Monday, May 20, 2013

Life Insurance Begins at Age Fifty

Life Insurance Begins at Age Fifty

            If your term life insurance policy is ending but your needs continue, consider the cash value alternative of permanent life insurance.  One way to continue your life insurance is simply to renew your term protection; however, if your health has changed, you may be limited on the type of policy you can buy.  A permanent life insurance policy, or whole life policy as some call it, may provide a steady investment.  In contrast, many people believe whole life insurance as an investment is controversial, but that is because it takes many years for a policy to show value.  The first years’ premium goes largely toward commission and other expenses, so your cash value will lag the amount paid in premiums in the early years.  It typically takes eight to ten years for your cash value to exceed the premiums you pay.  If you carry on, however, the results improve—sometimes dramatically.  This is a long term proposition.  Do not buy it if you cannot keep it.  From 1991 to the start of 2011, according to Blase Research (a life insurance data provider from Easton, PA), annualized cash value returns for representatives from major companies such as Northwestern Mutual and New York Life in private range from 2.62% to 4.44%.  This amount is tax deferred and includes the part of your premiums that go to pay for death protection and company expenses.  It is also a good idea to see whether you can convert your term policy to permanent insurance without changing insurers and without a new physical exam, especially if you have developed medical conditions that were not present when you purchased the life insurance originally.  Clearly earnings on life insurance policies will not keep up with stocks over a lifetime and certainly not with an extended bull market.  This is why just about every financial advisor, including well-trained life insurance agents, emphasize that life insurance is not meant to be your primary investment.  Tom Newsad advises everyone to have a comfortable emergency reserve savings or tax deferred investment.  Remember that permanent or whole life insurance has a few strong suits, the first of which is safety.  With the exception of AIG, life insurers survived the credit crisis and the recession in excellent financial condition.  The next strong suit mentioned is that falling costs, competition, and longer life expectancies are driving the cost of all life insurance policies down, including those for people aged fifty and older.
            Permanent life insurance also appeals to risk-adverse people who do not have time to recover investment losses in the event of another financial crash.  Another form of whole life or permanent life insurance protection is a type of whole life policy called limited pay.  You may pay higher premiums for fewer years, but it is an option that has become popular among pre-retirees who want to time the end of their premium obligations with their retirement date.  Cost could range perhaps twice as much per year versus regular premiums paid over one’s lifetime, but by putting more into the pot earlier cash value also compounds quicker.
            Cash value life insurance can also be a good portfolio diversifier.  That is because a whole life policy is unconnected to the securities market.  You can think of it as cash or bond allocation in your overall investment nest that allows you to become more aggressive with stocks, commodities, or real estate in your IRA and 401(k) or taxable brokerage accounts.  Cash value life insurance is also one alternative to home equity line of credit or other sources of borrowed money.  That is because the money you usually borrow from your whole life insurance policy is not taxed (remember, whole life insurance policies are the only vehicle that you can borrow money out of and not have to pay taxes on).  A policy loan is instant credit.  You can borrow up to your total premiums paid with no questions asked, simply by sending a fax or sending the insurance company a check at the office of Newsad Insurance Services.  A simple phone call or email starts this process for you.  Besides speed, there are two huge advantages to CDs and conventional loans, and that is that nobody runs a credit check or ties the interest rate to your credit score, and that you do not have to repay the money on any schedule.  There is also no penalty if you want to make a withdrawal at or before age 59 ½ because it is not a taxable event like a withdrawal from an IRA or a 401(k).  Policy loans are not a totally free ride, however.  They tend to acutely accumulate interest at 5% to 8% in your unpaid principal and accrued interest is deducted from the death benefit paid to your survivors, or from the cash value taken away if you discontinue the policy. 
            Ultimately, what is most important here is that the money accumulating in your policy is your money.  You also will not have to beg a banker to approve a loan after you have retired and have a lower income.

Tom Newsad has been building relationships in the Middletown, Ohio area since 1994.  Newsad Insurance Services offers life, health, disability, and long term care insurance as well as fixed indexed annuities and serves clients in Middletown, Franklin, Trenton, Liberty Township, Hamilton, Cincinnati, Dayton, and beyond.  Click on or call 513-424-6871 for more information

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