What is Flexible Premium Adjustable Life Insurance?
Flexible premium adjustable life insurance is a type of whole life insurance policy that offers individuals the greatest amount of flexibility in terms of their investment choice and monthly premiums. It provides both a death benefit and an investment vehicle. Many individuals opt for such a policy because it provides a form of forced savings for retirement, while also protecting dependents in the event of premature death.
The first key to understanding this type of insurance is understanding whole life insurance policies. Whole life policies are distinct from term life because the death benefit on a whole life policy is paid no matter when the insured dies. With term policies, the death benefit is paid only during a set period; for example, for his beneficiaries to collect the death benefit on a 30-year term, the insured would have to die within the 30-year period that the policy was active.
With a whole life policy, premium payments continue for life and the death benefit is paid no matter when the insured dies. Premiums for this type of policy are generally more expensive than those for a term policy. They are also more expensive because the insured pays another fee, over and above the cost of insurance, which is invested in various types of investment vehicles.
The payments are invested in one of two ways: the investor may have control over the investments and receive a variable rate of return, or he may have no control over the investment and receive a fixed rate of return. In other words, an investor with a variable policy pays extra premiums that are invested, and then gets to direct the course of that investment, ideally growing his policy, and the amount he is eventually paid. An investor with a fixed rate policy, on the other hand, pays extra premiums in and earns a fixed rate of return, while the insurance company invests those premiums.
A flexible premium adjustable life insurance policy is an alternative fixed rate policy that gives investors greater freedom. Instead of paying the same premiums every month, the insured can choose to pay within a range. The amount he pays in ultimately affects how much income he will earn from the life insurance policy.
He also has discretion to direct the investment of his money within the terms of the policy. The money eventually paid out to him in the form of withdrawals or dividends fluctuates based both on how much he paid on a monthly basis and based on how well his investments perform. Some policies may contain a guaranteed minimum rate of return when a policy is purchased, as long as a minimum amount of premiums are paid.
Make sure the financial strength rating is high according to A.M. Best. They rate the best insurance companies. Only 3 percent out of the 3,000 insurances companies in the U.S. have an A+ superior rating. So find one of those, because legally, life insurance companies can wait six months to pay out a death benefit and the average one waits 4.7 months.
Also make sure that you are getting what you want out of the program. Lump sum or monthly installments? Income replacement or final expenses? All good things to consider. I would recommend a straight whole life policy that gets locked in at a young age to take care of final expenses and some term with a high face amount to cover your liabilities.
I had an ordinary whole life level premium plan for $750K. My agent passed away and in the fourth year his 'replacement' called to say they had a new and better deal for me. It was called flexible premium adjustable life insurance. The only description he provided was that it provided a surplus or reserve premium to be invested in a variety of capital gain and income producing vehicles.
I told him to leave my original policy untouched, but he could write an additional policy to reach total $1 million.
Instead, he rewrote entire policy for the "better" policy and collected a $10K commission. I did not know these details until 20 years later, because the new policy was mailed to the trustee of the family trust who was named the beneficiary.
The trustee received the policy and simply placed it in our trust file. It was uncovered only 20 years later when we were told premiums had reached a level twice what we had been paying ($21K/year).
In the course of our subsequent communication with the insurer, they admitted a significant error in calculation of the premiums from 20 years ago.
They are now recalculating and, you can imagine, things are a bit tense around here. I guess I should have had the decency to die younger, but at 87 I am now in something of a bind. I can't pay current $44K out of social security.
When shopping for life insurance, it's basically the same thing as shopping around for any product or service - you compare rates and coverage from different life insurance companies.
When we had our first child, I started getting life insurance quotes online to see what was available. One site was a good resource. It gave me rates, companies, and coverage options, and by getting a few quotes from three or four companies, I began to learn generally what a good price for certain coverage was. They also have tons of articles, but let's face it: you can't get specific prices without picking what specific coverage you want.
Good luck, Alchemy. Hope this helps a bit in your search.
How do I tell if I am paying a good price for life insurance? If buying life insurance is anything like buying automobile insurance, then prices can vary widely. I am getting married soon, and I want to buy a motorcycle. The only way my fiancée will let me have a motorcycle is if I buy some type of life insurance. Riding bikes can be dangerous in Arizona, and we have a two-year-old daughter so I can agree with her point of view. My only problem is I don’t know where to start shopping. Does anyone have any good advice for a relatively young person shopping for life insurance?
Are premiums for a charitable gift of life insurance tax deducible, payable in a lump-sum only, and taxable to the charity after the gift is made?
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