Types of Life Insurance - Part 4

Retirement Annuityit was in the past. Loading the policy up front with
In a sense, this represents the opposite of lifea lump-sum premium creates what is now called a
insurance. With life insurance, the company that"modified endowment contract." Withdrawals or
insures you is risking its money against theloans from such contracts during the lifetime of
possibility that you may die before the age atthe policyholder are taxed first as ordinary income
which the actuarial tables say you will.to the extent that there is a gain, then as a
return of the policyholder's investment in the
This possibility-that you may live to retirement,contract. Additionally, unless such distributions are
and perhaps many years beyond your lifetaken after age 59 1/2, disability or annuitization, a
expectancy-is one that every planner must take10 percent penalty tax is applied.
into consideration. Life spans are increasing today.Second-to-Die Life Insurance
Life expectancies represent only an average; it isSecond to die, or survivorship, life insurance
not uncommon for a person to live to a greatoffers a low-cost way to preserve both business
age; 80, 90, 95 even. There may be twenty toassets and estates. As an estate-planning tool, it
thirty years of retirement for which income hasworks hand in glove with the unlimited estate tax
to be found. The value of the annuity income ismarital deduction. It is a single policy insuring two
that you can never outlive the payments oflives and pays off at the second death only, just
principal and interest which it provides. No matterwhen estate taxes create the need for cash.
how long you live, the payments continue; this isBecause the face value of the policy isn't paid until
something that no other form of investment canthe second death, the premiums are lower than
offer.two separate policies. After the first death, with
Single Premium Lifewhole life policies of some dividend-paying mutual
This policy contains many of the features ofinsurance companies, the dividends and cash value
term, variable, universal, and paid-up life insurance.increase and the death benefit goes up, an
For the payment of a lump sum, the policyholderadvantage to estates appreciating in value. Some
receives life insurance coverage in a greaterpolicies offer the option of combining whole life
amount than his premium. He has two investmentwith term life insurance to reduce premium costs.
options. He may elect to have the cash valueSecond-to-die universal life and variable universal
invested at a fixed return that will vary with thelife policies can also be used, providing the same
change in general interest rates. In this case thepremium flexibility as their single life counterparts.
insurance company will guarantee the principal.Whole Life with Supplemental Term Life Insurance
Alternatively, he may elect a variable investmentA hybrid policy composed of whole life and term
plan similar to those of the variable and universalinsurance can be used to create a level death
programs. The death benefit will vary according tobenefit, while keeping premium costs down.
the amount of the underlying insurance and theInsurance companies that pay dividends to
cash value at the time of death, and may bepolicyholders can use the dividends to create a
received by beneficiaries free of tax as acombination of one-year term insurance and
distribution of life insurance death proceeds.paid-up additions of whole life insurance. Each year
Since the tax law changes that took effect afterdividends are used to purchase more and more
June 21, 1988, this form of life insurance has lostwhole life, until the term insurance is gradually
some of its tax advantages. Although buildup ofreplaced, and the policy is 100 percent whole life.
the cash value from fixed returns or variableIf ongoing dividends are sufficient, the policy may
investments within the policy is still tax-deferred,reach a point in time when the policy can pay its
borrowing from the policy is no longer tax free asown premium for you.