Health Tips, Products and Free Money Making Ideas: Using Insurance Products As An Investment

An Overview of Life Insurance

With more than $9 trillion of insurance in force,

life insurance is one of the largest industries in the

United States. While each household in America carries

an average of $100,000 in life insurance, many people

have difficulty understanding what life insurance is

and how it works.

Life insurance provides financial security.

Whether providing for replacement income due to the

death of a breadwinner, meeting financial emergencies,

sending a child to college, supplementing retirement

income or paying for final expenses, people want the

ability to pay for needs that may -- or will -- arise

in the future.

Term versus permanent

There are two basic types of life insurance

products: term and permanent insurance.

Term insurance is purchased for a specific period

of time and provides benefits only if the insured

person dies during the period covered by the policy.

If the policy is purchased for one year, for example,

and the insured is alive at the end of the year, no

benefit is paid. After the term expires, the person

who purchased the policy may have the option of

renewing coverage, but it will be necessary to pay a

higher premium. As the insured grows older, premiums

will usually increase as the probability of death

increases.

There are several types of permanent insurance,

the most popular of which are universal life and

traditional whole life. Universal life, a relatively

new product, allows the policyholder a flexible premium

payment schedule and the option to change the death

benefit from time to time subject to certain

restrictions. The product also allows the insurance

company flexibility in adjusting rates at which

interest is credited to the policy values. However,

the mainstay of the industry remains traditional whole

life insurance.

Traditional whole life offers insurance protection

for the insured person's entire life at a fixed premium

payment schedule. If a person buys a $50,000 policy,

for example, that $50,000, called the "face value" of

the policy, is the amount that generally will be paid

out whenever the insured dies. As long as the

policyholder pays the required premiums, the policy

remains in effect.

Permanent life insurance also allows policyholders

to receive financial benefits while they're alive

because their insurance builds up a sum of money called

the "cash value." In fact, more life insurance

benefits are paid to people who are living than to

their beneficiaries.

Cash value and how it works

Cash value is the amount of money policyholders

would receive as a refund if they cancel their coverage

and surrender their policies to the company. The cash

value (also called the cash surrender value) continues

to grow as long as the policyholders pay the premiums.

A policy's cash value is generally a result of the

payment of "level premiums" throughout the payment

period of the policy. Since mortality rates increase

as people grow older, the actual cost of insurance also

increases. If premiums were changed to match the cost

of insurance each year, the result would be

progressively higher premiums as people grew older. To

avoid this dilemma, premiums are "leveled" which

results in premiums being collected in the early years

of a policy that are higher than necessary to pay

current benefits.

The "excess" premium paid in the early years of

the policy is held in a reserve which, together with

accumulated interest and the payment of future level

premiums, assures that sufficient funds will be

accumulated to cover the increasing risk of death as

the insured grows older.

The policyholders are entitled to their portion of

this reserve if they should decide to cancel their

insurance protection by surrendering the policy. This

portion of their reserve is the cash value at any given

time.

Policyholders often borrow from the cash value of

their life insurance policies. During the Great

Depression of the 1930s, for example, many people used

the cash value of their policies to buy food, pay taxes

and keep their farm or home from foreclosure. Today,

people can use their cash value to pay tuition, make a

major purchase, or provide for an unexpected emergency.

Whatever the reason for borrowing from the cash

value of their policies, people should use caution. As

long as the loan is repaid, the value of the policy

rebuilds. But if the insured should die before the

loan is repaid in full, the outstanding loan amount is

subtracted from the death benefit, if a person has a

policy with a death benefit of $50,000, for example,

and the policyholder dies with a $5,000 outstanding

loan balance, the actual death benefit would be

$45,000.

Group life insurance

One of the most widely known types of insurance is

group life insurance, which is really term life that is

purchased for a number or "group" of people. Group

life insurance makes up approximately 40 percent of all

life insurance now in force in the United States and is

usually offered as part of a company's or an

organization's benefit plan.

In a group policy, a number of people are insured

under a single contract, called a "master contract."

This contract is actually an agreement between the

insurance company and the group policyholder which is

either the employer or the sponsoring organization. In

most group policies, the group policyholder selects the

amount of coverage each member is to receive or can

elect to purchase.

Each insured member of the group selects his or

her own beneficiary. If an insured member leaves the

group, that person can, within a limited period of

time, convert his or her group policy to individual

coverage without presenting evidence of insurability.

