Permanent Life Insurance Policies

A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the death proceeds and is thereby safeguarded from the financial impact of the death of the insured

The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments and college? It is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business

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Permanent Life Insurance Policies
A. umbrella term for life insurance plans that do not expire (unlike term life insurance)
B. combines a death benefit with a savings portion.
C. This savings portion can build a cash value

D. the policy owner can borrow funds against the cash value
E. Permanent life insurance policies enjoy favorable tax treatment. The growth of cash value is generally on a tax-deferred basis, meaning that you pay no taxes on any earnings in the policy so long as the policy remains active.

There is usually a waiting period after the purchase of your policy for sufficient cash value to accumulate.

If the amount of the unpaid interest on your loan plus your outstanding loan balance exceeds the amount of your policy's cash value, your policy and all coverage will terminate

A. Cash value is the savings part of a permanent life insurance policy.
B. The policyholder can use the cash value:
1. as a tax-sheltered investment (the interest and earnings on the policy are
not taxable)
2. as a fund from which to borrow
3. as a means to pay policy premiums later in life
4. they can pass it on to their heirs

Cash-value insurance has higher premiums than term insurance because part of the premium pays for the death benefit coverage and part of it goes toward the policy's cash value

The amount on a life insurance policy or pension that is payable to the beneficiary when the annuitant passes away. A death benefit may be a percentage of the annuitant's pension. For example, a beneficiary might be entitled to 65% of the annuitant's monthly pension. Alternatively, the benefit may be a large lump-sum payment from a life insurance policy. The size and structure of the payment is determined by the type of policy the annuitant held at the time of death.

A policy feature of permanent life insurance that allows policyholders to leave any dividends received with the insurer, where the dividends can earn interest. Accumulation options are the variety of options holders of participating life insurance policies can make with the dividends they receive. Some types of insurance pay dividends to their policyholders each year when the insurance company performs better than estimated. Also called an "accumulation option," "accumulation at interest option" or "dividends on accumulation".

Common options available to participating permanent life insurance policyholders are to use their dividends to purchase more insurance, or to pay a portion of their existing premiums. They can also elect to receive their dividends immediately as cash, or to leave them on deposit with the insurance company to earn interest.

Many people use life insurance, and in particular cash value life insurance, as a source of benefits to the owner of the policy (as opposed to the death benefit which provides benefit to the beneficiary). These benefits include loans, withdrawals, collateral assignments, split dollar agreements, pension funding, and tax planning.

Collateral assignments will often be placed on life insurance to guarantee the loan upon the death of debtor. If a collateral assignment is placed on life insurance the assignee will receive any amount due to them before the beneficiary is paid. If there is more than one assignee, the assignees are paid based on date of the assignment, i.e. the earlier assignment date gets paid before the later assignment date.

Permanent Life Insurance (also known as “Whole Life Insurance”) is a more complex form of life insurance. The premiums are usually higher than those of a Term Life insurance policy.

In addition to the death benefit, Permanent Life Insurance offers a savings component, known as a Cash Value Account. The monies paid on the policy are split between premium and savings. The money saved in the Cash Value Account grows on a tax-deferred basis.

Although the premiums for Permanent Life Insurance tend to be higher than those for Term Life Insurance, one of the primary advantages is that the death benefit is not limited to a pre-determined timeframe.

There are three major types of Permanent Life Insurance: Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance.

There are four types of permanent life insurance for which you can receive a life insurance quote:

Whole Life insurance (sometimes called Ordinary Life) is the most common type of permanent insurance policy. It remains in force during your entire lifetime, and offers a death benefit along with a savings vehicle (called the cash value). Some companies pay a dividend, which is a return of excess premiums.

Universal (or Adjustable) Life insurance offers more flexibility than whole life insurance. As with Whole Life policies, Universal Life insurance provides a savings vehicle (cash value account) which generally earns a guaranteed rate of interest. The cash value belongs to you, the policy owner, and you may withdraw or borrow against it as provided for in the policy.

These policies also give you the option to adjust the death benefit and/or premium payments, within limits, to fit your situation. For example, if there is enough money in your cash value account to cover the costs, you have the option of reducing your premium payments. This can be a useful feature if your economic situation has suddenly changed. However, if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage could end.

Variable Life insurance is a kind of policy that, in addition to a death benefit, offers several professionally managed investment options. You can use the cash accumulated in your savings account to invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit could decrease, or you could be required to pay higher premiums to keep the policy in effect. Some policies, however, guarantee that your death benefit will not fall below a minimum level. As with whole life insurance and universal life insurance policies, you also may borrow against or withdraw the cash value at any time. However, it is important to remember that loans and withdrawals could reduce cash values and the death benefit.

Variable-universal Life policies combine the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.

What are the Advantages of Permanent Life Insurance?

Because of the savings element, premiums are generally higher for permanent life insurance than for term insurance. However, the premium in a permanent policy remains the same, while the premium for a term policy can go up substantially each time you renew it.

The cash value can also be used to pay premiums. If unexpected expenses occur, you can stop or reduce your premiums. The cash value in the policy can be used toward the premium payment to continue your current insurance protection, provided that there is enough money accumulated. However, bear in mind that your death benefit is reduced by the amount that you use or withdraw. You can also surrender the policy before you die and collect the accumulated savings for use as you see fit.

There are seven main types of permanent life insurance. These include non-participating, participating whole life insurance, indeterminate premium, economic, limited pay, single premium and interest sensitive. Each type has their pros and cons, so do your research before selecting one type. Economic whole life insurance is a type of insurance policy that pays your beneficiaries a death benefit. This type of insurance covers you for your entire lifetime. It is basically a cross between a term policy and a participating insurance policy.

An economic never ending life insurance policy covers you for your entire life. A similar type of insurance is term insurance, but that only lasts a certain number of years before you have to renew it or find another policy. An "economic" type of policy gives you money back at the end of the year if the company has made profits. The money can be credited toward your death benefit so that your beneficiaries get a bigger lump sum upon your death.

Whole Life Insurance Benefit

This sounds like a favorable type of life insurance policy. However, an economic-based policy depends on the company's financial health. If the company has a bad year, you will not get any bonuses, and, in fact, your death benefit will decrease. Some people like to take this type of risk because over the long run, your death benefit will likely increase. You need to determine for yourself if you want to go with the economic policy. But how can you find out whether or not you should do this kind of policy? One way is to look at the company's grades.

There is one benefit you can take advantage of with an economic whole life insurance policy. This benefit is the cash value account, which you contribute to every month with your premium. The cash value can be used to borrow loans from any company since it acts as the collateral. The money is used like a credit line and assessed interest. An economic life insurance policy may lower your death benefit, but it does not affect your cash value. An economic whole life insurance policy requires monthly premium payments. Some policies let people pay the premium in one lump sum or in a few payments. There is usually a discount for paying the premium in larger sums. After the premium is paid off, the insured individual no longer has to make any further payments.

