I recently ran across a blog article from a certified financial planner. In the article he described a situation where a 28 year old man with $5,000 in credit card debt and no heirs was sold a $200,000 whole life policy. The financial planner mentions term life as the best solution in this situation. However, his analysis relies on too many assumptions, including an assumption that disability will not occur. According to the US Centers for Disease Control and Prevention (CDC), 1 in 4 adult Americans will suffer from disability. The financial planner picked the cheapest term policy he could find when doing his analysis. The cheapest term policies typically don’t include living benefits. A living benefit provides an income stream to insureds if they become disabled. Cheap term policies may also lack valuable riders like the waiver of premium for disability rider, where the insurance company pays premiums for a disabled insured. People who become disabled are often unable to pay premiums, so living benefits are critically important. Don’t automatically go with the cheapest option.
I will agree with the financial planner that whole life wasn’t the best solution, but term life wasn’t either. A better solution would have been indexed universal life. With this type of policy, the insured could have paid the minimum premiums for a short time while he was paying down credit card debt. After the credit card debt is paid off, the insured can increase his premium payments (universal life offers flexible payments).
Another problem I have with the analysis is the assumption that sufficient funds will be available after a term policy expires, therefore a new life insurance policy won’t be needed. Even with careful financial planning, there’s still a chance of not having enough money. At the very least, people should fund their final expenses with a permanent life insurance policy. I’m not talking about a large policy; just something large enough to cover end of life expenses. If you don’t like the idea of paying premiums for the rest of your life, there is a special type of policy called limited pay whole life that allows you to pay off a policy in 10 years. After 10 years there are no more payments to make, and the policy stays in force forever.
The great thing about being young is the number of options available. This applies to whole life insurance as well. I will discuss four whole life options for young adults: simplified issue whole life, fully underwritten whole life, limited pay whole life, and single premium.
Simplified issue whole life is the easiest to sign up for. Only a handful of underwriting questions are asked and most of the time you have an underwriting decision before the agent walks out the door. This type of policy is highly recommended for seniors, but young people usually have better options.
Fully underwritten plans are good for young adults, but not for older adults. Of course this is a generalization. There are certain circumstances where I would recommend the opposite. Fully underwritten doesn’t always mean medical exams. There are no medical exams if the policy is small enough. A physician statement might be required (a statement from your doctor claiming you are in good health). Physician statements don’t require any effort from the applicant, but they do slow down the underwriting process since doctors typically view physician statements as a low priority.
The next type is limited pay whole life. This type of policy has advantages. The first advantage is the limited number of payments before the policy is paid up in full. You can have the policy paid up in 10, 15, or 20 years. You can even have the policy paid up at a certain age, like when you’re 65 or 85. The other advantage is having a policy paid up before you retire. Paying for life insurance in retirement can sometimes be a heavy burden. There are two versions of limited pay whole life: simplified issue and fully underwritten.
The last type is single premium. This type gives you whatever coverage one premium payment can buy. This is a one and done deal. The biggest downside to single premium plans is the lack of tax advantages (the IRS treats these plans less favorably than other plans).
Depending on which agent you talk to, insurance riders are either fundamentally important or a waste of money. I say it depends on which type of policy you’re talking about. For sophisticated products like universal life, a long term care rider can alleviate the need for a separate long term care policy. Some riders are both cheap and critically important, like the “waiver of premium for disability” rider. As the name implies, your premiums are paid by the insurance company if you become disabled. Some term life policies have riders that provide living benefits for severe illness, and those are good as well.
Perhaps the most controversial use of riders is with small whole life policies. The most common riders on these polices are accidental death and grandchild riders. Accidental death is a relatively rare occurrence, and dishonest agents can use certain language to suggest that they are doubling or tripling the amount of coverage with this rider, conflating the death benefit with the rider benefit. Grandchild riders provide a small amount of convertible term insurance for grandchildren. The problem with this rider is that almost nobody converts the term insurance into a permanent policy. You would be much better off buying a “limited pay whole life” policy for your grandchildren. Be weary of agents trying to push these two riders because they might be using them to justify an overpriced policy.
I sometimes hear people tell me they would rather wait to buy whole life insurance because if they purchased it now their premium payments would exceed the death benefit. Is that scenario possible? Sure, but its impossible to predict because many people pass away much sooner than expected. There are better ways to minimize that problem that don’t involve postponing coverage. A type of policy called “limited pay whole life” has a set number of years that premium payments are made. After those years are done, the life insurance policy is paid in full and the coverage stays in force forever. A 20 pay whole life policy has 20 years of payments, whereas a life pay whole life policy can have 50 or more years of payments. The insurance company makes more profit on 50 years of payments than 20 years of payments. If you have a life pay whole life policy, you can stop premium payments and still keep coverage in force with a “reduced paid up” option. With this option you accept a lesser amount of coverage that is paid up.
Learn about a powerful type of life insurance called “limited pay whole life” that isn’t discussed very often by agents.
Many people put off buying burial insurance or final expense life insurance because they think death is a long way off and the monthly payments are better spent on other expenses. However, buying burial insurance early in life has its advantages. One obvious advantage is a lower price, and the price you start with is the price you keep forever. There is also a less obvious advantage. A product called “limited pay whole life” is usually unaffordable late in life, but it can be affordable earlier in life. Limited pay whole life is similar to making a car payment or mortgage payment because payments only have to be made for a set number of years before it is paid in full. With this type of product there is a finish line to making payments (usually 10 or 20 years), and after that you’re covered for the rest of your life without making any more payments. Lets say you are 45 years old and you don’t want to be paying on a life insurance policy when you retire at 65 because you’ll be on a fixed income. In this case, a limited pay whole life policy is the perfect solution. A policy started at age 45 can be paid in full by age 65. The 65 year old has life insurance coverage forever and doesn’t have to make payments in his or her retirement years.
Limited pay whole life is also good for children. Parents can purchase this type of policy for their children and have the policy paid in full in 10 or 20 years. Its one more way to make sure your children are financially taken care of, and your children will do the same for their children. It creates financial security for generations. We love questions, so please contact us if you have them.