A viable alternative to Company Health Insurance Benefits

In most instances, an individual applying for a position in a company reviews the health insurance benefits the company offers. Good healthcare benefits can often times solidify a potential employee on a position and likewise a poor health insurance benefit program can turn a potential employee away. Assuming your employer offers a fantastic set of health care benefits there are still problems.




Assume you're employed with this company at age 30. Your in great health, things are going well and the company is thriving. After working for this company for 15 years the company has problems and either lays you off or the company goes out of business. Now your 45 years old and not in the best health. You may have had some depression issues or perhaps some back problems. You can get health insurance through COBRA but it is very expensive so eventually you would like to get off of COBRA and get a more affordable health plan. The job market isn't great so you decide to work from home on your own projects. You apply for a more affordable health insurance policy and you get declined due to your health history. This is an extreme example and your situation could be different. Maybe you leave to start your own company, maybe you leave to ake care of a family member, the point is that when you leave the company you don't take your health benefits with you, they stay with the employer. Once you lose these health benefits you will need to find and purchase health insurance and hopefully you can find a comparable policy at close to the same premium.

A solution for Employers that make Health benefits even more attractive!

A new trend in healthcare benefits companies are offering is individual health insurance policies where the premium is expensed. The employee is encouraged to find and purchase their own health insurance policy and each premium is then expensed so the employer is offering great coverage and a viable alternative to standard health insurance benefits. If you leave for any reason, you take your health insurance policy with you continuing your insurability and as long as you keep the policy in force you have very little to worry about. Sure you'll have to cover the premium but odds are it will be cheaper than COBRA and you won't have to be concerned about applying and possibly being declined.

If this interests you, ask your employer to look into it.

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Variable universal life insurance

From Wikipedia, the free encyclopedia

Variable Universal Life Insurance (often shortened to VUL) is a type of life insurance, that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in volatile investments similar to mutual funds. The 'universal' component in the name is a bit of a misnomer that is used to refer to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the IRS code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.

Variable universal life is also considered to be a type of permanent life insurance, because the death benefit will be paid if the insured dies any time up until the endowment age (typically 100) as long as there is sufficient cash value to pay the costs of insurance in the policy.

Uses

Variable universal life insurance receives special tax advantages in the United States IRS code. The cash value in life insurance is able to earn investment returns without incurring current income tax as long as it meets the definition of life insurance and the policy remains in force. The tax free investment returns could be considered to be used to pay for the costs of insurance inside the policy. See the 'Tax Benefits' section for more.

In one theory of life insurance, needs based analysis, life insurance is only needed to the extent that assets left behind by a person will not be enough to meet the income and capital needs of his or her dependents. In one form of variable universal life insurance, the cost of insurance purchased is based only on the difference between the death benefit and the cash value (defined as the net amount at risk from the perspective of the insurer). Therefore, the greater the cash value accumulation, the lesser the net amount at risk, and the less insurance that is purchased.

Another use of Variable Universal Life Insurance is among relatively wealthy persons who give money yearly to their children to put into VUL policies under the gift tax exemption. Very often persons in the United States with a net worth high enough that they will encounter the estate tax give money away to their children to protect that money being taxed. Often this is done within a VUL policy because this allows a tax deferral (for which no alternative would exist besides tuition money saved in an educational IRA or 529 plan), provides for permanent life insurance, and can usually be accessed by borrowing against the policy.

Contract Features

By allowing the contract owner to choose the investments inside the policy, the insured takes on the investment risk, and receives the greater potential return of the investments in return. If the investment returns are very poor this could lead to a policy lapsing (ceasing to exist as a valid policy). To avoid this, many insurers offer guaranteed death benefits up to a certain age as long as a given minimum premium is paid.