1. Whole Life Insurance
Premiums - Fixed
Death Benefit - Guaranteed
Cash Value - Guaranteed

2. Universal Life Insurance
Premiums - Flexible
Death Benefit - Guaranteed
Cash Value - Fixed Interest Rate

3. Variable Life Insurance
Premiums - Flexible
Death Benefit - Guaranteed
Cash Value - Fixed Interest Rate

A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component pays a stated amount upon death of the insured. The investment component accumulates a cash value that the policyholder can withdraw or borrow against.

As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build-up tax-deferred.

Universal Life Insurance ia a type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder's circumstances change. In addition, unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.

Universal life insurance was created to provide more flexibility than whole life insurance by allowing the policy owner to shift money between the insurance and savings components of the policy. Premiums, which are variable, are broken down by the insurance company into insurance and savings, allowing the policy owner to make adjustments based on their individual circumstances. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums. Unlike whole life insurance, universal life allows the cash value of investments to grow at a variable rate that is adjusted monthly.

Death Benefit Options:

Option A - The death benefit is the total of the current face amount and the accumulation account.

Option B - The total death benefit is the current face amount.

Universal life insurance (often shortened to UL) is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer where premium payments above the cost of insurance are credited to the cash value of the policy. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, as well as any other policy charges and fees which are drawn from the cash value if no premium payment is made that month. The interest credited to the account is determined by the insurer; sometimes it is pegged to a financial index such as a stock, bond or other interest rate index.

Universal life is similar in some ways to, and was developed from, whole life insurance. The advantage of the universal life policy is its premium flexibility and adjustable death benefits. The death benefit can be increased (subject to insurability), or decreased at the policy owner's request.

The premiums are flexible, from a minimum amount specified in the policy, to the maximum amount allowed by the contract. The primary difference is that the universal life policy shifts some of the risk for maintaining the death benefit to the policy owner. In a whole life policy, as long as every premium payment is made, the death benefit is guaranteed to the maturity date in the policy, usually age 95 to age 121. A UL policy will lapse when the cash values are no longer sufficient to cover the cost of insurance and policy administrative expense.

To make UL policies more attractive, insurers have added secondary guarantees, where if certain minimum premium payments are made for a given period, the policy will remain in force for the guarantee period even if the cash value drops to zero. These are commonly called "No Lapse Guarantee" riders, and the product is commonly called guaranteed universal life(GUL, not to be confused with group universal life insurance, which is also typically shortened to GUL).

The trend up until 2007–2008 was to reduce premiums on GUL to the point where there was virtually no cash surrender values at all, essentially creating a level term policy that could last to age 121. Since then, many companies have introduced either a second GUL policy that has a slightly higher premium, but in return the policy owner has cash surrender values that show a better internal rate of return on surrender than the additional premiums could earn in a risk-free investment outside of the policy.

With the requirement for all new policies to use the latest mortality table (CSO 2001) beginning January 1, 2009, many GUL policies have been repriced, and the general trend is toward slight premium increases compared to the policies from 2008.

Another major difference between universal life and whole life insurances: the administrative expenses and cost of insurance within a universal life contract are transparent to the policy owner, whereas the assumptions the insurance company uses to determine the premium for a whole life insurance policy are not transparent.

• Final expenses, such as a funeral, burial, and unpaid medical bills
• Income replacement, to provide for surviving spouses and dependent children
• Debt coverage, to pay off personal and business debts, such as a home mortgage or business operating loan
• Estate liquidity, when an estate has an immediate need for cash to settle federal estate taxes, state inheritance taxes, or unpaid income in respect of decedent (IRD) taxes.
• Estate replacement, when an insured has donated assets to a charity and wants to replace the value with cash death benefits.
• Business succession & continuity, for example to fund a cross-purchase or stock redemption buy/sell agreement.
• Key person insurance, to protect a company from the economic loss incurred when a key employee or manager dies.
• Executive bonus, under IRC Sec. 162, where an employer pays the premium on a life insurance policy owned by a key person. The employer deducts the premium as an ordinary business expense, and the employee pays the income tax on the premium.
• Controlled executive bonus, just like above, but with an additional contract between an employee and employer that effectively limits the employees access to cash values for a period of time (golden handcuffs).
• Split dollar plans, where the death benefits, cash surrender values, and premium payments are split between an employer and employee, or between an individual and a non-natural person (e.g. trust).
• Non-qualified deferred compensation, as an informal funding vehicle where a corporation owns the policy, pays the premiums, receives the benefits, and then uses them to pay, in whole or in part, a contractual promise to pay retirement benefits to a key person, or survivor benefits to the deceased key person's beneficiaries.
• An alternative to long-term care insurance, where new policies have accelerated benefits for Long Term Care.
• Mortgage acceleration, where an over-funded UL policy is either surrendered or borrowed against to pay off a home mortgage.
• Charitable gift, where a UL policy is donated to a qualified charity, or the policy owner names a charity as the beneficiary.
• Charitable remainder trust replacement, where a policy owner wants to replace assets donated to a Charitable Remainder Trust.
• Estate equalization, where a business owner has more than one child, and at least one child wants to run the business, and at least one other wants cash.
• Life insurance retirement plan, or Roth IRA alternative. High income earners who want an additional tax shelter, with potential creditor/predator protection, who have maxed out their IRA, who are not eligible for a Roth IRA, and who have already maxed out their qualified plans.
• Term life insurance alternative, for example when a policy owner wants to use interest income from a lump sum of cash to pay a term life insurance premium. An alternative is to use the lump sum to pay premiums into a UL policy on a single premium or limited premium basis, creating tax arbitrage when the costs of insurance are paid from untaxed excess interest credits, which may be crediting at a higher rate than other guaranteed, no risk asset classes (e.g. certificates of deposit or U.S. Savings Bonds).
• Whole life insurance alternative, where there is any need for permanent death benefits, but little or no need for cash surrender values, then a current assumption UL or GUL may be an appropriate alternative, with potentially lower net premiums.
• Annuity alternative, when a policy owner has a lump sum of cash that they intend to leave to the next generation, a single premium UL policy provides similar benefits during life, but has a stepped up death benefit that is income tax-free.
• Pension maximization, where permanent death benefits are needed so an employee can elect the highest retirement income option from a defined benefit pension.
• Annuity maximization, where a large non-qualified annuity with a low cost basis is no longer needed for retirement and the policy owner wants to maximize the value for the next generation. There is potential for arbitrage when the annuity is exchanged for a single premium immediate annuity (SPIA), and the proceeds of the SPIA are used to fund a permanent death benefit using Universal Life. This arbitrage is magnified at older ages, and when a medical impairment can produce substantially higher payments from a medically underwritten SPIA.
• RMD maximization, where an IRA owner is facing required minimum distributions (RMD), but has no need for current income, and desires to leave the IRA for heirs. The IRA is used to purchase a qualified SPIA that maximizes the current income from the IRA, and this income is used to purchase a UL policy.
• Creditor/predator protection. A person who earns a high income, or who has a high net worth, and who practices a profession that suffers a high risk from predation by litigation, may benefit from using UL as a warehouse for cash, because in some states the policies enjoy protection from the claims of creditors, including judgments from frivolous lawsuits.^[1]
• Cryonics funding, where a life insurance policy funds the costs associated with cryonic suspension.

