Long-term life insurance comes in several forms

I am in a situation where I believe my life insurance needs are long term. Other than term insurance, what options are available to me?

Permanent insurance needs are met through varying types of whole life and universal life insurance policies designed to stay in force throughout one’s lifetime. Unlike term insurance, where premiums generally increase as the insured ages, most permanent life insurance premiums remain level. These policies combine the death benefit protection of term insurance with a savings element known as cash value.

Life insurance cash values grow on a tax-deferred basis, thus creating a supplemental tax-advantaged savings vehicle. Unlike other tax-deferred vehicles such as individual retirement accounts, retirement plans, and annuities, life insurance cash values are not subject to the minimum penalty-free withdrawal age of 59½ years. In addition, and of particular interest to physicians, is the fact that, in many states, life insurance cash values and the death benefits (assuming there is a named beneficiary) are shielded from creditors, creating an effective asset-protection strategy. The accumulated cash values form a reserve that enables the insurer to pay a policy’s full death benefit while keeping premiums level.

Depending on the specific life insurance company, cash values of permanent life insurance policies may be withdrawn or borrowed over the life of the policy. Cash-value loans or withdrawals can be used to supplement retirement income, fund college education costs, or for any other reason without restriction.

The main attribute of whole life insurance is the inherent guarantee that as long as premium payments are made in a timely manner, the policy will remain in force regardless of changes in the insured’s health.

Universal life insurance policies differ from whole life policies by separating the various components of the policy, such as cash value, mortality costs, and other expenses. This allows the insurance company to build a higher level of flexibility into the contract, which in turn provides the policyholder with the ability to make adjustments in response to changing needs and circumstances. This flexibility can include the amount and frequency of future premium payments, as well as the ability to reduce the amount of the death benefit as one’s net worth increases.

Whether it is a traditional whole life or universal life insurance policy, it is important to understand the variables that impact the growth of your cash value over time. Most permanent insurance cash-value increases are due to either the dividend-paying ability of the insurance company (based on the company’s earnings and profitability) or through the insurance company’s own investment returns expressed as an interest rate percentage (interest rate-sensitive insurance). In both cases, insurance companies offer a guaranteed minimum amount, or interest rate percentage, that they will credit to the policy.

With interest rate-sensitive policies, which are the most common type used in universal life, the insurance company invests its cash assets in relatively conservative investment vehicles such as government and high-grade corporate bonds, although they may also diversify into equities and real estate. The results of this investment strategy are passed to policyholders via cash-value additions at a specific interest rate.

Variable life insurance, whether it’s a whole or universal life policy, actually provides the policyholder with the ability to control the investment of his or her cash-value account. The policyholder can allocate a portion of each premium payment to one or more investment sub-accounts or separate investment options, based on his specific risk tolerance and long-term growth objective. Deductions for expenses and mortality charges are taken by the insurance company prior to the allocation to the specific sub-accounts.

Most variable life policies offer the policyholder a wide range of investment options, including various stock and bond mutual funds. Depending on the specific insurance company, options may include index funds, real estate funds, foreign stock funds, small company, and other types of sector funds. Also included may be a fixed account option in which the insurer guarantees a fixed rate of return.

When should a physician implement an asset protection plan?

The best time to plan is before a claim arises. There are different rules that apply for known claimants and unknown future claimants. But even with an existing claim, and sometimes even after a judgment has been entered, some options may still be available. It is, however, vital to avoid making a “fraudulent” transfer; ie, a transfer of assets with intent to defraud or hinder creditors that is made without full and adequate consideration.

Because asset protection planning can include a variety of strategies, it is usually best accomplished by a team of advisers, which may include a certified public accountant, estate planning attorney, and your financial adviser. Any member of this advisory team may recognize that you need asset protection planning and recommend an evaluation, or you may have some concerns that you would like to address.UT

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