Premium Flexibility

VUL policies have a great deal of flexibility in choosing how much premiums to pay for a given death benefit. The minimum premium is primarily affected by the contract features offered by the insurer. To maintain a death benefit guarantee, that specified premium level must be paid every month. To keep the policy in force, typically no premium needs to be paid as long as there is enough cash value in the policy to pay that month's cost of insurance. The maximum premium amounts are heavily influenced by the IRS code for life insurance. The IRS code section 7702 sets limits for how much cash value can be allowed and how much premium can be paid (both in a given year, and over certain periods of time) for a given death benefit. The most efficient policy in terms of cash value growth would have the maximum premium paid for the minimum death benefit. Then the costs of insurance would have the minimum negative effect on the growth of the cash value. In the extreme would be a life insurance policy that had no life insurance component, and was entirely cash value. If it received favorable tax treatment as a life insurance policy it would be the perfect tax shelter, pure investment returns and no insurance cost. In fact when variable universal life policies first became available in 1986, contract owners were able to make very high investments into their policies and received extraordinary tax benefits. In order to curb this practice, but still encourage life insurance purchase, the IRS developed guidelines regarding allowed premiums for a given death benefit.

Maximum Premiums

The standard set was twofold: to define a maximum amount of cash value per death benefit and to define a maximum premium for a given death benefit. If the maximum premium is exceeded the policy no longer qualifies for all of the benefits of a life insurance contract and is instead known as a modified endowment contract or a MEC. A MEC still receives tax free investment returns, and a tax free death benefit, but withdrawals of cash value in a MEC are on a 'LIFO' basis, where earnings are withdrawn first and taxed as ordinary income. If the cash value in a contract exceeds the specified percentage of death benefit, the policy no longer qualifies as life insurance at all and all investment earnings become immediately taxable in the year the specified percentage is exceeded. In order to avoid this, contracts define the death benefit to be the higher of the original death benefit or the amount needed to meet IRS guidelines. The maximum cash value is determined to be a certain percentage of the death benefit. The percentage ranges from 30% or so for young insureds, declining to 0% for those reaching age 100.

The maximum premiums are set by the IRS guidelines such that the premiums paid within a seven year period after a qualifying event (such as purchase or death benefit increase), grown at a 6% rate, and using the maximum guaranteed costs of insurance in the policy contract, would endow the policy at age 100 (ie the cash value would equal the death benefit). More specific rules are adjusted for premiums that are not paid in equal amounts over a seven year period. The entire maximum premium (greater than the 7 year premium) can be paid in one year and no more premiums can be paid unless the death benefit is increased. Because the 7 year level guideline premium was exceeded the policy becomes a MEC.

To add more confusion the 7 year MEC premium level cannot be paid in a VUL every year for 7 years, and still avoid MEC status. The MEC premium level can only be paid in practice for about 4 years before additional premiums cannot be paid if non MEC status is desired. There is another premium designed to be the maximum premium that can be paid every year a policy is in force. This premium carries different names from different insurers, one calling it the guideline maximum premium. This is the premium that often reaches the most efficient use of the policy.

Investment Choices

The number and type of choices available is dependent on the insurer, but some policies are available with a wide variety of separate accounts, also known as sub-accounts. Some insurers offer over 50 separate accounts with investment styles from very conservative guaranteed fixed accounts, to bond funds, to equity funds to highly aggressive sector funds.

Separate accounts are organized as trusts to be managed for the benefit of the insureds, and are named because they are kept separate from the general account which is the other reserve assets of the insurer. They are treated, and in all intents and purposes are, very much like mutual funds, but have slightly different regulatory requirements.

Tax Advantages

* Tax free investment earnings while a policy is in force
* FIFO withdrawal status after 15 years
* Tax free policy loans from non-MEC policies
* The death benefit is paid income tax free if premiums are paid with after tax dollars

Taxes are the main reason those in higher tax brackets (25%+) would desire to use a VUL over any other accumulation strategy. For someone in a 35% tax bracket, the investment return on the sub-accounts may average 10%, and at say age 75 the policy's death benefit would have an internal rate of return of 8.5%. In order to get an 8.5% rate of return in an ordinary taxable account, in a 35% tax bracket, one must earn 13.1%. However, using long-term gains (e.g. hold stocks for more than a year), you would only need to have a return of 10%, which should be easily accomplishable since this is roughly the long-term return of the stock market. Another alternative is a Roth IRA, because one would get the 10% tax free. But the limits on the Roth are low, and the Roth is unavailable to those in the 35% tax bracket. These numbers assume expenses that may vary from company to company, and it is assumed that the VUL is funded with a minimum face value for the level of premium. If an individual is unable to max fund the VUL, it may easily be more preferred to use term insurance until able to convert to VUL.