Most universal life policies come with an option to take a loan on certain values associated with the policy. These loans require interest payments which are paid to the insurance company. The insurer charges interest on the loan because they are no longer able to receive any investment benefit from the money that has been loaned to you.

Repayment of the loan principal is not required, but payment of the loan interest is required. If the loan interest is not paid, it will be deducted from the cash value of the policy. If there is not sufficient value in the policy to cover interest, the policy will lapse.^[2]

Loans are not reported to any credit agency and payment or non-payment against them will not affect the policyholder's credit rating. If the policy has not become a "modified endowment", the loans are withdrawn from the policy values as premium first and then any gain.^[3] Taking Loans on UL will affect the long term viability of the plan. The cash values removed by loan are no longer earning the interest expected, so the cash values will not grow as expected. This will shorten the life of the policy. Usually those loans will cause a greater than expected premium payment as well as interest payments.

Outstanding loans will be deducted from the death benefit at the death of the insured.

If done within IRS Regulations, an Equity Indexed Universal Life policy can provide income that is tax-free. This is done through withdrawals that do not exceed the total premium payments made into the policy. Also, tax-free withdrawals can be made through internal policy loans offered by the insurance company, against any additional cash value within the policy. (This income can exceed policy premiums and still be taken 100% tax-free.) If the policy is set up, funded and distributed properly, according to IRS regulations, an Equity Indexed UL policy will provide an investor with many years of tax-free income. This can significantly outperform traditional investments such as; stocks, bonds, mutual funds, CDs or annuities that are placed in taxable and tax-deferred accounts such as; an IRA, 401(k) or 403(b).

Most universal life policies come with an option to withdraw cash values rather than take a loan. The withdrawals are subject to contingent deferred sales charges and may also have additional fees defined by the contract. Withdrawals will permanently lower the death benefit of the contract at the time of the withdrawal.

Withdrawals are taken out premiums first and then gains, so it is possible to take a tax-free withdrawal from the values of the policy (this assumes the policy is not a MEC, i.e. "modified endowment contract"). Withdrawals are considered a material change and cause the policy to be tested for MEC. As a result of a withdrawal, the policy may become a MEC and could lose its tax advantages.^[3]

Withdrawing values will affect the long-term viability of the plan. The cash values removed by loan are no longer earning the interest expected, so the cash values will not grow as expected. To some extent this issue is mitigated by the corresponding lower death benefit.

Single premium

A Single Premium UL is paid for by a single, substantial, initial payment. Some policies do not allow any more than the one premium contractually, and some policies are casually defined as single premium because only one premium was intended to be paid.^[2] The policy remains in force so long as the COI charges have not depleted the account. These policies were very popular prior to 1988, as life insurance is generally a tax deferred plan, and so interest earned in the policy was not taxable as long as it remained in the policy. Further withdrawals from the policy were taken out principal first, rather than gain first and so tax free withdrawals of at least some portion of the value were an option. In 1988 changes were made in the tax code, and single premium policies purchased after were "modified endowment contract" (MEC) and subject to less advantageous tax treatment. Policies purchased before the change in code are not subject to the new tax law unless they have a "material change" in the policy (usually this is a change in death benefit or risk). It is important to note that a MEC is determined by total premiums paid in a 7-year period, and not by single payment. The IRS defines the method of testing whether a life insurance policy is a MEC. At any point in the life of a policy, a premium or a material change to the policy could cause it to lose its tax advantage and become a MEC.

In a MEC, the premiums and accumulation will be taxed just like an annuity upon withdrawing. The accumulations will grow tax deferred and will still transfer tax free to the beneficiary under Internal Revenue Service Code 101a under certain circumstances.^[3]

Fixed premium

Fixed Premium UL is paid for by periodic premium payments associated with a no lapse guarantee in the policy. Sometimes the guarantees are part of the base policy and sometimes the guarantee is an additional rider to the policy. Generally these payments will be for a shorter period of time than the policy is in force; for example payments may be made for 10 years, with the intention that thereafter the policy is paid-up. But it can also be permanent fixed payment for the life of policy.^[2]

Since the base policy is inherently based on cash value, the fixed premium policy only works if it is tied to a guarantee. If the guarantee is lost, the policy reverts to it flexible premium status. And if the guarantee is lost, the planned premium may no longer be sufficient to keep the coverage active. If the experience of the plan is not as good as predicted, the account value at the end of the premium period may not be adequate to continue the policy as originally written. In this case, the policyholder may have the choice to either:

1. Leave the policy alone, and let it potentially expire early (if COI charges deplete the account), or
2. Make additional or higher premium payments, to keep the death benefit level, or
3. Lower the death benefit.

Many universal life contracts taken out in the high interest periods of the 1970s and 1980s faced this situation and lapsed when the premiums paid were not enough to cover the cost of insurance.

Flexible premium

Flexible Premium UL allows the policyholder to vary their premiums within certain limits. Inherently UL policies are flexible premium, but each variation in payment has a long term effect that must be considered. In order to remain active, the policy must have sufficient available cash value to pay for the cost of insurance. Higher than expected payments could be required if the policyholder has skipped payments or has been paying less than originally planned. It is recommended that yearly illustrative projections be requested from the insurer so that future payments and outcomes can be planned.

In addition, Flexible Premium UL may offer a number of different death benefit options, which typically include at least the following:

• a level death benefit (often called Option A or Option 1, Type 1, etc.), or
• a level amount at risk (often called Option B, etc.); this is also referred to as an increasing death benefit.

Policyholders may also buy Flexible Premium UL with a large initial deposit, thereafter making payments irregularly

Unlawfully sold to individuals as an investment

In the US it is illegal to offer Universal Life Insurance as an "investment" to individuals, but it is frequently offered by agents as a tax-advantaged financial vehicle from which they can borrow as needed later without tax penalties. This also makes it an alternative for individuals who are not able to contribute to a Roth IRA due to IRS income restraints.

Conflict of interest

Agents who sell Universal Life Insurance often receive commissions equal to the first year of target premiums providing an incentive to sell these policies over other less expensive term life insurance policies.

Proponents respond that it would be inaccurate to state that term insurance is less expensive than universal life, or for that matter, other forms of permanent life insurance, without qualifying the statement with the other factor: Time, or length of coverage.

While term life insurance is the least expensive over a short period of time, say one to twenty years, permanent life insurance is generally the least expensive over a longer period of time, or over one's entire lifetime. This is mainly due to the high percentage of the premiums paid out in commissions during the first 10–12 years.

Misunderstood risk to policyholders

Interest rate risk: UL is a complex policy with risk to the policyholder. Its flexible premiums include a risk that the policyholder may need to pay a greater than planned premium in order to maintain the policy. This can happen if the expected interest paid on the accumulated values is less than originally assumed at purchase. This happened to many policyholders who purchased their policies in the mid 1980s when interest rates were very high. As the interest rates lowered, the policy did not earn as expected and the policyholder was forced to pay more to maintain the policy. If any form of loan is taken on the policy, this may cause the policyholder to pay a greater than expected premium, because the loaned values are no longer in the policy to earn for the policyholder. If the policyholder skips payments or makes late payments, it is possible that this will need to be made up for in later years by making larger than expected payments. Market factors relating to the 2008 stock market crash adversely affected many policies by increasing premiums, decreasing benefit, or decreasing the term of coverage.

No-lapse guarantees, or death benefit guarantees: A well informed policyholder should understand that the flexibility of the policy is tied irrevocably to risk to the policyholder. The more guarantees a policy has, the more expensive its cost. And with UL, many of the guarantees are tied to an expected premium stream. If the premium is not paid on time, the guarantee may be lost and cannot be reinstated. For example, some policies will offer a "no lapse" guarantee, which states that if a stated premium is paid in a timely manner, the coverage will remain in force, even if there is not sufficient cash value to cover the mortality expenses. It is important to distinguish between this no lapse guarantee and the actual death benefit coverage. The death benefit coverage is paid for by mortality charges (also called cost of insurance). As long as these charges can be deducted from the cash value, the death benefit is active. The "no lapse" guarantee is a safety net that provides for coverage in the event that the cash value isn't large enough to cover the charges. This guarantee will be lost if the policyholder does not make the premium as agreed, although the coverage itself may still be in force. Some policies do not provide for the possibility of reinstating this guarantee. Sometimes the cost associated with the guarantee will still be deducted even if the guarantee itself is lost (those fees are often built into the cost of insurance and the costs will not adjust when the guarantee is lost). Some policies provide an option for reinstating the guarantee within certain time frames and/or with additional premiums (usually catching up the deficit of premiums and an associated interest). No-lapse guarantees can also be lost when loans or withdrawals are taken against the cash values.

Miscellaneous

The single largest asset class of all but one of the largest banks in the United States is permanent cash value life insurance, commonly referred to as BOLI, or Bank Owned Life Insurance. During the recent economic crisis, banks accelerated their purchasing of BOLI as it was the single most secure investment they could make.

One banker described BOLI as a "constantly resetting municipal bond that I never have to mark to market."

The majority of BOLI is current assumption Universal Life, usually sold as a single premium contract.

If you are the type of person who loves to watch the market and you think of yourself as being a clever investor, then Variable Life Insurance and Variable Universal Life Insurance products were made for you. These two life insurance policies allow for a portion of the premium to be allocated to the insurance company's investment fund, allowing you to achieve investment profits tax-free for your beneficiaries. The next two sections will describe these two policies so you can decide if they are what you have been looking for.

A form of permanent life insurance, Variable life insurance provides permanent protection to the beneficiary upon the death of the policy holder. This type of insurance is generally the most expensive type of cash-value insurance because it allows you to allocate a portion of your premium dollars to a separate account comprised of various instruments and investment funds within the insurance company's portfolio such stocks, bonds, equity funds, money market funds and bond funds. In addition, because of investment risks, variable policies are considered securities contracts and are regulated under the federal securities laws; therefore, they must be sold with a prospectus.

The major advantage to variable policies is that they allow you to participate in various types of investment options while not being taxed on your earnings (until you surrender the policy). You can also apply the interest earned on these investments toward the premiums, potentially lowering the amount you pay. However, due to investment risks, when the invested funds perform poorly, less money is available to pay the premiums, meaning that you may have to pay more than you can afford to keep the policy in force. Poor fund performance also means that the cash and/or death benefit may decline, though never below a defined level. Also, you cannot withdraw from the cash value during your lifetime.

Variable Universal Life (VUL) insurance, as the name suggests, is a policy that combines variable and universal life insurance (i.e. flexible variable life insurance). This is one of the more popular insurance policies because it gives its policyholders the option to invest as well as alter the insurance coverage with ease. (Confused about universal life insurance? Read What is the difference between term and universal life insurance?)

As with universal life insurance, you have the ability to decide the amount and the frequency of premium payment, although within specific limits. You may also make a lump sum payment within certain limits or use your accrued cash value toward premium payments.

The Risks Involved
These policies allow you to increase and decrease you death benefit according to your wishes. An increase in the death benefit calls for evidence that you are enjoying good health, while a decrease in the death benefit may have surrender charges.

In VUL policy, you are left with two options of death benefit - fixed death benefit and variable death benefit equal to the cash value at the time of death plus theface value of the insurance.

Unlike universal life insurance, this policy gives you the freedom to invest in your preferred investment portfolio. You may be a conservative or an aggressive investor, and your investment will reflect your risk tolerance. The investment options vary among insurers, but almost all VUL policies consist of investment in stocks, bonds, money market securities, mutual funds and even the most conservative option of guaranteed fixed interest. Your cash value and death benefit will vary according to the investment performance.

As you know, there is a possibility that the underlying assets in your account may provide positive or negative returns. This affects your cash value and, therefore, insurers do not offer guaranteed cash value. Despite this, the flexibility in death benefits, premiums and the potential growth in cash value make this policy attractive to some.

VUL provides insurance protection and the element of long-term investment. However, you should have a fundamental understanding of stocks, bonds and securities before you invest. If you are considering buying VUL insurance, you also need to be clear about your future goals, such as providing income to a spouse, taking care of high estate taxes or having a comfortable retirement.

Taxes and Variable Universal Life
Because it is a permanent life policy, VUL provides tax-deferred cash value and loan withdrawals - within certain limits - against the cash value. Normally, policy loans are tax free, but you need to confirm this with your insurance advisor because the tax implications may differ from one state to another.

Because you bear the investment risk in these policies, if your investments perform poorly, this may mean that you'll pay higher premiums to sustain the policy.

The Governing Bodies
Like variable insurance, due to the inherent securities risk, VUL policies must be sold with a prospectus and are governed by securities laws. You must carefully read the prospectus before buying a VUL policy.

Your insurance coverage needs may change over time and variable life insurance products take good care of this alteration. At any age, you should consider your individual circumstances and the standard of living you wish to maintain for your family. Variable life as well as VUL policies form a perfect hedge against inflation. For some, control over their investments through variable life gives them the desired edge, while others may prefer VUL for its high level of flexibility and the policyholder's open-mindedness with market fluctuations. The key to helping you choose is to fully research these two insurance plans and decide on the one that best suits your requirements.

Finally, before going for a variable life or VUL policy, make sure that your insurance company enjoys high ratings from major rating services like Standard & Poors, AM Best and others.

Single Premium Whole Life Insurance is similar to regular Whole Life Insurance, the differences being the lump sum single payment provided by the applicant to pay for the contract up front and also in the way the insurance company handles the investment feature. A Single Premium Whole Life Policy pays a set interest rate based on the insurance company's investment experience and the current economic conditions when the policy is written.

