Posted by Susan Shoptaugh on Apr 30, 2014 i

Misconceptions about Life Insurance

There are a lot of misconceptions about life insurance; as an agent you need to be able to help clients decipher between fact and fiction. One way to begin a discussion about life insurance is to arm yourself with valuable statistics. For example, 70% of American households with children 18 and younger would struggle meeting everyday living expenses in a matter of months if the primary wage earner passed away. And 40% of households in that same category would immediately have trouble meeting daily expenses.

A study published by the Federal Reserve Bank of New York reveals that 75% of respondents have credit card debt; among singles, there is a 20 percentage point discrepancy between those who report that they have credit card debt and those who actually owe. Among couples, this discrepancy increases to 30 percentage points. So, when discussing life insurance coverage, it is important to have them consider any debt they may have such as a car loan, mortgage, unpaid credit cards or student loans.

Here are some common misconceptions and the facts to help you overcome these obstacles to selling.

Life insurance is too expensive.

According to a study conducted by LIMRA, 85% of participants said they thought life insurance was too expensive. However, many of these participants overestimate the cost by hundreds of dollars. If your clients are coming into a conversation about life insurance with this preconceived notion, they may be unwilling to hear the benefits a policy could offer.

Start off by letting them know that over the past 16 years, the cost of simple term insurance has gone down by more than 60%, making it more affordable than they may have thought.

Life insurance is only necessary for breadwinners. 

This common misconception is relatively easy to understand; it’s reasonable to correlate life insurance with the loss of salary. 

It’s valuable to point out the many ways a non-working spouse can contribute to the overall financial well-being of a family. The stay-at-home spouse is often responsible for valuable services that would otherwise cost the family extra money, such as housekeeping or childcare. According to a census report released last year, the average weekly cost of childcare is up to $143 per child. Life insurance for a spouse can help cover those newly needed expenses should the unthinkable happen.

I am young (and invincible). I don’t need life insurance.

This can be a frustrating myth to debunk because realistically none of us know when our number will come up. Like all insurance, life insurance is bought before you need it.

But, often trying to convince someone that they’re not invincible is a fruitless task. Life insurance rates are directly correlated with the insured’s age, therefore for most coverage options the longer you wait the higher your rate will be. Helping them see the long-term financial benefits may clarify the value of purchasing life insurance coverage today.

Once you have a policy, you don’t have to worry about it anymore.

There is currently more than $1 billion in life insurance benefits unclaimed.This is largely due to the fact that many beneficiaries are unaware of the policies or how to collect. 

Policy owners need to review their policies periodically. Life has a funny way of changing, and your clients’ coverage should change with it. It’s best to revisit policies annually to ensure that it is up-to-date.

70% of American participants failed a recent life insurance IQ test conducted by LIMRA, showing that most don’t understand the basics of life insurance.

There are two basic types of life insurance beneficiaries, a primary beneficiary and a contingent beneficiary.   Individuals frequently designate their spouses and children as their life insurance beneficiaries, but estates, trusts, businesses and charities can be named as well.

A lot may change between the time a policyholder designates a beneficiary and the policyholder’s death.  Their beneficiaries may relocate, marry and change names, or they may even pass away prior to the policyholder.  These occurrences also contribute to the amount of unclaimed life insurance policy proceeds.

Your trusted adviser and industry expert, should have communicated the importance and value of having life insurance.  Now you they should play a significant role in helping their clients ensure their families claim their life insurance policy proceeds.  Their relationships with policyholders lets them help the families ensure their beneficiaries do not leave any life insurance policy proceeds unclaimed.  Let’s take a look at a few tips.

1. When you identify your beneficiary make sure you include his or her full name, relationship, social security number and date of birth.
2. Identify a secondary beneficiary just in case your primary beneficiary passes before you do.
3. Let your beneficiary know that they are your life insurance policy beneficiary.  If your beneficiary is a child, make sure that you share this information with the individual who will be the executor of your will.
4. Inform your beneficiary of where your policy information is located.  This will keep those you leave behind from having to reach out to former employers or searching bills and banking information to determine if a policy ever existed.
5. Review your policies every couple of years to ensure that your beneficiary information is current.  Let your agent know that changes need to be made, and take the required steps to complete the changes.

Insurance products businesses can offer to employees to enrich their lives

LKC has diversified our portfolio of products and have included  Business 2 Business (B2B) products. Below are the most prevalent in addition to Term Life. We are offing this to businesses in Wisconsin only at the present time. Some of these products also have a Return of Premium capability which allows the premiums to be returned to the insured after a predetermined period of time (term).

These are also available to individuals.

