I am an Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser (RIA) based in Fairfield, IA. I am also registered with Cambridge Investment Research, Inc., an independent broker-dealer with over 3,000 registered representatives nationwide.
Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.
Whole Life Insurance | Financial Advisor Tim Hayes
Life insurance is one of the most important but least understood financial products. After the death of a loved one, life insurance can offer enormous financial comfort to your beneficiaries. However, many Americans don’t have enough life insurance because of how it has been sold (high pressure) and the buying process (which can be cumbersome).
There are two types of life insurance policies: term life insurance and permanent. Job one is matching your needs with the right plan. Job two is choosing the insurance company and designing the policy.
Finding a Life Insurance Company
Partial List of Life Insurance Companies I Work With
- Jackson National
- Pacific Life
Before coming to Cambridge Investment Research Advisors in 2010, I spent 20 years with MetLife. So, I am well-versed in guaranteed retirement products such as variable and fixed annuities and life insurance.
Owning a Life Insurance Policy
Once a hallmark of middle-class American financial planning, a whole life insurance policy is less of an economic staple today and is more likely purchased by upper-middle-class families or wealthier Americans who have already maxed out their 401k retirement plan contributions looking for insurance protection and tax deferral or, in some cases, tax-free growth of its cash value. Or, it may be purchased by business owners who need to fund a buy-sell agreement or insure the life of a key employee.
Today, the middle class is just as likely to purchase a term life insurance policy or get insured through a workplace group policy. Moreover, interest rates have fallen from 18% in the inflation-ridden late 1970s to 1% or 2% today, making the cash value component of a whole life policy less attractive as returns earned by insurance companies to pay dividends have fallen.
Permanent Life Insurance
The life insurance premiums pay for the insurance cost for term life insurance. However, life insurance premiums for a whole life policy pay for more than the insurance cost. This is because it builds up a cash value in the policy. The life insurance premiums remain the same for the policy’s life. In contrast, universal and variable life policies allow for a more flexible premium design.
In contrast to term insurance, permanent insurance, whole life, universal life, or variable life policies are designed to be owned for the policyholder’s entire lifetime and pay out a death benefit to the insured’s beneficiaries.
Term Life Insurance
Today, many people are unwilling to pay the higher cost of whole life insurance. However, those who need coverage tend to buy term insurance, hoping to live a long life and, at some point during that life, no longer need coverage due to the premiums for term insurance becoming very expensive as one ages.
Many people get term insurance quotes on the internet. The user inputs their age, general health, and sex, and the calculator spits out quotes from multiple insurance companies.
Whole Life Insurance and Term Life Insurance
Though no longer a staple of middle-class financial life, whole life insurance still offers many benefits to its buyers. The policy is designed to remain in effect for the policyholder’s entire life, so the beneficiary receives a tax-free death benefit. In addition, the policy’s tax-deferred cash value grows and can be borrowed against tax-free.
However, premiums can be high, so purchasing less than needed and buying a term rider is one way around the expense. The insured can then take the dividends paid by the whole life policy and purchase paid-up additions of whole life insurance.
The insured uses tax-free dividends to buy more insurance and do so without paying any commission on that additional insurance. Hopefully, by the time the term rider runs out, the policyholder has purchased enough paid-up whole life coverage to make up most of the difference.
Buying more insurance is not the only thing you can do with dividends. You can also take them as income or use them to reduce your current premium.
Universal Life Insurance or Variable Life
Universal or variable life insurance premiums are usually less than those for a whole life policy but more than for a term policy. With a universal policy, the premiums for the insurance cost; any additional monies are deposited into a fixed interest account. The plan builds value to help defer the insurance cost in later years.
Variable life is similar to universal life. However, instead of going into a guaranteed account, the monies are invested in stocks and bonds, making variable life more attractive to younger, more aggressive insurance buyers.
A problem with these policies is that if someone doesn’t pay enough money in early premiums, the policy might not have enough value to pay the premiums later. As a result, the policy could lapse or become very expensive.
