Life Insurance The Cornerstone of Your Financial Plan Building a Solid Foundation for Your Financial Plan PM0987
start C O N T E N T S How Solid Is the Foundation of Your Financial Plan? > > > > > > > > > > > > > > > > > > > > > > > > > >1 Why Should You Consider Life Insurance? > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >2 What You Should Know About Term Life Insurance > > > > > > > > > > > > > > > > > > > > > > > > > >4 What You Should Know About Permanent Life Insurance > > > > > > > > > > > > > > > > > > > > > >5 Comparing the Cost of Permanent and Term Insurance > > > > > > > > > > > > > > > > > > > > > >10 How Riders Help You Customize Your Policy > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >11 Why Should You Buy Life Insurance Now? > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >12 Glossary > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >end
How Solid Is the Foundation of Your Financial Plan? FINANCIAL PLANNING. These words make some people pause for thought. But they also require action because like it or not, having a financial plan for the future is the only sure way you can to do the things you want in life. Your financial plan can help you send your children to college, start your own business, or enjoy your retirement. The process of creating the plan doesn t have to be painful instead it can be an opportunity to relish the journey ahead. Life insurance can play an important role in your financial plan No matter what your future holds, having the right plan in place is crucial. And 1 working with a financial professional who can help you select the appropriate financial products for your goals is an important part of that plan. For many, life insurance is the cornerstone of a well-crafted financial plan designed to protect their families and preserve and accumulate wealth. This guide is designed to help you learn more about the role life insurance can play in that plan. It includes information on: Reasons people buy life insurance Differences between term and permanent insurance policies, and Kinds of policies that might fit into your plan. Working with your financial professional, this guide can be a valuable resource in helping you decide how to make life insurance the cornerstone of your financial plan.
Why Should You Consider Life Insurance? Life insurance is a contract that guarantees payment to a beneficiary after the death of the person who is insured. It can be used for a number of needs including family protection, business planning, supplemental income and estate and charitable planning. One of the most attractive features of life insurance is that its death benefit is free of federal income tax, and if properly structured, free of federal estate tax. With this in mind, below are just a few ways people use life insurance in their financial plans: 2 Besides death benefit protection, life insurance can help you accumulate assets and leave a legacy FAMILY PROTECTION The most fundamental benefit of a life insurance policy is financial protection. Death benefits in a life insurance policy are paid directly to the beneficiary, which helps to avoid probate and protect privacy. These benefits can be used by a family to pay funeral costs, a mortgage or other debts, replace lost wages and manage other financial aspects of the family s lifestyle. SUPPLEMENTAL INCOME Both individuals and businesses use permanent life insurance policies to provide supplemental income. The assets accumulated within a permanent life insurance policy can be accessed to provide tax-advantaged income for college funding, retirement, or other needs that may arise. BUSINESS CONTINUATION PLANNING Small businesses need flexibility to change their ownership structure, should something happen to one of the principals. Life insurance proceeds can fund the sale of the business and provide important assets through a difficult transition. Businesses insure their key employees and owners in order to recapture the costs associated with the loss of a key person.
SELECTIVE EMPLOYEE BENEFITS Life insurance is a cost-effective and tax-efficient way to fund selective benefit plans used to recruit, retain and reward key employees. Insurance on the life of a key employee can fund the business s obligation to pay executive death benefits, supplemental retirement income, or other employee benefits. CHARITABLE PLANNING Charitable gifts and bequests offer an opportunity for individuals to fulfill a philanthropic goal, as well as realize many tax and non-tax benefits. In order to ensure the family s inheritance is not diminished by a charitable gift or bequest, wealth replacement life insurance that benefits the donor s family represents an ideal partner in charitable planning. Life insurance policies themselves also make excellent charitable gifts, since the premiums can be dramatically leveraged to provide the charity with an amplified legacy upon the donor/insured s death. 3 ESTATE PLANNING Life insurance can play an important role in estate planning as a cost-effective and tax-efficient source of estate liquidity to pay taxes and other expenses upon the death of the insured. In addition to providing estate liquidity, life insurance can enhance an estate plan in many other ways. It plays a complementary role with many popular tax and non-tax estate planning strategies, including business continuation planning and estate equalization, charitable planning and wealth replacement, and family legacy and retirement planning.