Agents add value

Whether it's individual term or permanent

insurance, group insurance, or a combination, a

knowledgeable insurance agent is the best resource for

selecting the right policy. Since the mid 1800s, life

insurance agents have been helping people choose the

best plans to meet their needs.

The agent starts with a good understanding of each

customer's future objectives or "needs." After

reviewing the person's financial circumstances, such as

social security benefits, group life insurance

programs, investment plans and savings accounts, the

agent can help determine an insurance program to assist

in achieving the financial objectives for the customer

and his or her family.

Life insurance companies manage risks

To provide financial security, a life insurance

company must successfully manage risks.

The company must predict as accurately as possible

the mortality risks faced by an individual or group, so

it can determine when it will need to pay benefits and

how much those benefits will be. Then, to assure that

the funds will be available to pay all benefits, the

company must control its financial risks by safely

investing the premiums it receives and controlling its

costs.

The rate of mortality is the rate at which insured

people are expected to die. Expected mortality is

based upon a company's own experience as well as data

from published mortality tables which contain

statistics on the average lifespan of millions of

people. This information, together with other

variables such as health history, enable insurance

actuaries to predict the risk of insuring any person of

a given age and thus determine the premium, called the

"risk premium," required to assume that risk. An older

person, for example, or someone who smokes, is assumed

to be at a higher risk than a younger person or a

nonsmoker of the same age. This prediction has nothing

to do with the actual life span of any specific

individual, but does provide a fairly accurate estimate

of when someone of similar age and circumstance might

die.

The determination of total premiums paid by the

policyholder also includes provisions for operating

costs, including commissions and underwriting expenses,

profit and the investment income that insurance

companies earn from the investment of reserves.

Insurance companies invest the reserves according to

state insurance laws and regulations. These

investments may include qualified municipal, state and

federal obligations, corporate bonds, real estate, and

mortgages.

Insurance companies must always look ahead,

carefully monitoring mortality rates, investing wisely

and controlling expenses to gain the resources they

need to pay benefits to policyholders or their

beneficiaries and to earn a profit. In return for

their premiums, policyholders are assured the ability

to provide for tomorrow's needs. Instead of risk, they

find security, and brighter prospects for themselves

and their families.

Whole Life Policies

Whole Life Insurance is sometimes called

"permanent insurance" or "ordinary life" and is

designed to stay in force throughout one's lifetime.

Generally, the annual premiums (payments) for this

type of policy remain the same throughout the life of

the insured. The premiums are higher in the early

years when compared to a straight term life policy.

However, due to the buildup of the cash values during

those early years, whole life policies tend to remain

in force when the premiums for the term life policies

have become prohibitively high.

If the owner of the policy decides to stop paying

the premiums, he or she can terminate the policy and

take the built up cash values or purchase a paid-up

policy (with a reduced face amount), or purchase a term

policy of the same face amount, but for a set number of

years. The number of years would depend on the

insured's age and amount of the cash values available

at the time.

Historically, whole life insurance has provided

several remarkable tax benefits:

1. There is a tax-free build up of the cash

values attributable to favorable investment experience

of the insurance company.

2. The owner can borrow against the cash values

at relatively low interest rates and without a tax.

3. At time of death, the beneficiary collects the

proceeds free of income tax.

4. By transferring ownership of the policy to

another, the proceeds can also escape Federal Estate

Taxes.

Although tax reformers have periodically tried to

eliminate or reduce these benefits, for most whole life

contracts, they have been unable to do so.

This type of policy is very well suited for an

insurance need which does not diminish with the years,

such as the payment of the costs of Federal Estate

Taxes, probate and other administration expenses.

Universal Life Insurance

Universal Life Insurance contracts differ from

traditional Whole Life policies by separating the

"protection element," the "expense element" and the

"cash value element. The separation of these three

elements enables the insurance company to build a

higher degree of flexibility into the contract. The

owner can change the face amount or the premium, within

certain guidelines, to adjust to changes in his or her

situation.

A monthly charge for the "protection element" as

well as the "expense element" are deducted from the

account balance, allowing the balance of the premium to

be invested in the "cash value element."

Therefore, unlike traditional Whole Life policies,

complete disclosure of the internal charges against the

"cash value element" of the policy are provided to the

policyholder in the form of an annual report.