Life Insurance Quote
Some people view term insurance as the ultimate commodity product, considering the policy’s price the most critical selection factor. Besides price, another difference is the conversion option—the ability to exchange, without any additional underwriting, your term plan for a permanent plan.
Whole life is even less of a commodity as the dividends paid by the insurance company can play an essential role during the life of a policy.
Most big insurance companies were once mutual companies owned by the policyholders. Some have subsequently become stock companies owned by shareholders and listed on the various stock exchanges. Some people contend that mutual companies are preferable for providing whole life insurance because they do not have to share the policy dividends with shareholders.
The four largest mutual life insurance companies are New York Life, MassMutual, State Farm, and Northwestern Life are the largest mutual life insurance companies. At the same time, the biggest stock life insurance companies are MetLife, Prudential, and Lincoln.
Variable life because of the nature of the policy, the cash value is invested in stocks and bonds with variable life insurance. The performance and fees of the subaccounts are paramount to any purchasing decision.
The cost of life insurance depends on your health, age, and the amount of coverage needed. There are formulas to determine how much life insurance you need—one rule of thumb is multiplying your income times a certain number. There is also human life value, which was used after 9/11 to pay victims. This method calculates the financial value someone brings by looking at their current and future income.
Life Insurance Tax Benefits
No matter the policy type, the main benefit of life insurance is that the beneficiary’s proceeds are tax-free. That is an enormous benefit. Also, in permanent plans, the growth of the policy is tax-deferred. If someone cancels or surrenders this policy, the proceeds would only be taxable if the payment was greater than the premiums paid.
Life Insurance at Work
Today, many people get their life insurance at work with an employer- and employee-paid group policy. If you are very healthy, the cost of that group insurance might be higher than a comparable individual policy. On the other hand, if your health is not great, the employer group plan could be less expensive as there is no underwriting on most of those plans.
If you forgo an individual plan, it is good to see if your employer plan is convertible to a personal one without additional underwriting. The one risk of waiting to purchase a separate policy is that your health could change, which could make the premiums higher or, in some cases, you may become uninsurable.
The Insurance Industry is Adapting
More and more financial products are becoming fee-based, such as variable annuities and life insurance programs. An annuity can be part of a fee-based advisor’s assets when calculating your cost. As a result, the product is stripped of some costs associated with a commission-based product.
Firms are also removing conflicts of interest to align with the new Best Interest Standard used by the DOL in their interpretation of who is a fiduciary advisor under ERISA. When working with an advisor, the investing public benefits from having a similar standard for conduct across the board as Best Interest aligns closely with the fiduciary responsibilities in the 40 Act.
Why I Remain a Dual-Registered Advisor
I remain registered as an investment advisor representative and as a registered representative. I conduct most of my business as a fee-only investment advisor representative, where I charge a client a flat or hourly rate for my advice. I like this arrangement because it is not product-based, and I can get paid to give my clients ongoing advice.
However, I keep my registered representative license because it makes more sense for the client when comparing a commission product. For example, I cannot imagine charging a new client who is 25 years old and wants to purchase a variable life insurance policy a fee for the next forty years.
I also like to use some companies for variable life insurance, so I need a registered representative licensed to provide this option.
Remember, life insurance is regulated at the state level. New York is thought to have the most stringent regulations, so it is a good idea to ensure the company you are buying a policy from is licensed to do business there.
The federal government also regulates variable life insurance because the subaccount stock and bond options make it a security.
Life Insurance Beneficiaries
Most people purchasing life insurance name their spouse or significant other as the beneficiary. The policy owner is the person or entity with the right to designate and change beneficiaries. Most of the time, the policy’s owner and the insured are the same, but not always.
Extra care is required if insurance proceeds are earmarked for minor children, as they cannot directly receive those payments. Instead, if proper planning has not been done, the state makes that appointment.
One way is to make sure you name a guardian or set up a Uniform Transfers to Minors Act (UTMA) with a custodian who will manage the assets until the child becomes of legal age. You can also name a trust as the beneficiary, allowing for more control of the funds past the child’s legal age. Because this is very important, it is best to seek an attorney when children are part of the life insurance planning process.
These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted on as individualized investment advice.