What You Should Know About Term Life Insurance There are two types of life insurance: term and permanent. Term life insurance policies are designed to provide temporary protection at an affordable cost particularly in the earlier years. The contract between the policy owner and the insurance company is for a specific period of time or term. Term policies deliver pure death benefit protection and appeal to those seeking cost-effective, temporary coverage. Term insurance enables you to buy more protection at a lower initial cost 4 Common Types of Term Insurance Policies ANNUAL RENEWABLE TERM These policies are designed for those seeking the lowest premium for temporary coverage. With an annual renewable term policy, the death benefit remains the same, while the premium increases each year as the insured grows older. Some of these policies include a conversion provision that allows the owner to convert the policy to permanent, cash value life insurance without providing medical evidence of insurability. DECREASING TERM Some insurance needs decrease over the years. In those cases, you might consider decreasing term insurance. With these policies, the premiums remain the same, but the death benefit decreases annually as the insured ages. People buy decreasing term policies when they have a debt, like a mortgage, that needs to be paid off in the event of the insured s death. LEVEL TERM Those who prefer that their premium remain the same or level for a specific period of time, such as 5, 10 or 20 years, may choose to purchase a level term policy. The death benefit is also level, meaning the death benefit remains the same throughout the life of the policy. These policies may also include a conversion provision.
What You Should Know About Permanent Life Insurance The second type of life insurance is permanent insurance. Permanent life insurance policies combine death benefit protection with the ability to build wealth within the policy, which is referred to as the cash value. While all permanent policies are designed to last a lifetime, different types are suited to specific needs, including tax and non-tax planning strategies. Permanent insurance suits a variety of tax and non-tax planning needs Common Types of Permanent Insurance Policies WHOLE LIFE These policies pay a death benefit, specified at the time the policy is purchased. The premiums paid into the policy are level, which means the premium amount never changes. A whole life policy also has a guaranteed cash value. In addition, some whole life policies are participating, which means they could receive dividends each year. 5 UNIVERSAL LIFE Universal life insurance offers significant flexibility to change the level of coverage, or to stop and resume premium payments. As a result, universal life policies can be adjusted to meet the owner s changing needs. In addition, universal life insurance builds up cash value based on declared credited interest rates. VARIABLE UNIVERSAL LIFE Variable universal life policies provide universal life insurance protection, but also investment flexibility. This type of insurance is designed for those who are comfortable taking on investment risk. The cash value of these policies has access to variable investments, such as money market, stock and bond funds. These policies typically also include access to a fixed-interest account, which helps balance the investments.
Common Types of Permanent Insurance Policies (continued) SURVIVORSHIP LIFE Survivorship life insurance policies are designed to cover two lives, instead of one. These policies, available in whole life, universal life and variable universal life policies, pay their death benefit after the death of the surviving insured. Typically, couples buy them to provide their children with assets to pay estate taxes or to provide coverage when one partner is considered uninsurable. Survivorship life can also be a cost-effective way to insure two lives with one policy instead of two. Key Benefits of Permanent Life Insurance Policies ACCESS TO THE POLICY S CASH VALUE Many policyowners use the cash value in their permanent life policies to supplement their income. They can access this value in two ways: 6 First with policy loans, which are not taxable, and often offer competitive interest rates. Second, policyowners may take withdrawals from non-qualified policies up to the amount of the premiums paid into the policy. This amount is referred to as the cost-basis of the policy and is income tax free. Amounts withdrawn above the cost-basis are fully taxable. Note: Whole life policies permit partial withdrawals of paid-up additions purchased by dividends, but not partial withdrawals of cash value. Please be aware that withdrawals and outstanding loans will reduce the death benefit amount. If a policy lapses, outstanding policy loans will be considered a withdrawal for tax purposes. Withdrawals from qualified plans are fully subject to income tax.
