Life Insurance Basics
Term and Permanent
Life insurance is very similar to renting or owning a home with these factors weighing the decision.
Single or married with kids
Short term and long range plans
Current and future financial situation
General rules at different stages of life
Starting out career = 100% Term insurance
Married with kids = 20% Permanent + 80% Term Insurance
Retirement = 100% Permanent Insurance
"The best life insurance policy is the one that is in place when
your family needs it."
How Much Protection Do I Need?
Ten times annual income for life insurance
Five times annual income for a severe short term or long term illness
"The purpose of life insurance is to create cash"
Permanent Insurance is Like Owning a Home
Similar to having a home, ownership is forever.
Insurance premiums, like your mortgage, a portion goes to the insurance company while the balance goes toward your equity.
One-third of your payment goes to owning your insurance coverage.
Two-thirds of the premium is credited to the equity=cash value.
Cash value grows from accumulated interests.
The cash value can be accessed at any time and age through withdrawals or low interest loans.
At death the family receives the original death benefit plus the accumulated cash, tax free.
Accessing the Cash Value in a Life Insurance Policy
You can access the cash value in a life insurance policy in three primary ways at any age.
1. Withdraw the cash value.
2. Borrow the cash value.
*No need to pay the balance back.
Balance is deducted on death.
3. Surrender or give up the policy
and take all the cash out.
There are three main ways to grow cash value in permanent life insurance policies
There are three general methods in which the cash value can grow and prevent losses.
a. Whole life grows the cash value through company dividends. A 0% floor acts as a "stop loss" to prevent loss of cash value.
b. Indexed Universal life accumulates interest by the growth of equity indexes (Dow Jones, S & P 500, Russell 2000). Nothing is invested into equities but the indexes are used as a barometer for how much interest the cash value will gain for that period. If the index is negative, a 0% floor negates any loss in cash value.
c. Variable life is directly invested into stocks/mutual funds. Both gains and losses are realized as there is no 0% stop loss.
Indexed Universal Life Example
Sean 45, has a $500,000 Indexed Universal Life Policy that he has been paying into since he graduated college.
Sean contributes $1,000 per month for 20 years for a total of $240,000.
The cash value (Blue Line) averages about 5% a year in compounded interests. (Orange Line)
In the "negative S & P 500 years" he does not lose cash value due to the 0% floor.
The curve is flat in those years.
At age 75, Sean will have about $620,000 in cash value plus $500,000 in original benefits.
If Sean were to pass away at age 75, his family would receive tax free $1,120,000.
$620,000 + $500,000 = $1,120,000
Cash Value+Death Benefit = Total Benefit