Life Insurance 101: The 5 Types of Life Insurance

Are you thinking about buying a life insurance policy but aren't sure what to do because there are so many options? Well stick around to the end of this video because we're going to go over the five different types of life insurance policies so you'll know exactly what to expect. Hi I'm Olivia Kirk and I'm Tim Urich. We're from Tier One Capital and we're here to help you regain control of your money. For the best advice on controlling your cash flow please be sure to subscribe to our channel and don't forget to hit the bell to be notified when we upload new videos. So initially there was only one type of life insurance and that's the simplest form, term insurance. And with term insurance there's only one benefit and that's the death benefit. If you die within the term then a death benefit is paid in cash to your family. And what happened was life insurance was initially bought by sailors and when they would go out on a voyage they would buy insurance and then when they would come back they'd be home for a month or two and they'd go out on another voyage and the price would go up. And one of them said hey is there a way that I could pay the same rate for the rest of my life? This way I don't have to keep paying an increasing premium. And what was developed was the precursor to whole life insurance. The insurance company realized that in order to even out the cost over the lifetime of this individual they had to overcharge in the early years so they could under charge in the later years. And by overcharging they were putting money aside and that created an ever-expanding pool of cash that could be utilized to offset the increases of premium in the later years. At its very essence life insurance is a transfer of risk. Whether you have a full life insurance policy or a term life insurance policy we're all going to die. So the insurance company is taking on that risk with a little bit of uncertainty because they don't know when you're going to die. So the insurance company has to price the policy properly so that they can guarantee the payment that they committed to or promised to your family and still make a profit. Now understand this when you have a whole life insurance policy you have an ever-expanding pool of cash and that's because when you get a whole life insurance contract the insurance company is making you two promises. They're promising to pay the death benefit when you die as long as the policy is in force and they're also promising that when that policy matures usually at age 100 the cash value and the death benefit are going to be the same. So they have to put reserves away to make sure they could keep those two promises. Now the insurance industry functioned very well for hundreds of years with these two products and then in the late 70s when interest rates were rising a company called EF Hutton and those of you who are old enough might remember EF Hutton because when EF Hutton spoke everybody listened. Have you heard him lately? He doesn't exist. EF Hutton was sold off to First Capital Life and First Capital Life was taken over by Executive Life and Executive Life doesn't exist because they were investing their policyholders cash values in junk bonds sold by Michael Milken. Michael Milken did jail time for his shenanigans but the bottom line is that life insurance universal life insurance is really term insurance with a side fund invested at market interest rates. So every year the cost of that annual renewable term policy is increasing and eventually it's going to hit a break-even point and it's going to start eating away at your cash values and so it transfers the risk of insurance and investments back to the policyholder. Understand that with whole life insurance you could never take a step backwards because of the way is the policy is actuarially designed the policy has an ever-growing cash value guaranteed by contract. In the early 80s when UL policies were first introduced they looked really attractive because they were tied to market interest rates and at that time CDs were paying 15 to 16 percent but by the mid 80s market interest rates started to stabilize and so UL policies didn't project as well. So the insurance industry's response was to not invest in market interest rates but to invest directly into the stock market through mutual funds sub-accounts in what was now known as a variable universal life insurance policy which was introduced by Equitable Life in the mid 80s and everything was functioning fairly well as the market was going up but what people didn't realize was that when the market went down you got hit with a double whammy number one your cash value moved backwards and number two because your cash value moved backwards you have to increase the amount of pure life insurance so at a time when your cash value was going down your expenses the pure life insurance component was going up and that created some significant problems for universal variable universal life policy holders. The newest version of the universal life policy is called an indexed universal life policy or an IUL and with that your market your money isn't in the market it's tied to a market index so they're able to eliminate the losses from the market but they also cap the crediting of interest to your account. The bottom line is this whether it's a universal life you lose UL if it's indexed universal life you lose if it's variable universal life you lose the bottom line is this with all three of those products you can move backwards with a whole life policy it's actuarially designed that you could never take a step backwards and if you're planning on having cash available for future events why would you ever want to transfer the risk from the insurance company back to you to us it doesn't make sense. As you know our mission is to help our clients regain control of their money so we use the whole life and turn life products because the certainty those products provide allow for us to adjust the planning for our clients uncertainties that happen in life. We know that life has a lot of uncertainties that come along with it and being able to position our clients in a way that they can react and adjust and thrive during these uncertain times creates an opportunity for them to take advantage of uncertainty rather than become a victim of uncertainty. If you'd like to get started with planning for life's uncertainties please be sure to visit our website at tieronecapital.com to schedule your free strategy session today also if you like this video please be sure to give it a thumbs up and don't forget to subscribe also leave us a comment down below let us know what topics you'd like us to cover in the future thanks so much for watching our video and remember it's not how much money you make it's how much money you keep that really matters.