Christian Finance Blog - Life Insurance and Annuities

What Questions Should I Consider Before Buying an Annuity?

nospam@example.com (The Christian Money Coach) — Wed, 21 Apr 2010 17:05:00 -0500

For years, investors have been bombarded with invitations to dinner presentations that will share the solution to every retiree’s investment problems and concerns. All too often, the solution usually involves the purchase of an annuity.

This is not to say that annuities do not serve a purpose. They can be a valuable and beneficial investment choice for many reasons. However, they are not a one-size-fits-all type of product, and they should not be advertised as such.

The industry regulators have also recognized the vast amount of misinformation being provided to retirees and pre-retirees. This happens frequently as employees debate whether they will roll their 401(k) money to an IRA. In an effort to protect investors, insurance agents are being held to a stricter standard of care in ensuring that the annuity product is appropriate for the investor.

Today, we will look at the 12 factors that must be considered in determining the suitability of an annuity. We will also look at some of the reasons these factors are important to understand.

1.) Age

Annuities are restrictive products. Once funds are deposited, they are no longer liquid. If we are under the age of 59 ½, there is a 10% penalty for withdrawing funds.

While we are under 59 ½, it is important to determine whether there is a possibility that we will need access to the funds in the near future. If so, the funds should not be placed in an annuity.

2.) Annual income

Annuities offer tax-deferred growth. Some investors in larger income brackets can benefit from placing disposable income in a tax-deferred vehicle. If annual income is not too high, we should again consider our liquidity needs and whether there may be a need to access to the funds for emergencies or other short term needs.

3.) Financial situation and needs

This can also be a reference to a need for liquidity. We do not want to tie up funds that we may need before retirement.

4.) Financial experience

Advisors should understand the level of experience investors have. Less experienced investors may need additional guidance in reviewing the pros and cons of each option to determine which route may be best for their present situation.

5.) Financial objectives and 6.) Intended use of the annuity

Every investment decision should be made with the end goal in mind. Before investing in an annuity, it is important to determine what the money will be used for and what we plan to accomplish with the decision.

We can ask ourselves several questions. Is the plan to allow the money to grow for a certain amount of time? Do we need to take a regular distribution for a specific amount of time, now or in the future?

7.) Financial time horizon

We need to know how long we can allow the money to be invested in the annuity before touching it. Some annuities have surrender periods that restrict our access in the early years. As mentioned previously, there is also a penalty for taking money from an annuity before age 59 ½.

If we decide to annuitize an annuity, it means that we will accept regular payments. This is something that we arrange with the insurance company. We only get one opportunity to make this decision, so we have to be ready to live with that decision. We need to decide if we will take payments for a specific amount of time, or over the remainder of our lives.

8.) Existing assets

Is this our complete investment portfolio or only a portion? We may put ourselves in a bind if we invest everything in an annuity and no longer have anything liquid in the event of an emergency.

We might also consider, before annuitizing, whether the payments are designed to supplement other income sources. Will that payment be enough?

9.) Liquidity needs and 10.) Liquid net worth

We’ve discussed liquidity several times. It is important to make sure that there is always access to funds somewhere in an emergency.

11.) Risk tolerance

Many investors consider annuities because they are not comfortable with risk. Many annuity products do provide principal protection, which is attractive when the market is down. However, variable annuities can be more risky than fixed annuities. Some may even consider equity indexed annuities for the additional downside protection.

12.) Tax status

As mentioned previously, some investors in larger tax brackets can benefit from the tax deferred growth.

Another tax consideration is whether the money is in a tax-deferred account, such as a retirement account, or in a taxable account. The additional fees charged in annuities may not make them beneficial to all investors, especially in an account that is already tax-deferred.

Any investment requires careful consideration, but annuities can clearly become complicated. Before choosing any annuity product, these 12 factors should be reviewed with the insurance agent to make sure that the product selected is really the most suitable option.

What are the Benefits of Owning an Indexed Universal Life Policy?

nospam@example.com (The Christian Money Coach) — Wed, 17 Mar 2010 20:08:00 -0500

There are many different types of permanent life insurance policies. Each type carries its own benefits. Indexed universal life policies are the newest type of permanent life. Many people are still unfamiliar with some of the advantages that these policies have to offer. Today, we will look at four benefits of owning an indexed universal life insurance policy.

We don’t have to invest in the stock market

When investing in an indexed universal life policy, the cash value portion of the contract is never actually invested in the stock market. The cash earns interest based on a crediting system that is linked to a market index.