Major Benefits:

1. Policyholder has a versatile and flexible tool

to accommodate ever changing business, financial and

family circumstances.

2. Low term rates and a competitive yield on the

"cash value element" combined with tax benefits

reinforced by recent tax reform in many instances make

the Universal Life contract a viable alternative to

more conventional investment vehicles.

3. Future premiums, based on interest rates and

past premiums, may be increased, decreased, or even

skipped, without causing the policy to lapse.

4. Unlike alternative investment vehicles, the

cash value can be accessed through no-penalty,

non-taxed loans, withdrawals or partial surrenders.

Funds that have been borrowed against continue to

accrue interest, however, usually at a lower rate. The

rate charged on these borrowed funds is usually far

less than the market rate.

5. The "cash value element" accumulates on a

tax-free basis, making it a valuable alternative for

college funding or as a retirement supplement.

6. Withdrawals from the "cash value element" can

be TAX-FREE if structured properly.

Tax reform has left life insurance in an enviable

position. Tax-free accumulation and a potential

tax-free payout make life insurance a very strong

financial tool, and Universal Life provides the owner

with more flexibility and higher yields than

traditional Whole Life policies.

Variable Life Insurance

Variable Life Insurance is similar to Whole Life

in that premium payments are level and there is a

minimum guaranteed death benefit. Expense charges are

deducted from each premium and mortality charges are

deducted monthly. The policyholder selects one or more

"accounts" or "funds" to deposit the account balance

into. These can be money market funds, mutual funds,

bond funds, and others.

The death benefit and cash value of a Variable

Life policy increase and decrease based on the

performance of the funds chosen. The death benefit

however, will not drop below the initial guaranteed

amount.

Major Benefits:

1. Creative approach to protecting one's family or

business, allowing the policyholder the selection of

the investment vehicle(s).

2. Policyholder has the advantage of professional

management as well as investment diversification which

can reduce the overall risk.

3. Policyholder receives an annual report

disclosing all fees, charges and credits to the

account.

4. Cash values may be reallocated to other funds

up to five times annually, with a minimum of 10% in any

one fund. This provides a greater degree of control

over the end result to the policyholder than with Whole

Life or Universal Life.

5. Some Variable Life contracts provide an

exchange option during the first 12-24 months to a

fixed contract (Whole Life/Universal Life).

6. Cash value can be accessed through no-penalty,

non-taxed loans, withdrawals, or partial surrenders.

These loans are generally available at rates far below

the market rate.

7. Withdrawals from the cash account can be

TAX-FREE if structured properly.

Tax reform has left life insurance in an enviable

position. Tax-Free accumulation and potential tax-free

income make life insurance a very strong financial

tool, and Variable Life provides the owner with

complete discretion over investment diversification, a

feature not available with Whole Life or Universal Life

contracts.

Variable Universal Life Insurance

This type of policy contains a combination of

features found in "variable life" and in "universal

life" policies.

As with universal life contracts, the owner of the

policy can, within certain limits, change the face

amount and the amount and timing of premiums paid to

meet his or her situation.

The prominent feature from the variable life

contract is the ability for the policy owner to

determine where the funds will be invested. Typically,

he or she can choose among a number of accounts, like:

Growth stock accounts

Bond accounts

Balanced accounts

Real estate accounts

Money market accounts, etc.

The ultimate value of the account, at either death

or retirement, will depend on the type of investments

chosen, the general market conditions and the abilities

of the money managers.

Once the costs are met for insurance protection

and a portion of company expenses, the balance of the

premiums go directly into the selected investment

options where they compound on a tax-deferred basis.

As with other permanent life insurance contracts,

the owner can borrow against the cash values of the

policy. The interest rate is generally more favorable

than from a regular lending institution and need for a

credit check is not a requirement. The future death

benefit will, of course, be reduced by the amount of

the loan unless it is repaid.

The Securities and Exchange Commission requires

this type of policy to be accompanied by a prospectus.

Modified Endowment Contracts

Life insurance policies issued after June 21, 1988

may be defined as modified endowment contracts (MEC),

if the cumulative premiums paid during the first seven

years at any time exceed the total of the "net level

premiums" for the same period.

