Life Insurance Process

Life Insurance Process:


Life insurance is a very important part of financial planning and many people neglect this aspect of their planning because they just don’t want to think about their own mortality.  However, most people love their family members, that this insurance protects, and should realize that their uncomfortable feelings shouldn’t stop them from taking the appropriate steps to protect them.

While we do not sell insurance, because we are a “Fee Only” firm, we do help our full-service clients to determine the appropriate amount of insurance and where they should purchase their protection.  Firms that we refer to (that sell loaded products) must donate 25-50% of the commission due to a charity of our choice.


Why Life Insurance (LI) is important:

Life insurance is a very important part of financial planning and as such has been around for thousands of years.  When you break it down to basics, LI is only asking someone else to take a risk for us that we are unable or unwilling to take.  For the risk that the insurer takes, spread out among many insureds, they are paid a premium.  This is very important because the majority of people just do not have the savings to deal with low-probability, high-cost/catastrophic events so it is necessary and desirable to remove these risks from our financial liabilities.


Who needs Life Insurance?

Generally, the highest need for LI comes from people who have others that are dependent on their income.  If something happened to the “bread-winner” it could cause significant hardship on the dependent(s) left behind.  A few examples of this include:

  1. Family with one spouse whose income far exceeds what the other could/would make if the primary income earner died prematurely.
  2. Single parent family with minor children.
  3. Family with one or more special needs children that would need ongoing assistance their entire lives (this would probably fund a trust).
  4. A business owner of a small/family business in which they are the primary “rain-maker.”

Who else can benefit from Life Insurance?

Beyond individuals that “need” LI, there are also a long list of people/entities that could benefit from LI as well:

  1. Supplemental Savings – Those that have maximized tax-preferenced retirement savings and could benefit from the tax-preferences afforded to LI.
    1. Note: Keep in mind that LI tax preferences are not as advantageous as retirement savings accounts and generally Term LI should be bought first until retirement plans are maxed out.  We mention this because there are many practitioners that like to sell permanent policies because they make more commission not because they are better for you.
  2. Estate Maximization – Estates that may be subject to estate taxes can benefit from the tax free nature of life insurance placed in trusts that are designed correctly (watch this video).
  3. Estate Equalization – If a large piece of real estate, business, farm needs to be given unequally to ensure that it survives then one solution to make the inheritance “fair” to other heirs is to buy LI to equalize how much all/each will receive.
  4. Business Succession Plans – LI can be key to making sure that a business would pass efficiently if an owner were to pass prematurely.
  5. Businesses with Key Employees – Some businesses are highly dependent on a few key employees.  LI can ensure that a business could survive the premature death of an important employee.
  6. Liquidity Needs – Sometimes the accumulation of our life savings becomes concentrated in illiquid instruments such as a business, real estate, a farm, etc. and since we generally cannot know exactly when we will pass, it can be hard to be prepared and our heirs may have to sell some/all of these assets to divide the estate or pay taxes.  In this event they may get considerably less than what these assets should be worth given the proper time and diligence.  LI can provide the liquidity to make this unnecessary and protect the value of what we’ve accumulated.

Types of Life Insurance:

There are many types and subsets of LI.  Below are a few of the major types of LI with descriptions:

  1. Term – A policy with a set duration limit on the coverage period. Once the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end. This type of insurance policy contrasts with permanent life insurance, in which duration extends until the policy owner reaches 100 years of age (i.e. death).1
  2. Whole Life (WL) – Whole life insurance refers to a policy that provides lifetime protection by paying a lump sum death benefit. Whole life policies differ from term insurance in that they have a savings component with earning accruing referred to as cash value. With this type of insurance a policy holder may take loans against the cash value which usually have a minimum guaranteed rate of interest. As with most life policies, whole life may be participating or non-participating.1
  3. Universal Life (UL) – A type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change. In addition, unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.1
  4. Indexed Universal Life (IUL) – A permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns.1
    1. Note: These policies have caps and do not usually participate in dividends, which can substantially reduce their growth versus the underlying index.
  5. Variable Universal Life (VUL) – A form of permanent life insurance, Variable life insurance provides permanent protection to the beneficiary upon the death of the policy holder. This type of insurance is generally the most expensive type of cash-value insurance because it allows you to allocate a portion of your premium dollars to a separate account comprised of various instruments and investment funds within the insurance company’s portfolio such stocks, bonds, equity funds, money market funds and bond funds. In addition, because of investment risks, variable policies are considered securities contracts and are regulated under the federal securities laws; therefore, they must be sold with a prospectus.1

1 Definition from Investopedia.

How we help our Clients:

Evaluate the Need: Through our financial planning process we will help you to identify your need or opportunity (at the Gold client level or through the purchase of a financial plan).

Recommend the Amount and Type: Through our analysis above we will help you determine how much LI you should purchase and whether you should buy term or permanent (and then what type of permanent).

Help to shop with client(s): Through our experience and industry contacts we will help you to identify which carrier will serve you best.  Remember we are the probably going to be the only person that is a fiduciary to you throughout this process so this is a very important/valuable service that we provide.

If you decide to purchase a VUL then we will help to manage: Some of these policies are no/low load (all of the ones we use) which means they do not pay commissions and thus have lower internal cost structures and no surrender penalties.  With these type of policies we will manage them for you like any other account and they will be eligible for your household discount.

Variable Universal Life Example:

Traditional Loaded VUL:

  • Mortality, Expense, and & Other Charges (M&E&O) – 0.85%
  • Variable Investment Options – ~1.2%
  • Cost of Insurance (COI) – Generally these should be very close depending on the mortality table used, however, there can be fluctuation and it can be difficult to ascertain.  So we generally rely on illustrations to show us the practical differences in policies.  In this example we will treat this cost as if they were identical.
  • Total On-going Cost = ~2.05%
    • You will have a 10-15yr surrender charge.
    • Some of these policies have significant premium charges.
    • Many of these policies will not be serviced because the advisor/agent that sells them gets no on-going compensation (they are commission driven and the agent is incentivized to sell new policies rather than service the old).

VUL with Ameritas with rF: 

  • Mortality, Expense, and & Other Charges (M&E&O) – 0.7% (reduces to 0.1% after 15yrs).
  • Variable Investment Options – ~0.75%
  • rF Advisory Fee – ~0.7%
  • Cost of Insurance (COI) – Equivalent as explained above.
  • Total On-going Cost = ~2.15%/yr.
    • No surrender charges.
    • We are a fiduciary to you.
    • We have discretion to continually manage your investments.

VUL with TIAA CREF with rF: 

  • Mortality, Expense, and & Other Charges (M&E&O) – ~0.65% (0.35%-0.95% based on account balance).
  • Variable Investment Options – ~0.75%
  • rF Advisory Fee – ~0.7%
  • Cost of Insurance (COI) – Equivalent as explained above.
  • Total On-going Cost = ~2.10%/yr.
    • No surrender charges.
    • We are a fiduciary to you.
    • We have discretion to continually manage your investments.

*Note: There are lots of other charges that insurance companies can load into these policies which is why we mention that illustrations are the best way to compare policies, per the individuals’ goal(s).  We tried to make a good comparison based on policies that do not front load as much to make a good comparison, but beware of insurers/agents that only compare a few variables without showing the total cost/benefit from the prospectus and illustration.

You may utilize our LI services by becoming a Silver or Gold client or by purchasing a Financial Plan: