are so many types of whole life insurance policies out there?  Have you ever wondered why new products come out year after year?  You have the paid up 40, the pay by 50, limited pay, single premium, the flexible premium this, the variable that.  Doesn't it all sound like jibber jabber?

Well this article is going to discuss some of the various names out there and the slight distinctions between the types.

Here are the names you might see:

1. 7702 plan
2. cash value life insurance
3. variable universal life
4. whole life insurance
5. universal life insurance
6. indexed universal life

Each of these types of policies is an example of a whole life insurance policy. According to en.wikipedia.org, whole life insurance is insurance that is meant to be owned for one's entire life. The policy accumulates a cash value over time that supposedly eventually matches the death benefit. Universal life was created to allow overfunding of the policy and accumulating interest in a separate account which could later be used to pay for the cost of insurance. Variable universal life allowed the same concept with the separate account being capable of holding investments. Indexed universal life typically has principal protection with guarantees on the separate account, less adminstrative costs.

Read about some of the flaws of whole life insurance in this earlier post.  Thanks for visiting and we welcome any comments or additions to the discussion!

This post was reposted from http://finlit.biz/life-insurance/6-names-associated-with-whole-life-insurance/, originally written on February 3rd, 2013.

Izu's RIPOFF Acronym for Whole Life Insurance

In just this last week, this is what I have seen:

THREE STORIES IN ONE WEEK

A whole life insurance policy that has been held for over ten years, paying in about $1620 into the policy each year, about $960 of which was supposed to go towards the separate account. The cash value after all that time was about $10,000. The owner of the policy and his wife are now out of work and were told to take a loan from the cash value to pay the premiums. Doing this, the cash value will last a few years before the policy lapses. If the owner gets back on his feet, he will have to pay the loan back as well as continue with the premiums to avoid lapsing the policy.

A whole life insurance policy that has been held for about seven years. The owner had been laid off a few years ago, drastically reducing his salary, so he has been taking a loan from the policy to pay off the premiums.

A whole life insurance agent that was ecstatic about taking someone's entire retirement savings and moving it into a whole life insurance policy. This policy is one of the newest flavors of whole life known as indexed universal life. From the best of my knowledge, this agent truly believed she was doing something good for the client despite how much money she made from the transaction. I believe that people who sell these policies either don't know or don't care.

ALSO KNOWN AS

Whole life insurance comes with many different names: whole life, universal life, indexed universal life, variable universal life, cash value life. Personally, I think the industry changes the name so that people don't recognize whole life when they see it.

RIPOFF

Retirement and College Savings: It is debatable whether it is even legal for agents to sell whole life policies as retirement and college savings vehicles. However, this is exactly what is happening. Insurance is not an investment! The purpose of insurance is to spread the risk to a large group of people but in the end, the insurance company is the one that profits. By the way, in general, it is better to save for retirement and then worry about college savings.

Inhibited Money Transfer: Whole life insurance agents often transfer retirement or other savings into a whole life insurance policy. However, if the owner changes their mind and wishes to regain control of that money, they may be forced to face surrender charges. In addition, the owner may find a lot of the money put into the policy is gone. It is much more difficult to move money out of a whole life policy than it is to move money into one.

Promised Rate Guarantees: Many policies guarantee specific minimum rates. The "guarantee" is based on the financial ability of the insurance company to pay. In addition, the company does not guarantee administration costs or mortality expenses, which means these can be raised at any time. If the company struggles to pay any guarantee, they have the option to pay the guarantee but with higher account costs. This means, families are getting a lot less money than they expected.

Optional Coverage for Life: Guaranteed renewable term insurance can be held until age 100 if desired but the owner can stop the policy at any time they desire. With whole life, the owner is placed into a "golden handcuffs" (as those in the industry call it), where the owner must continue to pay for coverage if they want the other benefits of the account. This coverage becomes very expensive as the owner gets older.

Fraudulent Commissions: Most people don’t know the commissions being paid for these policies. A high commission in general cannot be good for the client. For example, rolling over $150,000 into a whole life insurance policy will probably generate at least a $75,000 commission. If the owner cancels early enough some of this commission may be recouped since there are laws which allow a client to recoup commissions. However after a few years, the owner will not be able to regain the commission paid. Some companies have been sued when clients took out huge home equity loans to fund a whole life insurance policy. Please don't throw your entire life savings into one of these accounts!

Fake Tax Free Retirement: Many agents try to sell whole life based on tax free benefits by mentioning that loans are tax free. However, one could also take a loan using a house or stocks as collateral. Typically, taking a loan from a retirement account will allow the interest to be paid back to the account. On the other hand, interest from a loan against a whole life insurance account will typically be paid to the insurance company. A loan is always a tax free since the lender pays the taxes. Since when did taking a loan count as a tax free retirement strategy?

RECOMMENDATION

Go with the "Buy Term and Invest the Difference" strategy. This is a tried and true principle that continues to work. You may also want to learn why you might need life insurance and about the various types of term insurance. For more information, contact me anytime: scottizu@gmail.com.

Dedicated to Chris Izu.

This post was reposted from http://sizuservices.blogspot.com/2012/11/izus-ripoff-acronym-for-whole-life.html, originally written on November 24th, 2012.