Life Solutions

Protect What Matters
Indexed Universal Life Doomed for Failure                                                            Part 2

As are well aware, there are many different brands of vehicles and each brand has its line of models. Within a brand, you will find vehicles such as trucks, sedans, sports cars, etcetera. The look, feel, ride, performance, bells and whistles are all determined by the model of the vehicle. The same is true for life insurance; it too is built on different models. Each model is designed for a unique purpose and/or objective and you want to make sure that you buy the model that suits your specific needs, purpose, or objective.  If you purchase a sports car with the intention of moving furniture, we can agree that you have selected the wrong model. As with a vehicle, you want to purchase the right model of life insurance. There are essentially three life insurance models:

 

  • Term Life

  • Whole Life

  • Universal Life

 

Term Insurance is designed to provide protection for a specified term. Terms start at 1 year and can go up to 30 years. It is the least expensive form of life insurance during your younger years but it becomes the most expensive type of insurance as you age. This is so because that is the model that it was built on; cheap while you’re young and more expensive as you get older.

 

Term insurance can be traced back to the 1600’s. At first, you could only buy what is known as Annual Renewable Term Life Insurance.  This type of insurance policy, as the name implies, could be renewed annually. What this means is that when you purchased this type of insurance, the price was guaranteed for one year (12 months). At the end of the12 month period, you could cancel your policy or you could renew it. If you wanted to cancel the policy you could; the insurance company would keep your premiums and you would then have no insurance; sort of like your auto insurance. If you decided to renew the policy, then you would keep the policy but pay a higher premium than you were paying. The new premium would then be guaranteed for another 12-month period. This process would then repeat every year and every year that you decided to renew, the premium would increase. Well, you can imagine what would happen eventually right? The premiums would eventually be so high that it would become unaffordable and impractical to keep renewing it and you would be left with no death benefit, and nothing to show for it because the insurance company would keep all your premiums.

 

Nowadays you can purchase term insurance with the guarantee that your premiums will not change for a specified number of years; from one year, up to thirty years. Of course, the longer the term the higher the premium.

 

There are two essential issues with term insurance. The first one is “Insurability”. When you apply for a term policy you will usually have to prove that you are insurable. To keep it short and simple, you are insurable if you are heathy and/or don’t have any life-threatening conditions. Now, if you are insurable, you will be able to obtain the insurance for the term that you specify (5,10 15, 20,25, 30 years). At the end of that term the premiums will increase dramatically. If you don’t want to pay the newly increased premiums, you will need to apply for a new term policy and you will have to prove once again that you are insurable. If you cannot prove that you are insurable and you want to keep the old policy, you will have to pay the higher premiums. Those premiums can become very high and very unaffordable as your age increases. There is not cap or maximum cost for term insurance; it WILL continue to increase uncontrollably. This brings us to our second issue with term insurance; it is called AGE.

 

You may be in good health and you may be able to prove insurability but your age will definitely have an impact on the premium that you will be required to pay. The older you get, the higher the cost. If you must renew your term policy in your 60s or 70s it will probably be unaffordable, even if you are in good health. This is why only 1% to 2% of every term insurance policy ever written ever pays out. It becomes so expensive that almost 98% of people who buy it, drop it in their later years, when they are more likely to die.

 

Like I stated at the beginning of this section, term insurance is good for specific, short term planning. It is NOT a good vehicle for long term goals. If you have longevity in your genes and you believe that you are going to live for a long time, term insurance is not your best option. This brings us to our next life insurance model; the whole life model.