For example, assume that the net level premium for

a policy is $1,000 per year and the following payments

are made by two different policy owners:

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º º (CAN'T EXCEED)º POLICY OWNER "A" º POLICY OWNER "B" º

º º CUMULATIVE NETº ANNUAL ³CUMULATIVE º ANNUAL ³CUMULATIVE º

º YEARº LEVEL PREMIUMSº PREMIUM ³ PREMIUMS º PREMIUM ³ PREMIUMS º

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º 1 º $1,000 º $1,000 ³ $1,000 º $1,000 ³ $1,000 º

º 2 º 2,000 º 500 ³ 1,500 º 1,000 ³ 2,000 º

º 3 º 3,000 º 1,000 ³ 2,500 º 1,000 ³ 3,000 º

º 4 º 4,000 º 1,500 ³ 4,000 º 1,500 ³ 4,500 º

º 5 º 5,000 º 1,000 ³ 5,000 º 500 ³ 5,000 º

º 6 º 6,000 º 1,000 ³ 6,000 º 1,000 ³ 6,000 º

º 7 º 7,000 º 1,000 ³ 7,000 º 1,000 ³ 7,000 º

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NOTES: In the POLICY OWNER "A" example above, even though the

premium paid during the fourth year exceeds the annual net level

premium of $1,000, the cumulative premiums do not exceed four

times (for the four years) the net level premium, and, therefore,

this is not a Modified Endowment Contract.

In the POLICY OWNER "B" example above, however, the premiums

paid in the fourth year cause the cumulative premiums paid to

exceed the cumulative net level premiums allowed and thus cause

this contract to become a Modified Endowment Contract.

Taxation of modified endowment contracts:

Withdrawals from "modified endowment contracts" (including

loans) will be taxed as current income until all of the policy

earnings have been taxed. There is also a 10% penalty tax if the

owner is under age 59 1/2, unless payments are due to disability

or are annuity type payments.

Well-designed premium payment schedules can avoid the

"modified endowment contract" treatment and retain the benefits,

which are unique to the life insurance contract.

How To Buy Insurance At The Best Prices

Insurance Price Comparison Service is a specialized

organization focusing on the specific needs of astute consumers

who take an active role in their insurance planning. As a self-

directed consumer, you can save both time and money by taking

advantage of this independent resource.

Whether you are purchasing for the first time, supplementing

existing coverage, or searching for a lower-cost alternative,

they will work with you to find insurance coverage that meets

your particular objectives, avoid buying mistakes, and locate

safe insurance companies.

This service gives its customers instant quotes, proposals

and financial stability ratings from a continually-updated

database of more than 400 leading insurance companies.

Most insurance brokers and agents don't want you to know

about a system like this because they're too busy selling for

just one or two favorite companies. Using the Insurance Price

Comparison Service puts you first. It gives you the most

complete picture of the marketplace whenever you want it, before

you buy or renew an insurance policy.

Without having to spend days calling insurance agents who

are trying to sell you something, you can find out if you are

eligible to receive the lowest rates being offered by America's

leading insurance companies, HMO's and Blue Cross & Blue Shield

plans. The computerized price tracking service keeps track of

thousands of high-quality policies (and their ever-changing

prices) which are offered by America's safest companies.

Nobody likes to buy insurance. It's almost always bought

out of necessity. But you need the best factual information

before you buy, and the price tracking service makes it possible

to keep on top of changing market conditions to an extent never

before possible.

Based upon the coverages that you are looking for, their

computer will electronically scan the marketplace and pinpoint

those policies that meet or exceed your request. The qualifying

companies are then ranked and listed by lowest cost in a

complete, simple report format.

The price comparison report will show insurance company

names, policy names, latest ratings and premiums for all of the

qualifying policies. You'll have complete market knowledge about

available coverages and prices -- without having wasted any time.

You will be equipped to make insurance decisions based upon

market facts.

Price comparisons are available for individual and family

medical insurance, for term insurance for individuals, for long-

term care insurance, for medicare supplement insurance, for group

medical & group dental insurance (especially useful if you have a

small business and need to insure several employees), and for

single premium deferred annuity quotes. Comparisons are not

available for property or automobile insurance, because these are

dependent upon neighborhood pricing and there is no national

calculation of the rates.

For more information on the service, send a long, stamped

addressed envelope to Insurance Price Comparison Service, P. O.

Box 540, Upper Marlboro MD 20772.

How To Buy Life Insurance in One Shot

There are essentially two ways to buy cash value life

insurance. The most common method is to pay premiums over a

period of time. But there's a different route you may decide to

take: you may purchase the same amount of life insurance

protection you are able to receive with level payments by making

a one-time payment.

Not surprisingly, this method is often called "single-

premium life insurance."

There are several reasons why you may consider single-

premium life insurance as an alternative to regular premium

payments.

1. You receive instant cash value in the policy.

2. You may be able to acquire the life insurance coverage at

a discount.

3. Single-premium insurance may be used for sophisticated

estate planning techniques (for example, to maximize wealth for

beneficiaries with a minimum of estate tax erosion).

Of course, single-premium life insurance can also provide

many of the same benefits available to policy holders who make

regular premium payments on a cash value policy. For example:

* The policy guarantees a substantial death benefit for your

family.

* The cash value grows without any current tax erosion.

* There is no income tax when the beneficiaries receive the

life insurance proceeds.

* With certain limitations, you may be able to borrow

against the cash value of the policy.

Of course, single-premium insurance is not for everyone.

Whether or not it makes sense for you may depend upon your

financial objectives (for example, college savings for a child).

In some cases, you may want to invest in a tax-deferred annuity

instead. Be sure to get professional guidance in this area.

Borrowing Against Cash Value Insurance

Zero Net Cost Loans

One of the benefits of life insurance policies which build

cash values is the ability to borrow against these funds.

The loan is actually made from the general funds of the

insurance company with the policy cash values used as collateral

assuring that the loan will be repaid.

Some polices permit the owner of the policy to borrow

against his or her policy at an interest rate which is equal to

the amount which the company is crediting on his or her cash

values.

If a policy is being used as a supplemental retirement plan,

zero net cost loans can make a significant difference in the

amount that can be borrowed from a policy, creating TAX-FREE

INCOME during retirement years.

For example, if at retirement age, a policy has $500,000 of

cash value and that cash would generate a TAX-FREE annual income

of $47,000 the chart below illustrates the effect of increasing

the interest rate charged by the insurance company on the loan.

It can have a dramatic effect on either the percentage of income

lost over the same time period or the number of years the fund

would last were the payments to stay level.

In the above example, increasing from a "Zero Net" to a "1%

Net" cost of borrowing, the effect could be looked at two ways.

Either the $47,000 annual income for 20 years would be reduced by

9% to $42,770 OR... the $47,000 annual income would only last 16

years. The ultimate total cost of this "extra spread" would be

$47,000 X 4 yrs or $188,000.

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º INTEREST ³ INTEREST ³ PERCENT LOST ³ YEARS OF LEVEL º

º CREDITED ON ³ CHARGED ON ³ AS LOAN RATE ³ INCOME AT VARIOUS º

º LOANED FUNDS ³ LOANED FUNDS ³ INCREASES ³ NET INTEREST RATES º

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º 4.0% ³ 4.0% ³ 0.0% ³ 20 º

º 4.0% ³ 4.5% ³ 5.5% ³ 18 º

º 4.0% ³ 5.0% ³ 9.0% ³ 16 º

º 4.0% ³ 5.5% ³ 13.3% ³ 15 º

º 4.0% ³ 6.0% ³ 17.4% ³ 14 º

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NOTE: Interest rates vary from one insurance company to another

and consideration should be given to these factors.

Low Interest Loans

Some polices permit the owner of the policy to borrow

against his or her policy at an interest rate which is only

slightly higher than the amount which the company is crediting on

his or her cash values.

If a policy is being used as a supplemental retirement plan,

low net cost loans can make a significant difference in the

amount that can be borrowed from a policy, creating TAX-FREE

INCOME during retirement years.

For example, if at retirement age, a policy has $500,000 of

cash value and that cash would generate a TAX-FREE annual income

of $44,000, the chart below illustrates the effect of increasing

the interest rate charged by the insurance company on the loan.

It can have a dramatic effect on either the percentage of income

lost over the same time period or the number of years the fund

would last were the payments to stay level.

In the above example, increasing from a ".5% Net" to a "1.5%

Net" cost of borrowing, the effect could be looked at two ways.

Either the $44,000 annual income for 20 years would be reduced by

9% to $40,040 OR... the $44,000 annual income would only last 16

years. The ultimate total cost of this "extra spread" would be

$44,000 X 4 yrs or $176,000.