Disability Income - Simplified DI - Individual DI - Graded Benefit - Business Overhead Expense

Critical Illness - Simplified CI - Fully Underwritten CI

Accident

Whole Life - Simplified Portfolio - Fully underwritten - Single Premium

The following are the Insurers we work with 

A Look At Single-Premium Life Insurance

By George D. Lambert on August 17, 2010

The main benefit of life insurance is to leverage funds to create an estate that can provide for survivors or to leave something to charity. Single-premium life (SPL) is a type of life insurance in which a lump sum of money is paid into the policy in return for a death benefit that is guaranteed to remain paid-up until you die. Here we look at some of the different versions of SPL available, which offer a wide range of investment options and withdrawal provisions.With single-premium life insurance, the cash invested builds up quickly because the policy is fully funded. The size of the death benefit depends on the amount invested and the age and health of the insured. From the insurance company's perspective, a younger person is calculated to have a longer remaining life expectancy, giving the funds paid in the premium more time to grow before the death benefit is expected to be paid out. And, naturally, the larger the amount of capital you initially contribute to your policy, the greater your death benefit will be as well. For example, a 60-year-old female might use a $25,000 single premium to provide a $50,000 income-tax free death benefit to her beneficiaries, whereas a 50-year-old male's $100,000 single premium might give a $400,000 death benefit. (For related reading, check out Living And Death Benefit Riders: How Do They Work?)Living Benefits

While the death benefits of insurance policies provide you with an efficient means to provide for your dependents, you also need to consider unexpected expenses that can crop up in old age. You probably understand the importance of long-term care insurance, as long-term care can often turn out to be an expensive predicament. But suppose you have put off buying this important coverage because you can't bring yourself to pay the annual premiums? SPLs can offer a solution.

Some SPL policies will give you tax-free access to the death benefit to pay for long-term care expenses. This feature can help protect your other assets from the potentially overwhelming cost of long-term care. The death benefit remaining in the policy when you die will pass income-tax free to your beneficiaries. And if you don't use any of it, the money will go to your loved ones just as you had originally planned. Therefore, your SPL plan allows you to cover your long-term care needs as required, but still leaves the maximum possible amount of your death benefit intact for your dependents.

A number of SPL plans also include a feature that will let you withdraw part of the death benefit if you are diagnosed with a terminal illness and have a life expectancy of 12 months or less. This flexibility can make the decision to sink away a large single-premium payment into a SPL policy less daunting for some people, and it is important to consider if you have limited financial assets outside of your SPL.

Investment Options 

There are two popular single-premium policies that offer different investment options.
1. Single-premium whole life pays a fixed interest rate based on the insurance company's investment experience and current economic conditions. 

2. Single-premium variable life allows policy owners to select from a menu of professionally managed stock, bond and money market sub accounts, as well as a fixed account. 

Your choice should depend on your ability to handle market changes, the makeup of the other assets in your portfolio, and how you plan to use the policy's cash value. With a fixed interest rate, you can depend on the safety and stability of the constant growth rate in your policy, but you miss out on potential gains if the financial markets have a good run. The minimum death benefit is established when you purchase the policy, but if the policy's account value grows beyond a certain amount, then the death benefit can go up as well. 

On the other hand, if you prefer the possibility of under-performance over the certainty of a fixed interest rate, a variable life insurance policy with subaccounts invested in equities and bonds may make more sense for you. 

Withdrawal Options 

SPL policies give you control over your investment, allowing access to the cash value for emergencies, retirement or other opportunities. One way to tap into the cash in the policy is with a loan. 

You can generally take a loan equal to 90% of the policy's cash surrender value. This will, of course, reduce the policy's cash surrender value and death benefit, but you have the option to repay the loan and re-establish the benefit. 

Companies will also let you withdraw funds and deduct the withdrawal from the policy's cash surrender value. They usually have a minimum amount that you can remove. The amount you can take out each year without paying a surrender charge might be 10% of the premium paid in or 100% of the policy's gains, whichever is greater. 

However, an extra cost can arise from withdrawals or loans from your SPL, since SPL policies are usually considered modified endowment contracts. This means there is a 10% IRS penalty on all gains withdrawn or borrowed before age 59.5. You will also have to pay income tax on those profits. Plus if you cash in the policy, the insurance company might hit you with a surrender charge. 

Tax Treatment 

Your investments will grow tax-deferred inside the policy. As noted above, you will only pay tax on the earnings if you withdraw or borrow from the policy. Your named beneficiaries, however, will receive the benefits income-tax free and without the time delay and expense of probate. This is an important benefit, as you do not want the effort and expense you devoted to providing death benefits for your dependents to be muted by undue time delays and probate costs. 

Drawbacks 

The minimum amount you can invest in a SPL policy is generally $5,000, which can make it cost-prohibitive for many investors. Additions are not additions allowed. You should only consider using funds that you had intended to pass on to the next generation or to help fund a long-term goal, such as retirement. Also, you will have to meet the insurance company's medical underwriting standards to qualify for SPL. 

Conclusion 

If you have a lump sum of cash that you don't need right now and you want guaranteed life insurance protection for your family or your favorite charity, single-premium life insurance may be the ideal product for you. It is also an excellent way to begin a child's life insurance program. 

