Different life insurance types have different issues—and some of them could blow up in your face. As part of RPOA’s comprehensive financial planning approach, we review our clients’ life insurance policies, and I’ve found two common problems I think you should know about.
The two basic life insurance types are “term” and “permanent.” Term insurance is what it sounds like: insurance for a specific period of time. When you buy an increasing premium term policy, your premium will rise annually. Premiums for five-, ten-, or twenty-year policies stay the same for the term of the policy. The policy expires at the end of the period of time—and your premium will go up, as much as three or four times the rate you initially paid. Why? When you first bought your policy, you were younger. You passed the health requirements the insurer set for you. You’re older now. They don’t know about the state of your health and assume you’re a bigger risk. If you have a term life insurance policy, I often suggest you consider replacing it several years before you get to the end of your term. It’d be a shame if you finished your term only to find you couldn’t afford another policy.
Permanent insurance covers a variety of life insurance types that include universal life, index universal life, whole life, and others. Permanent insurance does not expire like term insurance and it accumulates a cash value. It’s this last “benefit” that can be a problem, because the insurer makes an assumption about interest rates when writing the policy. I recently reviewed a policy and found that the interest rate assumption was—are you sitting down—12%! Is there anywhere in today’s world you can predictably earn 12%? Not likely! So what happens now?
When you buy insurance you are paying for expense charges and mortality costs, which both increase as time goes by. And if your policy assumed you’d be making a high interest rate, your account could get eaten up paying the difference between the assumed amount (such as the 12% above) and whatever pittance you’re able to make today. Your policy could die before you do.
If you have a permanent life insurance policy, I suggest you ask your insurance company for a ledger illustration on your policy at the guaranteed interest rate, not the non-guaranteed (projected) rate. Once you see what really is going on with your policy, you can make an informed decision. If it looks as if your policy will give out before you will, you may want to take the cash value out now and buy a different policy. A 20‑year term policy, for example, might satisfy your needs.
If that sounds like something above your pay grade, we can help. Our credentialed Retirement Planners, who have experience with all life insurance types, will sit down with you and review all your insurance policies. We’ll look at Medicare costs, and help you with Social Security decisions. Contact us today to build a retirement plan that encompasses your entire financial life.
Ken Moraif, CFP®, MBA
Senior Advisor at Retirement Planners of America