Almost everyone needs life insurance. Whether its to pay off debts, ensure the family income and standard of living, make sure college can be paid for, leave a bequest to charity, provide liquidity for a business or real estate, or hedge against the return of estate taxes, most of our clients need at least some life insurance. At the same time, two people who are outwardly similar may have very different needs, cash flows, risk tolerances, and so forth. For many people, the biggest decision is not the amount of insuranceits how to pay for the insurance they need.

That brings up the term versus permanent life insurance consideration.

In some cases, the need for insurance is temporarymaybe for the next 20 years until the house is paid for and the kids have left the nest. In other cases, the need may be for a longer termmaybe until a business interest is sold, or the need may be for a lifetime--to ensure estate taxes can be paid[1] or to provide cash to equalize an estate, and so on.

When Should You Consider Choosing Term Life Insurance?

Term life insurance is much like a starter home or apartment. It is basic and inexpensive, and thats all some people will ever need. But as with starter homes, there are variations of term life insurance that offer room to grow as needs change. There are also fixed-duration options, where the amount you pay is guaranteed, and other options where the amount adjustsjust like a mortgage.

In other ways, term life insurance is like rentingyou pay money every month[2], on time, or you lose your insurance (or apartment). Like some rentals, term insurance has a lease with option to buy provision. This can be the best of both worlds when you cant afford the permanent insurance (or home) just yet, but know you will be able to buy it in the next few years. If you buy term insurance just to cover a specific time period, such as the years when the children are young, it makes sense to select a plan that will last, at the same premium amount, for that entire period. But, since nothing ever seems to go as planned, we usually recommend that our clients buy convertible, level premium when they choose term life insurance.

What is level premium, convertible term life insurance?

This is a plan that is inexpensive while it is used as a term life insurance policy, and the premiums stay the same for the selected period (anywhere from five to thirty years or longer). But the convertible aspect is what makes this option such an attractive choice when money is tight. Convertibility is simply a feature the insurance company offers that allows a person to convert part or all of the policy face (pay-out) amount to a permanent insurance plan. This conversion can normally be done over a period of years, bit by bit.

Converting to this option as cash flow improves is a great way to get the most insurance benefit for your dollars. So, who really buys term life insurance? Lots of people:

Families and single parents with children
Dual-income couples
Small business owners
People who are caring for a disabled family member
People needing permanent life insurance who cant afford the cost
Divorcing couples who need life insurance as part of the settlement

Term life insurance is inexpensive, flexible, and often an excellent interim solution. But it has its downside, too. If you miss a premium payment, you no longer have life insurance. There is no cash value to carry a missed payment. If you decide you no longer want the insurance, you get nothing back, even after years of regular payments. There is no tax-favored accumulation of cash.

When Should You Consider Choosing Permanent Life Insurance?

Permanent life insurance includes a number of insurance plans that have a major feature in common: If you pay enough money for enough years, the plan is permanentit will last until the person being insured dies or reaches an age such as 100, when the full amount will be paid by the insurance company. The way insurance companies can make this type of insurance last is by charging a premium that covers two main things:

The actual cost of the insurance, plus other expenses (as is the case with term life insurance)

An additional, much larger amount that accumulates and earns dividends (similar to interest[3]) and grows year by year[4]

Permanent insurance has several features not available with term (unless you convert it):

It has a cash value and you can borrow money from it.

You can pay extra money and pay the policy up sooner (assuming the return on your cash value is high enough[5]).

As long as there is enough cash value, you can miss a payment (in most cases).

There are tax advantages to accumulating money inside an insurance policy.

So who uses permanent life insurance?

People who need to know their coverage will last even if they miss a payment here and there

People who need to know their insurance will be around to cover estate taxes and provide cash for liquidity needs at death

People who like the idea of the tax advantages

People who want supplemental retirement income

People who want another way to save money for college

Many people are good candidates for permanent life insurance, and many others will be, so convertible term can work for them. Maybe its time for us to weigh the options and run the numbers to see what is right for you.

If you or someone you know needs some help managing retirement assets, setting up a retirment savings plan, or have life insurance needs, just give me a call at 801-545-0696.

Respectfully,

P.S. If there is a topic or question you would like to have explored in one of my newsletters, please feel free to submit any questions or topics for discussion.

[1] Taxes may well return on estates of $1 million+ in 2011.
[2] Or other set period such as quarterly or annually.
[3] This has been simplified since there are many other costs in an insurance policy.
[4] Although in the case of VL/VUL, this growth is not guaranteed.
[5] This only works with so-called over funded UL policies, and even then circumstances could change and additional payments might be needed to keep the policy in effect.

Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
http://www.stonecreekwealthadvisors.com
Securities offered through
Sammons Securities Company, LLC
Member NASD and SIPC

Mark K. Lund, CRFA, has spent almost a decade as a Wealth Manager, serving the retirement planning needs for clients in Salt Lake City, Utah. Mark is one of a very small number of retirement planners across the country trained in retirement tax strategies. Most financial professionals typically take only one aspect of your personal finances and attempt to make it grow in a very linear, single-dimensional fashion. Thats why they dont bother to correlate other items or tax issues in your total financial picture! Mark looks at all four phases of wealth accumulation to plan the most effective way to manage your wealth. To learn more about Mark, please visit http://www.stonecreekwealthadvisors.com

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