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With the slumping stock market more people are turning to safer investment opportunities, one of which is life insurance. There are a number of different types of life insurance, and I will briefly attempt to help you better understand why the right life insurance policy might offer you more than just peace of mind. Please keep in mind that in order to provide a broad explanation of these coverages, I need to make some assumptions that do in fact vary from insurance company to insurance company.

The three major types of life insurance are Term Life, Whole Life and Universal Life. Although there are other types of life insurance, they are typically born from one of these three.

Term Life insurance is coverage for a limited period of time. Typically term polices range from 10 years to 40 years and end at age 65. At the term's expiration, an insured can renew the policy, if they remain qualified, but premiums will increase dramatically due to age. A term life policy is the least expensive policy available, simply because it does not contemplate anything but an unexpected death. Additionally, because it only acts as a death benefit, the administrative costs involved are lower than other types of coverage.

Whole life insurance is coverage underwritten to remain in force for the insured's entire life. Whole life coverage consists of fixed level premiums and if that premium is not met every month, the policy will lapse. A whole life policy does accumulate a cash value over time; however depending on the type of insurance company you use; a stock company, mutual company, or a fraternal company, you can expect a rate of return between 2% and 6%. Whole life policies come with higher premiums, variable administrative fees, less payment flexibility, and a sometimes disappointing rate of return on the accumulation of cash. For some of these reasons buyers started seeking more creative alternatives, which lead to the invention of Universal Life in the late 1980's.

Universal Life insurance is a permanent term life policy (lasts until age 100, not just 65) that offers a minimum premium as well as a target premium. As money is deposited that exceeds the minimum premium a cash value accumulates. Like a Whole Life policy, the typical rate of return on Universal Life cash value accumulation is between 4% to 6%, but where a Universal Life policy outperforms other life policies, is the flexibility and incentives granted by the IRS. As that cash value grows over time, those dollars can be used to pay any due premiums. Additionally, any money that is funded towards that cash buildup does not show up as 1099 income and is therefore not considered ordinary income. A Universal Life policy also allows the insured to borrow against the cash value for roughly 5% interest. Because the typical rate of return is 5%, the borrowing of money from a Universal Life policy is done so almost interest free. Additionally the IRS has said that if the insured dies before paying back the borrowed money, that debt is forgiven and the full death benefit is reinstated, minus any due premiums, etc. These policies are not subject to Probate and they do not count against an insured when applying for government loans. These are just some of the many highlights associated with this creative investment vehicle and death benefit protection.

As the age of mortality increases, the rates of life insurance decrease. Even if you already have a policy or multiple polices in place, re-evaluating your life insurance options could prove to be a worthwhile venture. It might be that your objectives have changed or simply that you are paying too much. Regardless, we would welcome the opportunity to assist you in better understanding the values associated with life insurance.


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