Tax Deferral Helps Your Money Grow Faster TAX-DEFERRED GROWTH OF CASH VALUE The cash value within a life insurance policy grows tax deferred. That means the cash value grows faster than if taxes were paid each year on the earnings. For instance, compare three, $100,000 investments, one fully taxable asset like a mutual fund, one tax-deferred investment with after-tax money and one tax-deferred investment with before-tax money. Assume each earns 8 percent interest annually, and that the investor pays income taxes at a combined rate of 35 percent. Even after taxes are paid, the tax-deferred investment grows more quickly than the fully taxable investment. 7 FULLY TAXABLE INVESTMENT $166,019 $275,623 $475,585 10 20 30 TAX DEFERRED [AFTER TAXES] $175,330 $324,962 $689,073 10 20 30 Y E A R S TAX DEFERRED $215,892 $446,096 [BEFORE TAXES] T T T T T T $0 200,000 400,000 600,000 800,000 1,000,000 $1,006,266 10 20 30 This chart is for illustrative purposes only and does not reflect the actual performance of any investment. It also does not reflect any charges and/or fees that may be associated with a product. Your own results may vary. Fully taxable investment earnings are taxed in the year in which they are earned. The tax-deferred after-tax investment assumes a lump-sum withdrawal at the end of the period, with taxes paid on the earnings at that time. Tax-deferred before-tax investments, like money paid into a qualified plan, are fully taxable upon withdrawal. Note: Withdrawals of earnings from a tax-deferred, after-tax investment or all withdrawals from a tax-deferred before-tax investment, are subject to ordinary income tax and may be subject to an additional 10 percent IRS penalty tax, when taken before age 59 1 /2. All withdrawals may also be subject to contractual withdrawal charges. All statements about the taxation of life insurance are based on our understanding of current tax laws which are subject to change. For specific questions about your personal situation, you should consult a qualified tax advisor. If a contract is held in a qualified account, arrangement or plan, it provides no additional tax-deferred benefits beyond those provided by the qualified account, arrangement or plan.
Key Benefits of Permanent Life Insurance Policies (continued) FLEXIBILITY Universal and variable universal life policies give policyowners the flexibility they need to meet their financial goals. Some of these flexibility features include: A choice of two death benefit options. First, is a level death benefit, which is equal to the death benefit you specify. Second, is an increasing death benefit that equals the policy s face amount plus the policy s cash value. Flexible premium payments that allow you to increase your premium amount if you want your cash value to grow. Or, you may even skip premium payments and let your charges and fees be automatically paid from your cash value. Adjustable death benefit, which means as your needs change, you can usually increase or decrease your specified death benefit. 8 INVESTMENT TOOLS Typical variable life policies offer a wide range of investment choices. In addition, you may also take advantage of a variety of investing tools, including: Asset allocation tools that help you create a customized investment strategy Automatic asset rebalancing, which helps you maintain your desired asset allocation and also employ one of the secrets of successful investing selling high and buying low. Dollar cost averaging, which helps you move money into the market consistently, and may reduce the effects of market fluctuation. Dollar cost averaging does not guarantee a profit nor protect against a loss in a declining market. Since it includes continuous investing regardless of price levels, investors should consider their financial ability to continue to make purchases during periods of fluctuating price levels. For more information on these and other investment strategies, be sure to review the Investment Concepts Illustrated brochure with your financial professional.