For instance, you could specify a child or grandchild as the insured and keep the policy in your name. That way you would still have control over the cash value. Or you could make him or her owner as a way to remove the policy from your estate. However you choose to use a single-premium life insurance policy, remember to consider your personal financial situation and other retirement vehicles already in use so you can select and shape your policy to best match your needs.

Could Whole Life Insurance Be Your Fixed Income Allocation?

Now we need to stretch our imaginations here and say what if there was an investment vehicle that had the following traits:

-A guaranteed interest rate?

-A variable dividend that got added to this guarantee and has been paid by some companies for over 100 continuous years? (Again, this is not constantly growing, but paid every year)

-Can access 90% of every dollar you put in at any time with a simple piece of paper?

-When structured properly, can be withdrawn tax free with no intention of ever paying it back and with no penalty?

-Protected from creditors and lawsuits (true in all but 2 states)?

-And finally, has a death benefit kicker?

There are different types of life insurance to purchase. Term insurance is exactly that - you are purchasing for a specified number of years (a term). Once that term is over, you are either alive and nothing got paid out, or you were one of the unlucky 1% who did die and your family received a death benefit. And that is the statistic: For every 100 term premiums an insurance company receives, it only pays out, on average, for 1 individual. It is cheap premiums (a healthy male in his 30s can get $1 million in coverage for about $700 for the YEAR) and is the bread and butter for life insurance companies. It is ESSENTIAL if you have a young family to have life insurance. If this is all you can afford to do, do this. It's better than not having any and your family having nothing if you pass.

The other broad category is permanent life insurance, which includes whole life and universal life. 

Can a whole life policy be structured so that it has a minimal death benefit but we can stick a lot of cash into it to maximize the cash value and use the money while we are alive? The answer is yes. When properly structured, a whole life policy done in a "banking" way focuses less on the death benefit and gives you the opportunity to get to the cash within that policy. 

Does it drive you crazy when you hear some CEO that was fired get a $15 million severance package? Where did the money come from? It was most likely from an insurance policy. The company goes to NY Life, in this example, and says we need an insurance policy on our CEO and we only want to pay the premium in full just once, and we want the death benefit to be $50 million. NY Life responds and says to the company that if they want $50 million dollars in death benefit, it will cost them a one-time fee of $18 million, and the company will have immediate access to the cash value of $15 million within the policy. This is known as a single premium policy. If the company does not need that money, it is earning interest on that cash value along with a possible dividend that compounds the cash value over time. These "single premium" policies are known as Paid-Up Additional riders for the policy that we purchase for ourselves (PUA for short).

There is one other key concept to understand. We just can't stuff this policy with excessive cash without the IRS starting to sniff around. There is a 7 pay-test to make sure this insurance policy remains as an insurance policy and does not turn into a Modified Endowment Contract, aka a MEC. If the policy becomes an MEC, you have lost all the flexibility and benefits this insurance policy can provide and have essentially created an annuity.

So think of a see-saw. You have this single premium whole life insurance policy on one side with all this cash value built in, and on the other side of the see saw is a term life insurance policy with $0 cash value (remember: if you pay in full for the term and you don't die, you get nothing). The teeter point is the MEC. We start on the term side, but get as close to that teeter point as possible WITHOUT crossing over.

How should one of these policies be structured to benefit you? Well let's use an example of a person in their early 30s. She makes $100,000/year, so the maximum amount of life insurance she can purchase is up to 25x her annual salary, or $2.5 million in death benefit. This should be structured to maximize the Cash Value of the policy, so we want to see lots of PUAs in the policy, but there has to be a minimum amount of a traditional whole life policy to support it. As I said earlier, the PUAs are the catalyst or the turbo. You can only put so much turbo on an engine of a Kia Rio. The engine of a Corvette, however, can handle much more turbo. The minimum ratio of whole life premiums: PUAs allowed should be at least 1:3 when done in favor for you, preferably higher.

(14K premiums: 45K PUAs, or 1: 3.1), which adds another $600,000 in death benefit, giving us $2.1 million in death benefit. What does this do starting Year 1? If this was a traditional whole life policy and the premium was $60,000, you would have about $1500 in cash value. That's it. By structuring it the infinite banking way, you have access to $44,000 of cash value, or almost 75% of what you just put in. And you have a $2.1 million dollar death benefit just in case something happened to you.

You have a choice in terms of trying to grow this cash value. This is supposed to be a very conservative part of our overall assets. I will make it easy and make sure this is a dividend-paying whole life policy. You do not want to be tied to the stock market directly as one can be with universal life. Though I called this the fixed income side of my portfolio, this is NOT something you put at risk. The dividend grows by compound interest, not simple interest. This dividend will become so large over time that it can pay your whole life premium without you putting in another penny into the policy. In fact, with our policy, our goal is to maximize the amount of money we can put in for the first 7 years and then leave it alone and let the dividends pay the premium. The other interesting thing to note is with a traditional whole life policy, the death benefit remains the EXACT same value. With an IB policy, as the cash value grows, the death benefit grows as well, so your loved ones will actually have more money from the death benefit in case you passed prematurely.