Brian Gruss Licensed Insurance Planner

Return of Premium Rider Makes Life Insurance Buying Easier

Since term life insurance policies accrue no cash value, most policyholders see no return on their investment unless they pass away during the policy’s term and a death benefit is paid out to their beneficiaries. This is true of any insurance policy—if your home never burns to the ground or your car accident history is squeaky clean, you’ll never see one dollar from your homeowners’ or car insurance.

Wouldn’t it be nice if your term insurance policy could act like a piggy bank for you—storing your premiums up for a full refund should you outlive the policy? Believe it or not, with the right rider added to your policy, it can. Unlike other types of insurance, many term life policies offer a return of premium (ROP) rider that guarantees a return of the premiums paid if you outlive the policy.

When a ROP rider is added to your policy, your premiums will increase. When determining whether the ROP rider is in your best interests, you must consider whether the funds paid for the rider would be better invested elsewhere.

As an example consider a ten-year term life insurance policy with a premium of $600 per year. If the ROP rider adds an additional $300 per year, you will pay $900 per year or a total of $9,000 over the life of the policy. At the end of that ten-year term, you will receive the entire $9,000 back from the insurance company.

Otherwise, without the ROP rider, you’d have an extra $300 per year to invest—but you would need to earn greater than 16% per year to accumulate $9,000 after ten years. In addition, refunds received under the ROP rider are tax-free, while you’ll pay income taxes on interest earned in your savings account.

There are certain conditions you must meet to receive the return of premium guaranteed by the rider. If you forget to make a premium payment or allow your policy to lapse, you may no longer be eligible for the full premium payout of your policy, so it is important to keep the policy in force or you will be wasting the extra premium dollars you send to the insurance company.

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Tax Advantages of a Permanent Life Insurance Policy

Most of us are aware of the benefits of obtaining a life insurance policy – the death benefit.  The death benefit protects your family from the financial hardship that may arise after your death.  But there is a second benefit of life insurance.  Permanent or cash value life insurance can offer unique tax advantages that cannot be found through other options.

Permanent life insurance, including whole life and universal life, provides long-term life insurance for the policyholder.  Most policies feature a level premium over the life of the policy.  You will always know your premium amount so you will not be surprised by increases, as you might be if you renewed a term policy.  Because of the permanent nature of this type of insurance, you also have the added benefit of accumulated cash value.  That cash value can be used by the policyholder through loans and other withdrawal options, and can be an important addition to your retirement planning.

There are several unique tax advantages of permanent life insurance that are not found with other financial tools.

o       Cash value accumulates free of taxation.  You will not be required to pay income tax on interest or other earnings that are credited to cash value.

o       Borrowing the cash value may be done without having to pay income tax.  Loans are generally treated as debts and are not subject to income tax.  In addition, these loans may not need to be repaid.  If you build up a large amount of cash value and maintain a minimum death benefit to cash value ratio, you can borrow against the cash value for systematic payments that can supplement your retirement income.  Be aware, however, that the cash value may be subject to income taxes when there is a withdrawal from or surrender of the policy, or if the cash value to death benefit ratio is not maintained.  Also, loans accrue interest and they can reduce the overall value of the policy.  And lastly, if the policy is a modified endowment contract, the loan may be taxable upon issuance.

o       Your beneficiaries receive the death benefit free of income taxation.  This tax advantage is true of both term and permanent policies.

o       By arranging the beneficiary designations in accordance with current laws, you can avoid potential estate taxes and probate costs.  By placing ownership and naming beneficiaries outside your estate, you may be able to avoid the proceeds of the policy going into your estate and thus being subject to estate taxes.  Keep in mind, however, that to avoid estate inclusion for existing policies, you must transfer the policy at least three years before your death.

Permanent life insurance policies offer unique tax advantages, as well as the traditional death benefit enjoyed by all life insurance policies.  Consult your insurance agent, Brian Gruss, and attorney to discuss the advantages of this financial product so that you and your loved ones may reap all the benefits it has to offer.

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Low Cost Term Life Insurance Isn’t Always Cheap

You’ve read about term life insurance and decided that you need to investigate this coverage further. Like so many other tasks in today’s world, you go online to get the ball rolling.

You’ve filled out numerous online applications for term life insurance, but when the quotes arrive you find that term life insurance isn’t really all that cheap. What’s happening?

A couple of factors could be causing higher than anticipated insurance premiums. First and foremost is the general state of your health. Receiving an online quotation is one thing, but only after an insurer has reviewed your medical history will you know your true cost for life insurance.

Very rarely will an individual obtain life insurance without first completing a medical examination. Taking out a policy through your employer maybe the exception, but generally in this situation, the coverage available is minimal. If you’re looking for life insurance that’ll be of financial value after you’ve passed away, you’ll most likely need to supplement the coverage available through your job.

Let’s take a look at the underwriting logic for a moment. If given the choice, life insurance companies would only accept applicants in the best of health. Someone in excellent health should live a nice long life. The longer you live the less of a chance the insurance company has of ever paying a death benefit.

In other words, if you outlive your term life insurance policy, the insurance company wins. The insurer has collected your premiums all along, but never provided anything in return other than a promise to pay a death benefit if you passed away before the end of the term period.

When determining the premium for a policy, life insurance companies use a classification system. Individuals in excellent health generally get classified as “super preferred” and boast the lowest premiums. Several more categories exist and, unfortunately, each category lower comes with a progressively higher premium.

Health conditions that raise a red flag in the eyes of an insurance company include tobacco usage, obesity, high cholesterol, high blood pressure, or a family history of cancer, stroke, diabetes, heart disease or other type of chronic disease, even if you do not show any symptoms of these conditions. Such medical conditions are more likely to cause premature death. And if the insured dies during the policy’s term, the insurance company is on the hook for the policy’s death benefit.

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