Single Premium Variable Life Insurance is similar to Whole life, the differences being the lump sum single payment provided by the applicant to pay for the contract up front, and the ability of the insurance company gives the insured to select from a menu of professionally managed stock, bond and money market subaccounts, as well as a fixed account. The death benefit is not guaranteed.

One type of popular premium is the "limited pay" premium. This means that you will only pay level premiums every month up to a certain number of years, then stop. You can also choose to pay off the policy early rather than in your senior years. Although your monthly premium will be larger than if you spread out the payments over a longer length of time, you will not have to think about your insurance as much. Many people prefer to get all their bills paid off before they turn 65. Paying off the mortgage, college tuition, and the life insurance policy early are worthy goals. However, limited pay never ending life insurance policies will incur large fees if you decide to end the policy early. However, you will be able to get most or all of your cash value back in your hand.

A single pay premium is similar to a limited pay, except that you literally pay off your entire premium amount in a single lump sum. The sum is substantial, but then your policy is guaranteed for life. You will not have to make another payment, and your beneficiaries will receive the full death benefit.

Following are three types of Limited Pay Whosle Life Insurance Policies. 10 or 20 Pay Life, Single Premium Life Insurance and Life Payable to Age 65.

Advantages of Limited Pay Life Insurance
There are many advantages to having a whole life insurance policy. Everyone who has children or other family members that depend on his or her income needs to have a life insurance policy. A limited pay whole life insurance policy gives you the best of both words. Your family will benefit from the face value, while you get to use the cash value that accumulates. After twenty years or so, you will not have to make any more payments to the company, but you still reap the benefits of your policy. Although it may seem like you are paying a lot every month, you are actually getting a discount. Making the same level monthly payments every month for fifty years will actually cost you more!

Some life insurance companies actually let you choose when you want your premium payments to end. However, you need to pay premiums for up to five years for this type of policy. This is a good plan if you are getting older but want to pay off your life insurance early and retire. The last thing you need after the age of 65 is worrying about how to pay life insurance bills. Your senior years should be free of stress, and knowing that your life insurance policy is protecting your family will give you peace of mind. Plus, if your family will not need all of the face value, you can start withdrawing some of the money during your lifetime.

Disadvantages of Limited Pay Life Insurance

There are also some disadvantages to the limited-payment life policies. Some of them, we already mentioned. During the period when the premiums are due, they are generally a bit higher than in a straight life policy plan (obviously because there is a shorter duration to pay them than in a straight life policy). The protection component decreases quite a bit more than in a straight life because the savings component increases.

Also, although the policy owner does not pay premiums after the premium paying period is over, he/she does pay in other ways. The interest on the savings component is used to offset the policy and to continue the protection (some of the interest is used). Also, some companies may charge more for the coverage in a limited-payment life insurance plan than in a straight life insurance plan.

Ten payment life insurance is a whole life policy in which all the premiums would be required to be paid in 10 years. This is what is sometimes referred to as a limited payment life insurance policy...in this case premiums are limited for 10 years.

Advantages To 10 Pay Life Insurance

One of the advantages of owning this type of insurance is that you pay for 10 years and never have to pay another premium. The policy remains in force. The death benefit remains level for the duration of the policy is paid to your beneficiary when you die. This can be paid in one lump sum or in the form of a monthly income. Some people don't like to think about paying premiums and as a result they may find a limited pay life insurance policy to their liking.

Disadvantages To 10 Pay Life Insurance

As you may appreciate the premiums for this policy can be pretty high. What the insurance company is doing in this case is packing premiums in 10 years that would normally be paid each and every year for as long as you live. If you, however, are fortunate enough to buy your 10 pay life insurance policy from a company that very efficiently keep their costs down while at the same time show a good return on investment you would receive what is called a dividend which among other options can be used to reduce your premiums. Dividends are not guaranteed. All in all it could work out pretty well for you.

With the 20 pay life insurance policy you pay a premium for 20 years. This premium is higher than the regular whole life policy but you are finished with premium payments in 20 years. You have guaranteed cash values accumulating interest just like your whole life policy and they continue to accumulate after you stop paying in 20 years.

If you have a participating 20 pay life policy you even earn dividends on your policy. Keep in mind though that dividends are not guaranteed. They are based on how well the company does with their investments and how efficiently they keep down expenses.

Your 20 pay policy does everything your whole life policy does but you pay only for 20 years. Now, isn't that exciting. If you buy enough of it you need have no concern about life insurance premium payments after 20 years.

Whole Life insurance has helped provide essential financial protection to families for generations. It provides a foundation upon which you can build your family’s financial future. Modified Premium Whole Life insurance offers the same guarantees as traditional Whole Life insurance. It differs from Whole Life insurance because it features a lower initial premium that remains level for the policy’s first five years. The premium increases in year six and remains level as long as you own the policy.

Modified Premium Whole Life is well suited for those who want a large amount of insurance protection with a moderate amount of cash value accumulation, and a lower premium in the early policy years.

In addition to a death benefit, Modified Premium Whole Life builds cash value and is eligible to receive dividends¹. The cash value that accumulates in the policy can be accessed during your lifetime to fund needs such as a child’s education or a new home². It is a flexible product that can be customized to meet your family’s unique needs.

Modified Premium Whole Life has the same highlights of a whole life policy:

• A guaranteed death benefit
• Tax-deferred cash value accumulation.
• The ability to borrow from cash value, generally on a tax-free basis²
• The potential to earn dividends as declared by the company¹

Modified Premium Whole Life can be used to help protect your family, your mortgage or to help supplement retirement income. It is especially useful for business planning needs, offering a lower initial premium at a time when cash flow might be tight during the early years of a business.

Graded Premium Whole Life Insurance is more affordable for many buyers because it offers a low introductory rate, a charge well below the actual cost of the insurance. Premiums increase marginally until they reach an certain level, where they remain for the rest of the policy’s lifetime.

Like traditional whole life insurance, graded premium whole life insurance guarantees a death benefit, whose value is fixed at the time the policy is underwritten.

The strategy behind graded premium whole life insurance

There is an advantage to beginning a permanent life in policy at asurance young age: a lower age corresponds with a lower cost, most buyers have few or no health problems to hurt their insurability, and the added years give the policyholder more time to accumulate cash va. The problem with buying permanent life insurance at a young age is that it is expensive; many customers cannot afford it until later in life, when their earning power has developed cash value.

Graded premium life insurance enables customers who anticipate a greater future earning power to begin their whole life insurance policy earlier in life. Graded premium life insurance charges a lower premium than its level of coverage is worth during the policy’s early years. The policyholder will make up the difference in later years by paying a higher premium.

Current Assumption Whole Life Insurance is a type of ordinary life insurance where the premiums may change depending on insurance experience, investment income and expenses. That means that current mortality experience and the current earnings of the insurance company in investments will also impact the policy. If the mortality experience and investment earnings are good, this will be credited to the policy through lowered premiums, through a dividend structure or through the policy's cash value account.

The death benefit, regardless of the changes in other factors, will remain the same. The cash value also has a guaranteed minimum amount, but with good performance, this can be increased. Premiums can also either be increased or decreased.

The most significant advantage of Equity Indexed Life Insurance (EIL) is that it combines most of the features, benefits and security of traditional life insurance with the potential to earn interest based on the upward movement of an equity index. Instead of the Company declaring a specific interest rate or dividend as with traditional life insurance, interest earnings are credited based on increases in value of a specific equity index.The Standard & Poor’s 500® Composite Stock Price

Index* (excluding dividends) is used as the index for Indianapolis Life’s EIL products. The S&P 500 Index is currently the most commonly used index for EILs. Credited interest is linked to increases in the S&P 500 Index without the downside risks associated with investing directly in the stock market. And, because EILs are permanent life insurance plans, they provide features which give you a sense of stability through:

1 - A guaranteed minimum interest rate

2 - Tax-deferred interest accumulation

3 - Access to cash value through withdrawal and loan provisions

In addition, the equity indexed link in EIL products offers important benefits:

1 - Equity index-linked returns with the potential to beat inflation

2 - Protection in the contract against downside market risk.

The typical profiles of EIL buyers are individuals who:

1 - Want affordable protection with strong cash value accumulation potential.

2 - Want built-in product flexibility to better accommodate changing financial circumstances.

3 - Want the security and attractive interest potential provided by Indianapolis Life equity indexed life insurance products

First introduced to compete with Universal Life Insurance, it involves complex combinations of whole life, term and paid up additions in proportions allowing favorable premium levels and adjustable face amounts.

Ordinary Life insurance that's modified and enhanced and includes a combination of dividends, purchasing paid-up additions, Term Life insurance. The minimum face amount of Ordinary Life insurance must be maintained, but there is no limit in the amount of Term Life insurance that a policyholder can add. The premium rate per $1,000 will vary since the Ordinary Life and Term Life mix can vary. A minimum rate per $1,000 must be paid, and any time after policy issuance, policyholder may increase or decrease the amount of Term Life insurance in addition to the extra premiums paid into the policy.

Policy dividends, additional premiums and "dump ins" are all used to purchase paid up insurance that would offset the temporary term coverage.

Interest Sensitive Whole Life^SM is a guaranteed fixed premium permanent life insurance policy with a Guaranteed Minimum Cash Value that increases each year and equals the Face Amount at age 100. The Policy Account Value may be enhanced by additional interest credited at current rates.

The interest rate credited to the Interest Sensitive Whole Life^SM Policy Account Value is declared periodically. For more detailed information, please refer to the fact card above.

The policy's required premium is guaranteed for life. It can never be increased. You can access cash value, through loans and withdrawals, potentially free of current income tax as long as the policy stays in force until the Insured’s death. A loan may be taken anytime after issue. For more detailed information, including possible surrender charges, please refer to the fact card above.

The Guaranteed Cash Value (less any outstanding loan and accrued loan interest) is the minimum your Cash Value can be. After the first few policy years and through the rest of the Insured's lifetime, as long as required premiums are paid, your policy's Guaranteed Cash Value increases. This Guaranteed Cash Value:

• Can never be decreased (unless there is a loan on the policy) or impacted by economic conditions
• Equals the policy's Face Amount at the Insured's age 100

A type of life insurance that combines features of term and whole life coverage, giving holders the option to change the characteristics of their policies as their needs change over time. Adjustable life insurance policies allow holders to manipulate the period of protection, increase or decrease the face amount, raise or lower the premium amount, and change the length of the premium payment period. These policies also incorporate an interest bearing side fund (cash value). Adjustable life insurance is also known as "flexible premium adjustable life insurance".

Adjustable life insurance differ from other life insurance products because there is no requirement to cancel or purchase additional policies as holders' circumstances change.
Adjustable life insurance policies are best suited for individuals who want the protection and cash value benefits of whole life insurance along with an increased measure of flexibility. With the ability to modify payments, coverages and terms, holders can customize their coverage as their incomes and family responsiblities grow and change through the years.

Advantages of Adjustable Life Insurance
1. Face amounts, protection periods, premium amounts and premium payment periods may be increased or decreased by the policyholder after the payment of the initial premium.
2. Options include 1) policyholders can specify the desired face and premium amounts, and the insurance company can formulate the best fitting plan.
3. Policyholders can choose the type of plan and coverage amount, and the insurance company can calculate the necessary premium payments.

Disadvantages of Adjustable Life Insurance
1. Cash value may fluctuate depending on the amount and frequency of premium payments.
2. Adjustable life insurance is more complex than term life or whole life insurance policies.
3. The death benefit is based on and depends on the cash value of the policy.

Life insurance protection comes in many forms, and not all policies are created equal, as you will soon discover. While the death benefit amounts may be the same, the costs, structure, durations, etc. vary tremendously across the types of policies.

Whole Life
Whole life insurance provides guaranteed insurance protection for the entire life of the insured, otherwise known as permanent coverage. These policies carry a "cash value" component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered. The premiums are usually level for the life of the insured and the death benefit is guaranteed for the insured's lifetime.

With whole life payments, part of your premium is applied toward the insurance portion of your policy, another part of your premium goes toward administrative expenses and the balance of your premium goes toward the investment, or cash, portion of your policy. The interest you accumulate through the investment portion of your policy is tax-free until you withdraw it (if that is allowed under the terms of your policy). Any withdrawal you make will typically be tax free up to your basis in the policy. Your basis is the amount of premiums you have paid into the policy minus any prior dividends paid or previous withdrawals. Any amounts withdrawn above your basis may be taxed as ordinary income. As you might expect, given their permanent protection, these policies tend to have a much higher initial premium than other types of life insurance. But, the cash build up in the policy can be used toward premium payments, provided cash is available. This is known as a participating whole life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some additional payment flexibility. (Fore related reading, see Buying Life Insurance: Term Vs. Permanent and Permanent Life Policies: Whole Vs. Universal.)

Universal Life
Universal life insurance, also known as flexible premium or adjustable life, is a variation of whole life insurance. Like whole life, it is also a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from its whole life cousin is that the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term as the insured's needs change. Cash values earn an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level. (For related reading, see Cashing In Your Life Insurance Policy.)

Variable Life
Variable life insurance is designed to combine the traditional protection and savings features of whole life insurance with the growth potential of investment funds. This type of policy is comprised of two distinct components: the general account and the separate account. The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. Because of this underlying investment feature, the value of the cash and death benefit may fluctuate, thus the name "variable life". (For more on this, read Variable Vs. Variable Universal Life Insurance and Vary Your Options With Variable Insurance.)

Variable Universal Life
Variable universal life insurance combines the features of universal life with variable life and gives the consumer the flexibility of adjusting premiums, death benefits and the selection of investment choices. These policies are technically classified as securities and are therefore subject to Securities and Exchange Commission (SEC) regulation and the oversight of the state insurance commissioner. Unfortunately, all the investment risk lies with the policy owner; as a result, the death benefit value may rise or fall depending on the success of the policy's underlying investments. However, policies may provide some type of guarantee that at least a minimum death benefit will be paid to beneficiaries.