Building Wealth within a Whole Life Policy As you learned earlier, whole life insurance has a guaranteed cash value. That means regardless of market performance and fluctuating interest rates, a minimum amount of cash value is guaranteed to be available to the policyowner. A more conservative policyowner might appreciate this type of life insurance. Building Wealth within a Universal or Variable Universal Life Policy The cash value of universal and variable universal life insurance grows based on two factors: First, is policy performance. The performance of the policy s variable investment accounts and/or fixed interest accounts (net of monthly deductions) will affect the amount of cash value in your policy. Fixedinterest rates are set periodically and are generally guaranteed not to drop below a certain level. Variable investments provide long-term growth potential for the policyowner who is comfortable assuming the risk of the volatility of the variable market in order to maximize his or her growth potential. Second, the more premiums paid into a universal or variable universal life policy, the bigger the cash value potential. To get a better understanding of how premiums build cash value in these policies, review the chart below: 9 PREMIUM PAYMENT Less applicable premium taxes and charges. NET PREMIUM PAYMENT The balance of your payment is allocated to your choice of investment options in the policy account. POLICY ACCOUNT Includes choice of fixed or variable investment options. From this account, the cost of insurance and cost of optional benefits and riders are deducted monthly. It accumulates tax-deferred for you to access through tax-favored withdrawals or policy loans. DEATH BENEFIT Protects your loved ones. Proceeds are received by the beneficiaries free of federal income tax.
Comparing the Cost of Permanent and Term Insurance Which type of insurance is best for you? It depends. To decide what kind of insurance to buy, you ll want to discuss the cost of various policy types, as well as the length of time that you will need protection with your financial professional. Term insurance fulfills a short-term objective Permanent insurance fulfills a long-term objective 10 Compare the premium costs for a term life and a permanent whole life insurance policy. This $250,000 policy was purchased by a man at age 35 and kept in force for 60 years. If this man needed protection for 20 years, it would be more economical to buy term insurance. On the other hand, if he needed coverage for life, the whole life policy is more economical, plus he would be building cash value within his policy and may earn dividends. $147,885 Total premium payments in year 60 = $1,808,285 ANNUAL PAYMENT $26,250 $3,605 Total premium payments in year 20 = $24,877 $3,235 $695 $273 Total premium payments in year 20 = $64,700 Total premium payments in year 60 = $194,100 T T T T T T T Years 1 10 20 30 40 50 60 Whole Life Insurance Premium Payments Term Life Insurance Premium Payments This chart is for illustrative purposes only and does not reflect the actual premiums of any specific insurance policy. It is based on current rates for an annual renewable term policy and a traditional whole life policy. For specific questions about your personal situation, you should consult a qualified financial professional.
How Riders Help You Customize Your Policy Policy riders are options that you can add to your insurance policy to customize its design and provide extra personal, family and business protection. Personal Protection BUY MORE PROTECTION COST-EFFECTIVELY You can enhance the death benefit coverage of the primary insured in several cost effective ways: supplemental term insurance, accidental death protection and guaranteed insurance without medical evidence. PROTECT YOUR POLICY IF YOU BECOME DISABLED Some riders guarantee the continuation of your policy in the event you cannot pay premiums due to disability. PROTECT YOUR POLICY FROM UNFAVORABLE MARKET CONDITIONS You can add a guarantee that your policy will not lapse as long as the specified premium payments are made, regardless of current market conditions. 11 EXTEND YOUR COVERAGE Most permanent policies mature at age 100, at which time the death benefit can be deferred or is paid to the insured. (The gain is fully taxable if paid to the insured.) A maturity extension rider enables the policy to continue in force beyond age 100. Family Protection COVER OTHER MEMBERS OF YOUR FAMILY You can add cost-effective coverage for your spouse and/or children. Business Protection MINIMIZE EARLY ACCOUNTING CHARGES You can add a provision that will increase early-year cash-surrender values. CHANGE THE INSURED You can add the ability to replace a covered employee with a different employee. MAKE THE DEATH BENEFIT EQUAL TO PREMIUM PAYMENTS MADE Ideal for split-dollar programs, you can specify that the death benefit equals all premiums paid, up to the most recent month.