The cash values would also be available to fund lifestyle or personally managed investments on a tax free basis in the form of refunds of premiums paid in and policy loans (which would be paid off on death by the death benefit.)

Risks of Variable Universal Life

* Cost of Insurance - The cost of insurance for VULs is generally more expensive than other types of life insurance policies, mostly due to the permanent nature of the product.

* Cash Outlay - The cash needed to effectively use a VUL is generally much higher than other types of insurance policies. If a policy does not have the right amount of funding, it may lapse.

* Investment Risk - Because the sub accounts in the VUL may be invested in stocks and bonds, the insured now takes on the investment risk rather than the insurance company.

* Complexity - The VUL is a complex product, and can easily be used (or sold) inappropriately because of this. Proper funding, investing, and planning are usually required in order for the VUL to work as expected.

* Fee Impact Over Time - The management fees can have a large impact on the cash value of the policy over time. These account management fees, applied to the total investment account value (unlike the insurance or policy fees, which are fixed and generally do not apply to the compounding account value) reduce the total net return on the portfolio, and can be very large compared to the identical investments held outside the VUL; often by several percent per year. These fees must be stated in every policy, although sometimes cryptically. VUL policies must be held until death to obtain the investment growth as part of the tax-free death benefit, so the fee exposure is typically measured in decades. Since an additional 2% annual fee over 36 years cuts the final portfolio value in 1/2, or a 3% extra fee over 48 years yields only 1/4 the final total portfolio value (see Rule of 72), it can be beneficial to choose to hold the exact same investment outside the Variable Universal Life policy. Ultimately these fees must be compared to the potential tax advantages of the policy to determine if the VUL is appropriate. Also, since the sales commission for VUL is often in excess of 70% of first year VUL premiums (vs. 2-5% of annual deposits for the same investment held outside the policy), sales agents may be reluctant to explore other options.

* Cannibalization - VUL is essentially annual renewable term with an investment vehicle attached. As such, the cost of insurance per unit within the policy rises yearly. At some point, the cash value/investment portion of the policy may be used to sustaining the policy. If improperly funded, the cash value may be depleted, and the insured may have to pay high premiums to keep the policy in force.

General Uses of Variable Universal Life

* Financial Protection - VULs can be used to protect a family in the case of a premature death. A VUL can be attractive for this need because it is a permanent policy, and, if funded correctly, will not lapse, unlike term insurance. This may give the insured more insurance flexibility in future years.

* Tax Advantages - Because of its tax-deferred feature, the VUL may offer an attractive tax advantage, especially to those in higher tax brackets. If highly funded (though still non-MEC), the tax advantages may even offset the cost of insurance.

* Education Planning - The cash value of a VUL can be used to help fund children's education, as long as the policy is started very early. Also, putting money into a VUL can be used to help children qualify for federal financial aid, since the federal government does not consider the cash value when calculating EFC (Expected Family Contribution).

* Retirement Planning - Because of its tax-free policy loan feature, the VUL can also be used as tax-advantaged income source in retirement, assuming retirement is not in the near future. Again, the policy must be properly funded for this strategy to work.

* Estate Planning - Those with a large estate can sometimes use a VUL as part of their estate planning strategy to reduce or avoid estate taxes.