Term Life
One of the most commonly used policies is term life insurance. Term insurance can help protect your beneficiaries against financial loss resulting from your death; it pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time. Term policies do not build cash values and the maximum term period is usually 30 years. Term policies are useful when there is a limited time needed for protection and when the dollars available for coverage are limited. The premiums for these types of policies are significantly lower than the costs for whole life. They also (initially) provide more insurance protection per dollar spent than any form of permanent policies. Unfortunately, the cost of premiums increases as the policy owner gets older and as the end of the specified term nears. (To learn more, read Buying Life Insurance: Term Vs. Permanent and What is term insurance?)

Term polices can have some variations, including, but not limited to:

Annual Renewable and Convertible Term: This policy provides protection for one year, but allows the insured to renew the policy for successive periods thereafter, but at higher premiums without having to furnish evidence of insurability. These policies may also be converted into whole life policies without any additional underwriting.

Level Term: This policy has an initial guaranteed premium level for specified periods; the longer the guarantee, the greater the cost to the buyer (but usually still far more affordable than permanent policies). These policies may be renewed after the guarantee period, but the premiums do increase as the insured gets older.

Decreasing Term: This policy has a level premium, but the amount of the death benefit decreases with time. This is often used in conjunction with mortgage debt protection.

Many term life insurance policies have major features that provide additional flexibility for the insured/policyholder. A renewability feature, perhaps the most important feature associated with term policies, guarantees that the insured can renew the policy for a limited number of years (ie. a term between 5 and 30 years) based on attained age. Convertibility provisions permit the policy owner to exchange a term contract for permanent coverage within a specific time frame without providing additional evidence of insurability.

Food for Thought
Many insurance consumers only need to replace their income until they've reached retirement age, have accumulated a fair amount of wealth, or their dependents are old enough to take care of themselves. When evaluating life insurance policies for you and your family, you must carefully consider the purchase of temporary versus permanent coverage. As you have just read, there are many differences in how policies may be structured and how death benefits are determined. There are also vast differences in their pricing and in the duration of life insurance protection.

Many consumers opt to buy term insurance as a temporary risk protection and then invest the savings (the difference between the cost of term and what they would have paid for permanent coverage) into an alternative investment, such as a brokerage account, mutual fund or retirement plan.

Survivorship Universal Life covers two people. The death benefit is paid when the last person insured under the policy dies. Survivorship Universal Life is an efficient way to assist with a variety of planning needs.

Features:

• Typically less expensive than two individual Whole Life or Universal Life policies
• Flexibility - You decide the amount of life insurance and premium payments subject to policy minimums.
• Death benefit - Life insurance proceeds are generally income tax free to the beneficiary.
• The growth in cash values is tax-deferred under current federal income tax law.
• Access to cash value - The cash value can be accessed to help with education expenses, provide a retirement supplement or other personal objectives.

Life insurance is not a simple product. Even term life policies have many elements that must be considered carefully in order to arrive at the proper type and amount of coverage. But the technical aspects of life insurance are far less difficult for most people to deal with than trying to get a handle on how much coverage they need and why. This article will briefly examine the top 10 misconceptions surrounding life insurance and the realities that they distort.

Myth No.1: I'm single and don't have any dependents, therefore I don't need any coverage.
Even single persons need at least enough life insurance to cover the costs of personal debts, medical and funeral bills. If you are uninsured, you may leave a legacy of unpaid expenses for your family or executor to deal with. Plus, this can be a good way for low-income singles to leave a legacy to a favorite charity or other cause. (Read Gifting Your Retirement Assets To Charity to learn more about these types of donations.)

Myth No.2: I only need an amount of life insurance coverage equal to twice the amount of my annual salary.
You need an amount of life insurance equal to the amount that is actually required. In addition to medical and funeral bills, you may need to pay off debts such as your mortgage and provide for your family for several years. A cash flow analysis is usually necessary in order to determine the true amount of insurance that must be purchased - the days of computing life coverage based only on one's income-earning ability are long gone. (Be sure to read our related article How Much Life Insurance Should You Carry? to learn how much - if any - insurance you really need.)

Myth No.3: My term life insurance coverage at work is sufficient.
Maybe, maybe not. For a single person of modest means, employer-paid or provided term coverage may well be enough. But if you have a spouse or other dependents, or know that you will need coverage upon your death to pay estate taxes or create an estate for charity, then additional coverage may be necessary if the term policy does not meet the needs of the policyholder.

Myth No.4: At least the cost of my premiums will be deductible.
Afraid not, at least in most cases. The cost of personal life insurance is never deductible unless the policyholder is self-employed and the coverage is used to insure the business. Then the premiums are deductible on the Schedule C of the Form 1040. (Read more about safeguarding your business assets in Asset Protection For The Business Owner.)

Myth No.5: I absolutely MUST have life insurance at any cost.
In many cases, this is probably true. However, persons with no debt or dependents and sizable assets may be better off self-insuring. If you have no debt and medical and funeral costs are covered, then life insurance coverage may be optional.

Myth No.6: I should ALWAYS buy term and invest the difference.
Not necessarily. The cost of term life coverage can become prohibitively high in later years; therefore, those who know for certain that they must be covered at death should consider permanent coverage. The total premium outlay for a more expensive permanent policy may be less than the ongoing premiums that could last for years longer with a less expensive term policy.

There is also the risk of non-insurability to consider, which could be disastrous for those who may have estate tax issues and need life insurance to pay them. But this risk can be avoided with permanent coverage, which becomes paid up after a certain amount of premium has been paid and then remains in force until death. (To learn more on this argument, read Buying Life Insurance: Term Versus Permanent.)

Myth No.7: Variable universal life policies are always superior to straight universal life policies over the long run because of their long-term growth potential.
Many universal policies pay competitive interest rates, and variable universal life (VUL) policies contain several layers of fees relating to both the insurance and securities elements present in the policy. Therefore, if the variable subaccounts within the policy do not perform well, then the variable policyholder may well see a lower cash value than someone with a straight universal life policy.

Poor market performance can even generate substantial cash calls inside variable policies that require additional premiums to be paid in order to keep the policy in force. (Read Variable Vs. Variable Universal Life Insurance to learn more about VUL policies and how they compare to other life insurance products.)

Myth No.8: Only breadwinners need life insurance coverage.
Nonsense. The cost of replacing the services formerly provided by a deceased homemaker can be higher than you think, especially when it comes to cleaning and daycare. (For more information on this topic, see the article titled Insuring Against The Loss Of A Homemaker.)

Myth No.9: I should always purchase the return-of-premium (ROP) rider on any term policy.
There are usually different levels of ROP riders available for policies that offer this feature. Many financial planners will tell you that this rider is not cost-effective and should be avoided. Whether you include this rider will depend on your risk tolerance and other possible investment objectives. (Read more in Are Return-Of-Premium Riders Worth It?)