The issuing insurance company generally uses premium payments to buy high quality bonds. They may also buy call options on the respective index to help pay the interest needed when the index does increase.

We can still take advantage of the gains in the stock market

If the respective index goes up, the policy’s cash value account is credited a portion of the market’s increase. If the index drops or does nothing at all, the cash value stays the same.

A common cap on the interest crediting is 10%. So, if the linked index goes up 9%, the account will get the full 9% credit. If the index rises 15%, the account will be credited at the 10% cap. On the downside, if the index falls by any percentage, the account will not be credited.

We have protection on the downside

We know that the market has historically performed well. But it can be hard to stomach the significant losses. This type of product allows us to still participate in the ups without being devastated during market crashes.

Granted, indexed universal life policies do not allow us to capture all of the market gains, but the opportunity to earn some of the gain and none of the loss can outweigh taking on all of the gains and losses.

For a policyowner who may decide to withdraw or borrow the cash value in the policy, protection on the downside can be important. A market downturn just before needing access to the cash can severely impact the amount of money that will be available.

We can earn moderate returns

While some investors are overly ambitious in their quest for huge returns, we also know that slow and steady can win the race. If we invest early enough to have time on our side and can set aside enough money from our budgets, the return does not have to be spectacular.

There may be a cap on the upside, but the long term potential of compound interest on even a 6% annual return can make this a worthwhile endeavor.

Indexed universal life insurance policies may not work for everyone, but they do work for many individuals who need life insurance. We should carefully evaluate the terms of any life insurance policy we might consider to make sure that it meets the needs that we intended to cover.

How to Choose a Permanent Life Insurance Policy

nospam@example.com (The Christian Money Coach) — Fri, 12 Mar 2010 16:21:00 -0600

We purchase life insurance based on specific needs. Some needs can be covered by term, but other needs can last a lifetime and require that we purchase a permanent policy. With so many different types of policies to choose from, the decision can be overwhelming. Reviewing the various types of permanent policies will help us to be in a better position to choose a policy that best meets the needs of our families.

Whole life insurance

When purchasing a whole life insurance policy, our premium payments are fixed. The payment will not change as long as the policy is in force. We must continue to make the payments as agreed for the policy to stay active.

The policy will pay the death benefit or face amount at the death of the insured, or at age 100, whichever occurs first.

As with all permanent policies, there is a cash value. It grows at a predetermined fixed interest rate, which is usually about 3%.

Universal life insurance

Similar to whole life, the premium payments are fixed. However, premium payments are flexible. This means that if there is enough cash in the cash value portion of the policy to cover our minimum payment, we can skip a payment.

These policies do not mature at age 100, but they will pay the death benefit upon the death of the insured.

Universal life policies also have a fixed interest rate for the cash value. The rate for most policies is also about 3%.

Variable life insurance

Variable life insurance is similar to whole life insurance in terms of premiums. There are fixed premium payments.

However, this type of policy allows us to choose among a variety of investment choices for the cash value portion of the policy. The insurance company will usually offer a guaranteed rate, as well as mutual funds. Since we are able to choose how to invest, the cash value is not guaranteed. The growth will depend on the selections we make.

While the cash value is not guaranteed, there will usually be a minimum guaranteed death benefit that is paid out to the beneficiaries at the time of the insured’s death.

Variable universal life insurance

A variable universal life policy combines the flexibility of universal life with the choice of variable life.

This policy offers flexible premium payments. Payments can be skipped and pulled from the cash value if it is large enough to cover the minimum payment required.

There are also investment options available for the cash value. However, because of both the flexibility of the payments and the wide range of investment options, there is no guaranteed cash value or death benefit. This type of policy requires the most care and attention to ensure that it does not lapse.

Indexed universal life insurance

Some policyholders want flexibility but are unsure of how to invest the cash value, especially in a volatile economy. An indexed universal life policy allows for flexible payments.

While we are unable to choose the investment vehicles used for the cash value, this policy will tie the growth of the cash account to a stock market index. If the index increases, the insurance company will adjust the account value up. If the index decreases or stays flat, the account value will not change.

Having the ability to take advantage of all of the ups and none of the downs sounds too good to be true, but there is a catch. The insurance company will put a cap on the amount of the gains that we are able to capture. So, if the market goes up 23%, as it did in 2009, and there is a 10% cap on the policy, the account value will only increase by 10%.

Each of the types of policies has their advantages and disadvantages. It is up to the purchaser to decide which policy best fits the needs that are to be covered.

