Last Updated: 10/15/2018
One of the most common reasons people purchase life insurance is to leave an inheritance behind for their loved ones. This money is often set aside to cover expenses like college tuition or buying a first home later in life.
In this article, we’ve explained the types of life insurance you should always avoid purchasing if your primary goal is to leave an inheritance behind to your loved ones.
We’ve also provided some sample quotes for lifetime or permanent life insurance coverage to help you select the best policy for your budget and needs.
Quick Article Guide:
- Types of Life Insurance to Avoid If You Want to Leave an Inheritance
- What Type of Permanent Life Insurance Should I Purchase Leave A Tax-Free Inheritance?
- Will My Loved Ones Have to Pay Taxes on the Payout from my Life Insurance Policy?
- Is it Better To “Self-Insure” with Savings, or Should I Buy Life Insurance?
- How Much Can I Expect to Pay for A Permanent Life Insurance Policy?
There are numerous types of life insurance, but not every type of life insurance is ideal for leaving an inheritance. If you’re purchasing life insurance to leave money behind at the end of your life, make sure you do not buy a life insurance policy you’ll likely outlive.
Avoid: Term Life Insurance
Term life insurance may seem attractive due to its low cost and high death benefit, but term insurance should never be purchased to leave an inheritance. The life insurance companies charge lower rates for term coverage because the vast majority of people outlive their guaranteed coverage period. Term insurance is meant to serve as a safety net if you die prematurely, and most term policies reach the end of their “term” (rate guarantee period) before age 80.
However, if you have a term policy now, don’t worry! You may have the ability to “convert” or exchange your policy into a permanent life insurance policy. Many people convert a portion of their term policy when they retire to set aside money for final expenses, especially if they have a few health issues.
When you convert a term policy to permanent life insurance, you are not required to reprove your health or disclose any health change since your policy started.
This can be extremely valuable if you originally qualified as low risk, and have since had a few health issues like diabetes, cancer, or heart issues, which could prevent you from qualifying for a new policy.
It’s important to note that most policies have a deadline for conversion elections, so make sure you review your policy. Most life insurance companies will not allow you to convert your policy after the age of 65 or 70.
Avoid: Increasing Premium Whole Life Insurance
When purchasing a permanent life insurance policy, make sure you select a policy that will still be affordable when you’re retired or on a fixed income. If you are unable to keep up with your payments, your policy will lapse or cancel due to non-payment, and your family will not receive an inheritance. For this reason, we often recommend against whole life insurance or traditional universal life insurance.
Many whole life insurance policies initially offer low “teaser rates” to get you to sign up, but then increase the cost of your coverage every 1 to 5 years. This is designed to price policy holders out when they need their coverage the most, preventing the insurance company from having to pay a claim.
These life insurance policies are commonly advertised on TV and through the mail as “Guaranteed Acceptance” or “Guaranteed Approval” life insurance. These types of policies are very easy to buy, do not require a medical exam, and ask very limited qualifying questions about your health.
AARP currently advertises these types of policies using New York Life as the insurer. These are two big, recognized companies, so many feel secure without understanding how the policies actually work. You’ll even see celebrities touting these products to add credibility, but buyer beware…these policies usually have waiting periods, exclusions, increasing premiums, or end your coverage when you turn 80.
Unless you’re a heavy smoker or have serious health ailments, these restricted policies should almost always be avoided. If you’re unsure of which coverage options you can qualify for, give us a call and we’ll conduct a complimentary pre-qualification assessment to determine your life insurance options. We are an independent, no-cost brokerage, and have no allegiances to specific insurers. By working with more than 60 top-rate life insurance companies, we’re able to match our client’s unique health profiles with the best coverage options available.
Avoid: Life Insurance that Promises to Build a Cash Value
Cash accumulating life insurance is the third type of coverage which often creates problems later in life. On the surface, most cash accumulating universal life insurance policies sounds great – you’re creating an inheritance for your loved ones, while building up a sizable savings account that you’ll be able to access in the future.
Unfortunately, as the Wall Street Journal’s article, “Retirees Stung by ‘Universal Life Cost” points out, these policies rarely perform as well as expected. All too often, the cash value in these policies become depleted due to low market rates and a rising cost of insurance. In addition, these policies also charge expensive investment and management fees that drastically reduce your returns.
When traditional universal life insurance was first introduced to the market in the 1980’s, interest rates we’re close to 15% and earning a sizable return seemed inevitable. Fast forward 30 years – with today’s rates hovering around 4-5%, most of these policies are hardly keeping pace with the insurance company’s management fees and rising cost of coverage. When the cash value in your policy gets depleted, the insurance company will send you a hefty bill to keep your policy active.
In the aforementioned WSJ article, James Woods Sr. explains his policy’s sudden increase in cost which left him and his family without coverage. After paying about $700 a year for close to 30 years, his “cash value” had depleted, and the cost of his policy suddenly increased to $6,000 a year. James was close to 70, living on a fixed income, and he could not afford to continue making payments on his policy.
Unfortunately, James is not alone, and hundreds of people call us every year with similar stories. It’s always best to keep your life insurance and investments separated; this diversifies your risk, and protects your life insurance if your investment performs poorly.
The only type of universal life insurance we recommend is guaranteed universal life insurance, we’ll explain this type of risk-free coverage in the next section.
In recent years, Guaranteed Universal Life or “GUL” insurance, has become the product of choice for people buying life insurance to create an inheritance.