A cash flow analysis will reveal whether you could come out ahead by investing the additional amount of the rider elsewhere versus including it in the policy. (Riders are available to provide additional benefits that help you customize your policy. Learn more about these riders in our related article Let Insurance Riders Drive Your Coverage.)

Myth No.10: I'm better off investing my money than buying life insurance of any kind.
Hogwash. Until you reach the breakeven point of asset accumulation, you need life coverage of some sort (barring the exception discussed in Myth No.5.) Once you amass $1 million of liquid assets, you can consider whether to discontinue (or at least reduce) your million-dollar policy. But you take a big chance when you depend solely on your investments in the early years of your life, especially if you havedependents. If you die without coverage for them, there may be no other means of provision after the depletion of your current assets. (For more information on providing for dependents, read Special Trusts For Special Needs and Protect Your Kids And Pets With Custom Insurance.)

Conclusion
These are just some of the more prevalent misunderstandings concerning life insurance that the public faces today. The key concept to understand is that you shouldn't leave life insurance out of your budget unless you have enough assets to cover expenses after you're gone. For more information, consult your life insurance agent or financial advisor.

Very few people enjoy thinking about the inevitability of death. Fewer yet take pleasure in the possibility of an accidental death. If there are people who depend on you and your income, however, it is one of those unpleasant things that you have to consider. In this article, we'll approach the topic of life insurance in two ways: first, we will point out some of the misconceptions about life insurance and then we'll look at how to evaluate how much and what type of life insurance you need.

Does Everyone Need Life Insurance?
Buying life insurance doesn't make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer's fees, etc.), then insurance is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), then you do not need life insurance.

However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, then you likely will need insurance to ensure that your dependents are looked after if something happens to you.(To learn about insurance basics, see Understand Your Insurance Contract and Exploring Advanced Insurance Contract Fundamentals.)

Insurance and Age
One of the biggest myths that aggressive life insurance agents perpetuate is that, "insurance is harder to qualify for as you age, so you better get it while you are young." To put it bluntly, insurance companies make money by betting on how long you will live. When you are young, your premiums will be relatively cheap. If you die suddenly and the company has to pay out, you were a bad bet. Fortunately, many young people survive to old age, paying higher and higher premiums as they age (the increased risk of them dying makes the odds less attractive).

Insurance is cheaper when you are young, but it is no easier to qualify for. The simple fact is that insurance companies will want higher premiums to cover the odds on older people - it is a very rare that an insurance company will refuse coverage to someone who is willing to pay the premiums for their risk category. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.

Is Life Insurance an Investment?
Many people see life insurance as an investment, but when compared to other investment vehicles, referring to insurance as an investment simply doesn't make sense. Certain types of life insurance are touted as vehicles for saving or investing money for retirement, commonly called cash-value policies. These are insurance policies in which you build up a pool of capital that gains interest. This interest accrues because the insurance company is investing that money for their benefit, much like banks, and are paying you a percentage for the use of your money.

However, if you were to take the money from the forced savings program and invest it in an index fund, you would likely see much better returns. For people who lack the discipline to invest regularly, a cash-value insurance policy may be beneficial. A disciplined investor, on the other hand, has no need for scraps from an insurance company's table.

Cash Value vs. Term
Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, this loan will cost you, as you will have to pay interest to the insurance company for borrowing your own money.

Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don't die, you get nothing (don't be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets. Unfortunately, not all term insurance is equally desirable. Regardless of the specifics of a person's situation (lifestyle, income, debts), most people are best served by renewable and convertible term insurance policies. They offer just as much coverage and are cheaper than cash-value, and, with the advent of internet comparisons driving down premiums for comparable policies, you can purchase them at competitive rates.

The renewable clause in a term life insurance policy means that the insuring company will allow you to renew your policy at a set rate without undergoing a medical. This means that if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact that the insurance company is certain to have to pay out.

The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secure enough to go without insurance. Even though you will be planning in the hope of not having to use this option, it is better to be safe and the premium is usually quite inexpensive. (To learn more about life insurance types, see Buying Life Insurance: Term Versus Permanent, A Look At Single-Premium Life Insurance and What is the difference between term and universal life insurance?)

Evaluating Your Insurance Needs
A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:

• How much debt you have: All of your debts must be paid off in full, including car loans, mortgages, credit cards, loans, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover you debts (and possibly a little more to take care of the interest as well).

• Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% (if you do not trust your dependents to invest, you can appoint trustees or chose a financial planner and calculate his or her cost as part of the payout). Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.

• Future Obligations: If you want to pay for your child's college tuition or have your spouse move to Hawaii when you are gone, you will have to estimate the costs of those obligations and add them to the amount of coverage you want. So, if a person has a yearly income of $40,000, a mortgage of $200,000, and wants to send his or her child to university (let's say this will cost $80,000), this person would probably want an $820,000 policy ($540,000 to replace yearly income + $200,000 for the mortgage expense + $80,000 university expense). Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal). (To find your estimate of insurance needs, see this MSN Money Needs Estimator.)

• Insuring Others: Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. The death of an income-earning spouse, however, does create a situation with both emotional and financial losses. In that case, follow the income replacement trick we went through earlier (your spouse's income/8% + inflation = how much you'll need to insure your spouse for). This also goes for any business partners with which you have a financial relationship (for example, shared responsibility for mortgage payments on a co-owned property).

Alternatives to Life Insurance
If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in to the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance - being doubly insured is a needless cost.

Summary
If you need life insurance, it is important to know how much and what kind you need. Although generally renewable term insurance is sufficient for most people, you have to look at your own situation. If you choose to buy insurance through an agent, decide on what you'll need beforehand to avoid getting stuck with inadequate coverage or expensive coverage that you don't need. As with investing, educating yourself is essential to making the right choice.

Annuities offer another option for protection from creditors’ claims in some states. An annuity is an agreement whereby a person is to get a sum of money regularly over a period of years. There are fixed annuities where the amounts are determined in the beginning, and variable annuities where the amount to be paid out depends upon the return on investment. To set one up, you can pay a lump sum, or you can make periodic payments. They are useful in asset protection planning because they are exempt from claims in several states. The exemption ranges from a few hundred dollars in some states, to an unlimited amount in others. In some states, all annuities are exempt, while in others only annuities payable to one’s spouse, children or other dependents are exempt.

In some states, such as Florida, annuities have especially strong protection. In one case, a woman who was injured in an auto accident had her million-dollar settlement structured as an annuity. Years later, she caused an accident and injured someone else. Her victim was unable to get anything from herbeyond her liability insurance policy.

Annuities are currently enjoying great popularity and are offered by many of the large mutual fund companies such as Fidelity, Vanguard, Dreyfus and Scudder. There are dozens of varieties to choose from. Besides asset protection, another benefit available with annuities is the tax-free compounding of the investment, since the interest is not taxable until it is paid out. It is like an IRA but with no limit on the amount you can contribute.

If you live in a state that does not allow an exemption for annuities, there are annuities available outside the United States, such as in Switzerland. Swiss law provides that if your beneficiary is your spouse or children, or made irrevocable, the annuity cannot be reached by creditors.

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