Why Should You Buy Life Insurance Now? Life insurance is the cornerstone of a healthy financial plan. With so many applications, life insurance can meet the needs of virtually anyone who is planning for a secure financial future. Once you and your financial professional determine which type is most appropriate for you, it s important not to delay your purchase. Aside from the obvious consequences to your family, business or estate, waiting to purchase life insurance has an inherent financial cost. 12 Reasons not to wait: risk of death while unprotected, uninsurability, increasing premiums Below is a chart that demonstrates the costs associated with waiting to purchase a life insurance policy. The example shows a 50-year-old male, who is debating whether to purchase a $250,000 whole life policy now or at a later date. His financial planner showed him the increase in premium amounts if he waits. Based on these numbers, it s important for this individual to lock in the cost at the youngest age possible. The Cost of Waiting ANNUAL PREMIUM AMOUNT $12,000 $10,000 $8,000 $6,000 $5,955 $6,273 $6,983 $7,775 $10,333 $4,000 $2,000 T Today - Age 50 T Age 51 T Age 53 T Age 55 T Age 60 POLICY ISSUE AGE This chart represents first-year premiums based on a preferred, non-smoker underwriting classification with a Penn Mutual LifeWise whole life policy.
Build A Solid Foundation Buying life insurance is a good step toward building a strong, comprehensive financial plan. Your financial professional can help you determine both the level of coverage you need and the right kind of policy. An important part of this consideration is the company from whom you choose to purchase your policy. Be sure to look for a strong company with a long history of meeting its financial obligations. G L O S S A R Y end ANNUAL RENEWABLE TERM A term policy where the premium increases annually, while the coverage stays the same. CASH VALUE The savings element that builds up in a permanent life insurance policy. DEATH BENEFIT The amount paid to the beneficiary upon the insured s death. DIVIDENDS A return of premium issued by life insurance companies to participating, permanent life policyowners. Dividend amount is based on the mortality experience, expenses and performance of the company for the previous year. Dividends are not guaranteed. FACE AMOUNT The amount of specified life insurance coverage. INSURED The person(s) whose life is covered by a life insurance policy. LEVEL TERM A term insurance policy where premiums are the same amount annually until the end of the term. LOAN PROVISION The ability to borrow funds from the policy account within a permanent policy. MINIMUM GUARANTEED INTEREST RATE Some policies guarantee that renewal interest rates will never fall below a certain percentage. NON-QUALIFIED PREMIUMS Premium payments paid with money that has already been taxed. PERMANENT INSURANCE A company s promise to pay a specified amount upon the death of the insured. POLICYOWNER The person who has all rights to the insurance policy. SURVIVORSHIP LIFE A permanent life insurance policy that covers two people. The death benefit is paid upon the death of the surviving insured. SUB-ACCOUNT The investment choices in a variable life insurance policy are usually referred to as the policy s sub-accounts. TAX DEFERRAL The postponement of income taxes on earnings from the current year to a future date. TERM INSURANCE A life insurance policy that guarantees coverage until the end of a term. Nothing is paid if the insured survives the end of that period. UNIVERSAL LIFE INSURANCE A permanent life insurance policy where the premium and face amounts can be selected by the policyowner to keep the policy from lapsing. VARIABLE UNIVERSAL LIFE INSURANCE A type of universal life insurance in which the policyowner directs how the cash value will be invested, and thus bears investment risk to which the death benefit is linked.
The principal underwriter of Penn Mutual s variable products is Hornor, Townsend & Kent, Inc. (HTK) 600 Dresher Road, Horsham, PA 19044, 215-957-7300. HTK is a member NASD/SIPC, a wholly owned subsidiary of The Penn Mutual Life Insurance Company. 2004 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172 www.pennmutual.com Investors should carefully consider funds objectives, risks, charges and fees before investing. This important information, as well as other information, is contained in the product and underlying funds prospectuses, which should be read carefully before investing. You can obtain these prospectuses from your Penn Mutual financial professional. PM0987 8/04 A4RC-0826-12