It’s very important to note that guaranteed universal life is not the same as non-guaranteed universal life insurance.
Although both types of coverage have similar sounding names, guaranteed universal life insurance does not require additional money to build a cash value.
With guaranteed universal life insurance, you pay for the cost of your coverage only. In addition, your rates and coverage are guaranteed not to change, just like term insurance. Many life insurers offer guaranteed universal life insurance with level coverage and fixed rates to age 90, 95, 100, 110, or even 121. While most estate or trust attorneys recommend purchasing a policy to age with rates guaranteed to age 121, most of our clients base their decision on family history of longevity and the cost of their coverage.
Here are some popular features of Guaranteed Universal Life Insurance:
1. Full coverage from the day you make your first payment—no waiting periods.
2. Guaranteed rates that do not to change until age 90, 95, 100, 105, 110, 120, or 121! You can make your choice when your policy application is approved.
3. Rates are based on your health and risk, unlike whole life that charges the same inflated rate to everyone. (For instance, non-smokers aren’t subsidizing a smoker’s cost of insurance.)
4. Coverage is often a fraction of the price of most whole life insurance policies providing the same death benefit amount.
5. Coverage amounts of $50,000 to $5,000,000 are available with most top-rated insurers.
For the vast majority of our clients, the proceeds from a life insurance policy are not taxable. Providing a tax-free death benefit has always been one of the most important benefits of life insurance. Life insurance contributes to the economy by reducing the likelihood of families going bankrupt if the household’s primary breadwinner passes away.
However, it’s important to note that the payout from your life insurance policy may be taxable if your individual net worth exceeds the current Federal Estate Tax Exemption of $11,200,000. If your net worth exceeds $11.2 million, you’ll want to create an Irrevocable Life Insurance Trust to separate your life insurance policy from your estate. If your life insurance policy is owned by your trust, it is not considered to be a personal asset and therefore it will not be subject to estate taxes.
Life insurance trusts are also commonly used by individuals with a high net worth to create a tax-free lump sum to pay off estate taxes. This will allow all of your assets to pass on to your loved ones without creating an estate tax liability. To learn more about using life insurance to avoid estate taxes, please read our article, “Estate Planning Life Insurance,” or give us a call at: 855-902-6494, and one of our experienced agents will provide you with the information you need to get started.
Term Life Advice works with tax professionals and tax advisers to ensure our client’s policies are completed properly for all available tax advantages. Life insurance is one of the most secure ways to create liquid assets needed to pay capital gains and estate taxes. This can often keep tangible assets such as property, businesses, and mineral rights in families for generations.
Clients often ask us if they are better off saving their own money rather than buying a life insurance policy. For most of our clients, the answer is dependent on their age, health, and whether or not they have a trust or will established. If you’re in average or better health for your age, and under the age of 80, life insurance is probably a better option.
A Real Life Example of A Client We Recently Helped:
Last year, we worked with a client named James who wanted to leave an inheritance of $100,000 behind for his two grandchildren. James is 63 and he is considered to be in average health for his age due to his well-controlled Type II diabetes, and slightly elevated cholesterol.
After applying for life insurance, James was approved for $100,000 of coverage until age 100 at “Standard Plus” rate of $216.66 per month. We compared the cost of James’ coverage to the amount of money he would need to save each month if he lived until the age of 90. (Most of the men in James family live until their late 80’s).
If James were to save $100,000 by the age of 90, he would need to set aside $308.64 each month and this inheritance could be subject to inheritance taxes. By buying life insurance, James will save almost $100 a month, and his grandchildren will not have to pay taxes on the money he leaves behind for them. In addition, James’ grandchildren will still receive $100,000, even if he passes away before he would have been able to save $100,000.
Purchasing life insurance will provide additional control of inheritance funds you’re creating if you do not have a will or trust established. Life insurance allows you to decide exactly how much money goes to the beneficiaries of your choosing when you pass away. If you have a sibling or family member that you choose to leave out of an inheritance, life insurance provides an easy way to exclude them by not listing them as a beneficiary on your policy.
To help you estimate the cost of your life insurance policy, we’ve provided some sample life insurance quotes by age and gender. The quotes displayed below are from a variety of A+ rated life insurance carriers that have been in business for more than 100 years.
Life Insurance Quotes by Age and Gender – $100,000 of Coverage to Age 90 or Later
|Age||Gender||Rates to 90||Rates to 95||Rates to 100||Rates to 110||Rates to 121|
Displayed rates are for an individual in excellent health and are valid as of 10/15/2018. Your cost may vary based on your actual age, health, gender, and state of residence.
We’re Here to Help You Find the Best Coverage Options Available
If you would like to learn more about your options for coverage, please feel free to give us a call. We will provide you with personalized quote comparisons from up to 60 highly-rated life insurance companies. Every life insurance company has its own rates and guidelines, and by having access to each company’s underwriting criteria, we will be able to determine the best life insurance options for your age, health, and other mortality risks.
At Term Life Advice, our services are free, and there is no cost to apply for coverage. Our owner-operated agency has helped thousands of people with their life insurance needs, and we can help you too. Life insurance can provide a tax free inheritance to your family members, or help your loved one’s avoid costly estate taxes.
To learn more about your options for coverage, or to receive an accurate non-obligatory quote, call us today at: 855-902-6494, or request a free life insurance quote online below to shop dozens of highly-rated insurers in less than a minute.