What Type of Life Insurance Should I Get?

nospam@example.com (The Christian Money Coach) — Wed, 10 Mar 2010 16:19:00 -0600

We know that life insurance is an important purchase for adults. It can be beneficial for children, as well. However, deciding what kind of life insurance to buy can be challenging. There are so many different types of policies available. We need to understand the advantages of each type so that we can make the best choice for our families.

Term insurance

A term policy will only provide a death benefit for a specific number of years. Most policies range from 5 years to 30 years. Since these policies do not last a lifetime, they are often less expensive than permanent policies. However, if the insured does not die during the term covered, there is no payout of a death benefit and usually no return of premium payments.

Many of these policies will lock in the premium payment amount for the duration of the policy. This ensures that we know how much our premium payment is at each due date. The premium payments can be made monthly, quarterly, biannually, or annually.

Term policies can be renewed at the end of the term, but the premium payment will be reset based on the insured’s new age. It is very possible to expect a large increase in the payment.

Permanent insurance

A permanent policy will provide a death benefit for the lifetime of the insured – as long as the policy does not lapse. Since permanent insurance has the potential to last much longer than a term policy, it is more expensive.

The premium payments for permanent insurance are fixed at the time the policy is purchased. As the insured ages, the premium payments will not increase.

One feature that makes a permanent policy different from its term counterpart is that there is a cash value feature. As premiums are paid, a portion is used to pay the cost of insurance, and the remainder is deposited into a cash account. The funds will earn interest and build over time. The policy owner is able to withdraw or borrow from this account.

Purchase based on the need

The best way to determine the type of insurance to purchase is to buy based on the need. Use term insurance to cover needs that have a shorter life span. Use permanent insurance to cover needs that are not expected to go away.

For example, we don’t plan to work forever. Our children will leave the house at some point, and we will no longer have to financially provide for them. So, the need to replace our income and support our children is best covered with term insurance.

Another example is covering a mortgage. If the policy is being purchased to pay off a 30-year mortgage in the event of an untimely death, the policy should be a 30-year term.

However, final expenses and gifts to family or charity don’t have an end date during our lifetime. These needs can be covered with a permanent policy.

If we carefully analyze the reasons for purchasing our life insurance, we have a better chance of being fully covered at a more reasonable cost.

Do My Children Need Life Insurance? – 5 Reasons to Consider Getting It

nospam@example.com (The Christian Money Coach) — Fri, 05 Mar 2010 19:29:00 -0600

While we understand the importance of adults having life insurance at each stage of their lives, there is much debate about whether children should have life insurance. There are some definite advantages to getting life insurance coverage for children, but each family must assess their own situations individually to see if it makes sense for their households. We will look at five reasons to consider life insurance coverage for our children.

Rates are lower

Since life insurance premiums are calculated based on the age of the insured, children’s policies are much more likely to be less expensive. Permanent policies are designed to “lock in” the premium payment, so that low rate will remain as long as the policy does not lapse.

Coverage can last a lifetime

As long as the monthly premiums are paid on a permanent policy, our children can keep their coverage for the duration of their lives. There will never be a need to re-evaluate their health condition unless they decide to increase the death benefit coverage amount.

Children may be easier to insure

Most children do not have the multitude of medical problems we tend to acquire in adulthood. They are less likely to have conditions that lead to rated policies, which have higher premium payments.

Children are also not likely to need the full paramedic examination that is required of adult applicants. Most insurance companies will issue policies strictly based on the application and the medical record. Fewer medical problems can mean a less expensive premium payment.

Accumulate cash value

Premiums paid to permanent life insurance policies go into two directions. One portion pays for the cost of the insurance, and the remainder goes into a cash bucket. Depending on the type of policy, this cash value will grow with either a fixed or variable interest rate. Over time, it is possible to accumulate a sizable amount of cash in the policy.

This cash can be withdrawn or borrowed against for any reason. Depending on when the policy is purchased and the amount of money paid in over time, a child may be able to use the money for any reason, including to help purchase a car or a home, or to help pay off college debt. Left long enough, it could help supplement their retirement income needs.

Cover final expenses

While it is a parent’s nightmare to outlive a child, it is also important to remember that final expenses can be expensive. If a household does not have an emergency fund to cover the expense, it is possible that the financial outlay needed to cover an unexpected death could cause a domino effect and negatively impact the household’s finances overall. If there are other children in the home, they, too, could be harmed by the lack of financial preparation.

A life insurance policy can be a great gift for a child. There are many benefits to purchasing a policy early in a child’s life. With proper planning, it can be a tool that works for them throughout the duration of their lives.