Insurance Investment Products

What is a "term life" policy?

Term life insurance is a type of life insurance where you're buying insurance for usually a limited period of time - 1 year, 2 years, 3 years. It's a pure insurance product. There's no added cash value to term life insurance, or any other accumulation within the policy itself which we might find in some other types of life insurance.

What is a "whole life" policy?

A whole life insurance policy is really the traditional type of life insurance where you're insuring, as it says, your whole life. What it really means is that you want insurance forever and so what you're doing is when you're buying that life insurance there's really two components: you're paying for the life insurance itself; the actual risk that you might die this next year and you're also building up something that's called a 'cash value', and that cash value is really what's used to pay for your life insurance as it becomes much more expensive over the course of your life. So let me give an example, that you buy a $100,000 life insurance policy; a whole life policy. With most of these whole life policies at some age in the future, 100 ,99, you're actually going to get $100,000 whether you're alive or dead. So what you're doing is you're buying the cost of insurance, that $100,000, plus you're putting a little more money to build up that cash value. So maybe when you're 90, what you have is $90,000 worth of cash value and $10,000 worth of insurance only to get you that $100,000 death benefit. So the cost of your insurance is really only that extra $10,000 as you get older. That's really the process of a whole life policy is it has cash value that's going to grow over time.

What is a "variable life" policy?

A variable life policy is a type of whole life policy where the cash value is variable. Usually a variable life policy means you're investing this cash value, and I'll use the word investing lightly, you're investing this cash value into different types of securities, whether it's stocks and bonds. You have different investment decisions, so the cash value can go up or down over time, and as a result it can decrease the cost of your insurance over time if your cash value grows really well. Otherwise, it can increase the cost of your insurance over time if the cash value doesn't really have the performance that you're expecting it to.

What are the pros and cons of insurance investments?

First and foremost, the purpose of life insurance is really to provide for the beneficiaries of the person who is insured, to give them some type of capital. To use life insurance as an investment really means that, to some extent, you might be putting that death benefit, that value to the beneficiaries, at risk. I really don't see life insurance as an investment. You should probably keep the two separate. There's no reason to think of life insurance as an investment. It's really an insurance policy against premature death.

What is an "annuity"?

An annuity in its traditional sense, and it's really when we talk about an annuitized annuity, is an insurance product where the insurance company is taking the average life expectancy of people, say retired people, this group of individuals who are 60, and they're going to say, "We can give this group of individuals $100 a month in income for the rest of their lives." What's going to happen is some people are going to die sooner than their average life expectancy, and so the money that they put into this product that didn't get used for their lifetime will actually be used to cover the people who live longer than average. So, really it's a way to give everyone income for life using an insurance vehicle to do that.

What are the pros and cons of investing in annuities?

There's really two ways that people look to annuities as investments. There's the traditional way, the reason why annuities were even established and that's for an annuitized income, an income that's going to last for you for the rest of your life. In that sense there's some pros and cons there. The pro for annuities is that you're not going to outlive your money, you're guaranteed not to outlive your money. The real con with this, and the biggest con with this, is that if you die really early, if you put $1000 into an annuity and it's annuitized and you die a month later, that $1000 is gone. Therefore your heirs don't receive any money, and so really the pros and cons you want to think about from the traditional sense of annuitizing an annuity.