What's Up

       Life insurance comes in two basic flavors: term and permanent. Each flavor, however, can have a few twists. A term policy lasts for a specified number of years, anywhere from one to twenty, and stays in force provided that you pay the premiums on time, every time. The longer the policy term, the higher the annual premiums. Often the policy is of the renewable variety -- usually you will have to show proof of insurability (medical underwriting) for the extension of coverage but you may escape another administration charge. A convertible term policy can be switched over to a permanent policy, generally requiring proof of insurability but frequently with some incentive built into the premium for year of conversion.

       The basic difference between term and permanent life insurance is that term policies generate no equity. It's like renting an apartment as opposed to buying a condo: you may pay less but have nothing to show for it when you move. Something like 85% of term policies are never collected upon -- because the policy has terminated before the insured has expired! A permanent policy, however, accumulates cash value and can be all paid-up (endow) after a certain number of years or at a certain age of the insured. An "ordinary" policy, frequently also called "whole life," assumes that your lifespan will match the actuarial table's number of years, and then spreads out the projected costs evenly over your whole life -- so that the amount you pay in year 1 is the same amount you will pay in year 34 even though the actual risk (hence, cost of the pure insurance element) increases. The cash value accumulating during your younger years absorbs the additional risk (offsets the additional cost) as you age.

       A policy with a "participation" feature (i.e., paying dividends), provides you with a tax-sheltered return on your "investment" of those additional dollars. Because of the returns on investment that the insurance companies have been netting lately, you could wind up with substantial dividends. You can receive the dividends as a cash payment or leave them with the insurer to collect interest. The better choice of options is from among the following, however: apply the dividends to accumulate cash value faster, and/or to offset premium payments, and/or to purchase additional, paid-up life coverage.

       A "universal" (or "adjustable") life policy is designed to be more flexible than a whole life policy. You can pay into the policy on an irregular basis and in differing amounts, and even stop paying at some point in the future. Especially if you are benefitting from a healthy return on investment from your premium dollars, your cash values can accumulate at a rate of increase faster than that of the insurer's amount at risk (the pure cost of insurance at that point in time). For so long as the cash value remains sufficient to cover the insurer's monthly draw, your coverage will remain in force. In order for there to remain a risk element (without which the contract would no longer qualify as insurance!), when your cash accumulation is too great relative to the face value of the policy, the death benefit automatically increases.

       Think about what you just read.

       You can effectively purchase additional life insurance coverage through calculated funding of a universal policy -- which, if you are no longer insurable because of health considerations, can be extremely beneficial. The proceeds of an insurance policy are TAX FREE to its recipient. Dividends from an insurance policy are TAX SHELTERED because they are deemed a return of premium. Accumulated cash values can be withdrawn or borrowed with FAVORABLE TAX TREATMENT, and the timing of these transactions is not governed by qualified retirement account rules and regulations.