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Universal life insurance

From Wikipedia, the free encyclopedia

Universal Life is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer where premium payments above the cost of insurance are credited to the cash value. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, which is drawn from the cash value if no premium payment is made that month. The interest credited to the account is determined by the insurer; often it is pegged to a financial index. Because only the amount of interest credited and not the cash value itself varies, UL policies offer a stable investment option. A similar type of policy that was developed from universal life policies is the variable universal life insurance policy, or VUL. VUL's allow the cash value to be directed to a number of separate accounts that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential reward. Additionally, there is the recent addition of Equity Indexed Universal Life contracts that invest in Index Options on the movement of an Index such as the S&P 500, Russell 2000, and the Dow (to name a few). These type of contracts only participate in the movement of Index and not the actual purchase of stocks, bonds or mutual funds. They may have a cap (but not always) as to the maximum amount they will credit interest to and a minimum guarantee which keeps the principle of the contract from losing money in a down year. Typically each year the starting point is last year's ending point which means that: (1) the policy amount is locked end at the end of the year; and, (2)the beginning value from which the movement measured is reset.


Universal life is similar in some ways to, and was developed from whole life insurance. The potential advantage of the universal life policy is in its flexibility and the potential for greater cash value growth if the interest rates offered outperform the insurer's general account (that whole life policy cash value growth is based on). Universal life is more flexible than whole life in two primary ways: the death benefit and usually the premium payment are flexible. The death benefit can be increased (subject to insurability) and decreased without surrendering the policy or getting a new one as would be required with whole life. Also a range of premium payments can be made to the policy, from a minimum amount to cover various guarantees the policy may offer to the maximum amount allowed by IRS rules. The primary difference is that the universal life policy shifts some of the risk for maintaining the death benefit to the insured. In a whole life policy, as long as every premium payment is made, the death benefit is guaranteed to be paid if the insured dies. In a UL the policy will lapse (the death benefit will no longer be in force) if the cash value or premium payments are not enough to cover the cost of insurance. To make their policies more attractive insurers often add guarantees, where if certain premium payments are made for a given period, the policy will remain in force even if the cash value drops to zero.

There are two other areas that differentiate Universal Life from Whole Life Insurance. The first is that the expenses, charges and cost of insurance within a Universal Life contract are transparently disclosed to the insured, whereas a Whole Life Insurance policy has traditionally hidden this type of information from the policyholder. Secondly, there are more flexible exit strategies within a Universal Life contract which increases the flexibility of that contract over a Whole Life policy including Zero interest or wash loans which virtually provide the policyholder the ability to access the growth inside the contract "income tax free."

Uses

Universal Life is used as a tax-advantaged way to purchase life insurance. In the early years of the contract, the premium far exceeds the cost of insurance (COI) charges. The difference between the two (the "inside build-up") will grow tax-deferred so long as the policy remains in force. If the policy is held until death, this inside build-up will escape taxation entirely. Policyholders may also be able to access the inside build-up via a policy loan without incurring it as taxable income.

Types

Single Premium

Single Premium UL is paid for by a single, substantial, initial payment. The policy remains in force so long as the COI charges have not depleted the account.

Due to changes in the tax code, this type of insurance no longer exists. All life insurance policies which accumulate cash value cannot be fully paid more quickly than in seven equal payments.

Fixed Premium

Fixed Premium UL is paid for by periodic premium payments. Generally these payments will be for a shorter period of time than the policy is in force; for example payments may be made for 10 years, with the intention that thereafter the policy is paid-up. If the experience of the plan is not as good as predicted, the account value at the end of the premium period may not be adequate to continue the policy as originally written. In this case, the policyholder may have the choice to either: 1. Leave the policy alone, and let it potentially expire early (if COI charges deplete the account), or 2. Make additional or higher premium payments, to keep the death benefit level, or 3. Lower the death benefit.

Flexible Premium

Flexible Premium UL allows the policyholder to determine how much they wish to pay each time premium is due. In addition, Flexible Premium UL offers two different death benefit options: 1. A level death benefit (often called Option A), or 2. A level amount at risk (often called Option B). This is also referred to as an increasing death benefit.

Policyholders frequently buy Flexible Premium UL with a large initial deposit, thereafter making payments irregularly.sssss

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