Term life insurance may not compare to traditional options

At the start of the new year Americans often look to the future. They spend time thinking about their yearly finances, their income and how they can invest and grow their assets over the next 12 months.

As a result, many consumers will want to compare life insurance quotes and review policies to help protect their families and loved ones in the event of an unfortunate event.

However, those who seek out new policies may want to avoid term life insurance because it can provide a number of drawbacks when compared to traditional coverage options.

In an interview with WalletPop, insurance agent Alan Canton said taking out this policy can be the equivalent of renting a home, and wasting what could have been built up to be a valuable asset. In addition, he says that while it can look like a more inexpensive option to those who compare insurance rates, it excludes some features that could help consumers in the long run.

Canton says the fact that money spent on a term life policy does not go into a forced savings account is a major drawback to the policy. These savings accounts can be beneficial as they earn interest and allow consumers to borrow against accumulated funds, typically at low interest rates, when they fall on hard times.

Additionally, he says when term life coverage runs out, it must be renewed, often at a much higher cost due to factors such as the insured's increasing age and declining health, the news source says.

Canton also says as much as 92 percent of consumers who invest in term life coverage never see any benefits. This is because many let these policies lapse long before they die. As a result, this coverage is more affordable for consumers, because insurers know they do not have to make payouts on these policies, according to the news source.

By comparison, those who invest in whole life insurance can be assured that their families will be well taken care of no matter what happens in the future, as these funds typically don't expire.

However, individuals who purchase a traditional type of coverage also pay much higher rates, which may be out of the price range for many consumers. As a result, these consumers may want to choose a term life policy over leaving their family unprotected.

Consumers who want to invest in life insurance this year can benefit from taking the time to compare quotes from different sources, and choosing the one that best fits both their short-term and long-term financial plans.

Financially Speaking: Know rules on borrowing from a life insurance policy

One of the basic components of a comprehensive personal financial plan is an analysis of risk exposure.

For most families, the premature death of a breadwinner, particularly when children are young, can be financially devastating. In most of these types of situations, the purchase of term life insurance will provide the largest amount of death protection at the most efficient cost, but sometimes more permanent forms of insurance coverage are more appropriate.

Many types of insurance policies are designed to accumulate cash value over time. The insurance industry has done an excellent job marketing the advantages of such policies, some of which include the ability to take tax-advantaged withdrawals (under current tax law, at least) and the ability to borrow against their cash value. I'll reserve the controversial topic of insurance as a retirement planning vehicle for another column. Today, I'd like to concentrate on the features and pitfalls of policy loans.

As access to credit has become a greater challenge, life insurance policy loans have become an attractive alternative to cashing in policies as a source of funds for people who may be unable to obtain money from other sources. Credit checks are not required. The loan interest rates of many older policies can be quite attractive compared to credit card cash advances or other types of loans. Most policy loans do not require repayment, a feature that can be helpful to a borrower who has serious cash flow difficulties. Some policy loans are structured to use the cash value as collateral for the loan instead of being withdrawn. In these cases, the entire cash value balance continues to generate dividends, earnings, in the form of interest for whole life and universal life policies, or appreciation potential for variable policies.

Potential pitfalls of policy loans are numerous, however:

Loan balances, plus accrued interest, are subtracted from the policy's death benefit. You might jeopardize the financial security of your family if you die prematurely without replacing the diminished death benefit with alternative coverage.

If you cancel a policy that has an outstanding loan balance, you'll receive its cash or surrender value, less the balance on the loan and accrued unpaid interest.

If you don't make an interest or principal payment, the unpaid interest will be added to the loan principal, which will increase the amount of interest that will accrue the following year.

If you never make any interest or principal payments, your loan balance will grow at a pace that is likely to erode your cash value.

If your loan balance exceeds your cash value, the insurance company will ask you to make a premium payment to cover the difference to keep the policy in force. If you cannot do so, the policy may lapse, which will result in the loss of the entire death benefit.

Depending upon your age and health status, you might not be able to replace the coverage.

In addition to the risk of losing your life insurance protection, you might also be hit with a tax bill if you cancel a policy whose loan balance exceeds the cumulative amount you paid into the policy. The difference between the loan balance and your cost basis in the policy may be considered taxable income.

If you are considering a policy loan, proceed cautiously. Be sure you understand all of the requirements and potential costs and risks to avoid inadvertently damaging your family's financial security.

Elaine Morgillo is a certified financial planner and president of Morgillo Financial Management Inc. She can be reached at emorgillo@morgillofinancial.com.

Guardian Life Exits Long-Term Care Insurance Market

The Guardian Life Insurance Company of America announced Friday that it would be exiting the long-term care insurance (LTCI) market as of the end of 2011. Although no new policies will be sold after the end of the year, all existing policies will remain in force, and are guaranteed renewable as long as premiums are paid.

Gordon Dinsmore, president of Berkshire Life Insurance Company of America, the Guardian subsidiary that underwrites and issues its LTC policies, said in an interview that the company had not been in the business of LTC for a very long time—it entered the LTCI market about five years ago—and after a strategic review in 2010 decided that it would be better to focus on growing its life and disability insurance.

The coverage had been added primarily for career agents to have a LTC product for their client base, he added, not as an attempt to capture market share, and it amounted to less than 1% of the company's business as a percentage of premiums, with 8,000-9,000 policies in force.

"I know our policyholders are in good shape," Dinsmore said. "We're a highly rated company and we're very stable. ... We've announced no plans for any rate increases, as other companies have. We're very committed to having good service and honoring all claims."

John Ryan, of Ryan Insurance Strategy Consultants in Greenwood Village, Colo., said "there's not much to tell" about Guardian's exit from the LTC business, since it was such a small part of the company's business. However, Ryan added that the LTC business itself might "whittle down to 10 companies that write 99% of the business, maybe five companies." Exiting the business was "probably a great move" for Guardian, he added; "if Guardian Berkshire feels like they need to do this, they don't make mistakes. It's a solid company for a reason."

Ryan added the government's involvement through the CLASS Act probably is "spooking companies. How much money do they want to pour into this to get overrun by some kind of government program?" he asks. "Companies are choosing what they do best and what they're most sure of going forward."