By Michelle Matlock, Life Quotes, Inc.

Life insurance discussions can be macabre by nature, but it is there to protect your family during times of need, especially if you are the primary breadwinner and something happens to you.

How will your family’s bills be paid? Who will provide for them?

There may not be a psychotic killer in the house harassing the babysitter… or a knife wielding masked madman hiding in the bushes stalking your teenager, but if you don’t understand how your policy works, what can happen is much scarier. Not only do you stand to lose a lot of money—your loved ones may be left in the cold.

Life Quotes, Inc. has compiled a list of the often overlooked and frightful intricacies of your life insurance policy that may surprise you.

TERM LIFE

1. No man’s land: While financial experts suggest that insurance shoppers should purchase term life for short-term needs and invest the difference, in some cases, term life may not be the best option for your situation. For example, once the term is over, all of the premiums you paid into the policy are gone and you will find yourself in search of coverage again. If you renew the policy, you are going to pay more because of your age and if you developed health issues during the term, it may be difficult to get a new policy.  Some term life policies offer an annual “guaranteed renewal” component but it may not justify the astronomical cost of getting the policy.

“The premium for Annual Renewable Term or ART increases every year, which is why it is different from other plans with premium guarantees,” says Brian Ashe, president of Brian Ashe and Associates, Ltd. in Lisle, Ill. “If you have a short-term need of 3 to 4 years, ART is better because it is less when it comes to upfront costs. But if you have a longer need there are policies that have premium guarantees of 10 to 15 years, but they are initially more expensive at the beginning of the policy.”

2. Return of the dead policy: If you survive the end of your term there is no refund for the amount you paid into the policy while it was in effect. Some life insurance companies offer a Return of Premium (ROP) term life insurance policy which gives you the opportunity to recoup the amount of money you paid on insurance premiums—but beware, this policy comes at a much higher cost than a basic term life insurance policy.

“The cost for these policies is between the cost of a guaranteed level premium term life policy and a whole life or universal life insurance policy. A basic term life policy is $1 per thousand dollars of insurance, and whole life costs $6 per thousand dollars of insurance, the ROP is more of a hybrid policy that would cost $3 per thousand dollars worth of insurance,” explains Ashe.

Ashe says that although this could be a good deal for some people there are not many of these life insurance contracts around anymore because insurance companies realized “they were giving away the store.”

“You might be better off with an ROP plan because the difference in premium between regular term life and ROP, if you were to invest the difference, would earn you 4 to 5 percent net after tax to equal the cash in the ROP plan,” says Ashe.

However, if your ROP contract reaches year 30 when it is no longer financially feasible to keep the policy, Ashe says a policyholder has a couple of options. If you paid $90,000 in premiums, you could cash in the policy and get the entire $90,000 back from the insurance company.  But if your needs have changed, you can convert the ROP policy to a permanent life insurance policy and take the $90,000 refund and apply it to the premium on a permanent policy.

3. Caught in its grip: Re-insurance. If you find your term has expired and you would like to still carry life insurance coverage, you may be forced to buy a new policy that might require another medical examination and will cost more because insurance costs increase with age.

4. Haunted history: Policy Lapse. There is good reason why insurance experts never advise policyholders to lapse an insurance policy.

“This may come back to haunt you the next time you try to get insurance cover,” warns Ashe.

Insurance companies may require a policyholder who has lapsed a policy to pay their premiums on an annual basis or reject a life insurance application altogether for someone who is known to frequently lapse their policy. In either case, if you can no longer afford the premiums take the initiative and contact your insurance agent and see what your options are before letting the policy lapse.

5. Skeletons in the closet: If you purchase a term life insurance policy at an older age, or if you find yourself in poor health during the term and it ends, it may be difficult—if not impossible—to renew or get a new life insurance policy.

WHOLE LIFE

1. Terrified about where your money is going: The insurance company decides where to invest your premiums and you have no say.

“On this policy, the dividends may be used to reduce premiums, but the dividend is not guaranteed because it is all based on the divisible surplus of the company, which can change every year,” says Ashe.

2. Never take anything at face value: There is no flexibility on premiums or face value amounts.

3. Don’t touch it: The policy has to mature for at least three years before you can grow any savings or cash value. What’s worse is the savings only grow at two to three percent.

4. Creeping death of your cash value: Your loved ones will NOT receive the cash value or savings in the account if you die, instead, they will receive the face value, which is only equal to the amount of the policy.

5. Eternally yours at a price: This is not a policy you would purchase for a short-term need.

“If you are only looking at short-term benefits, you don’t want to invest in a whole life or universal life insurance policy because the surrender charges in the early years would reduce the cash value and you would end up with less than you paid in premiums,” says Ashe.

VARIABLE & UNIVERSAL LIFE INSURANCE

1. Never assume or go into a dark room when you hear a noise: You assume certain risks when it comes to these life insurance policies. Variable and universal life insurance policies have cash value accounts that are tied to the movement of investments such as stocks and bonds.  In addition to this, the value of both insurance types is subject to interest rate fluctuations.

“When it comes to a universal life insurance policy, the insurance company would need 1.5 to 2 percent between what they earn on their portfolio and what they credit to your policy.  In order to credit you with 4 percent, they may have to earn 5.5 to 6 percent.”

Variable insurance policies are considered securities contracts and are regulated by your state’s department of insurance and the federal Securities and Exchange Commission.

2. When it becomes a house of cards: A benefit that is often touted by insurance agents is that variable and universal life insurance policies are considered self-sustaining because the cash value accrued in the policy can eventually cover the premiums.  This may not be entirely true for a number of reasons. For one, it may take up to 10 years to have built up enough cash value in the policy for it to cover the premiums. (This is often dependent on where interest rates are during the life of the policy.) For example, when interest rates are high—the cash value grows at a faster rate, but when interest rates are low, this change combined with a higher cost of insurance can be fatal to the cash value.

The cash value may fluctuate based on the actual performance of the underlying sub-accounts you have chosen to invest in. When the investment funds perform poorly and your cash value starts to tank, less money is available to cover the cost of premiums. In other words, you would have to shell out more cash each month just to keep the policy from lapsing. A universal life insurance policy will lapse when it can no longer cover the cost of insurance (premiums) and administrative costs.

“The most volatile element of variable and universal life insurance policies is the investment return on the cash value. In a good investment environment, you may earn a higher rate of return than what you can get with a whole life or traditional universal life insurance policy,” says Ashe. “In a bad investment environment, you may earn much less. These insurance policies credit the returns earned in the sub-accounts.”

3. Death throws: The purpose of life insurance is to make certain your family is not cash-strapped if you die. If the investments perform poorly, the cash value and the amount of the death benefit will both start to decline, leaving you and your family with less money to cover your burial and your family’s living expenses. However, the cash value and death benefit will never fall below a certain level.

4. Crypt keeper: Maintenance charges on a variable life insurance policy can be more than 2 percent of its cash value. Also, if you surrender the policy you will be taxed on your earnings or any money that the policy accumulated in its cash value.

5. Ghost in the machine: Certain states tax up to 2 to 3 percent of your premiums.

VARIABLE UNIVERSAL LIFE INSURANCE

1. You’ll pay a King’s ransom: It is expensive. You will pay a great deal more for a VUL than a traditional whole or permanent life insurance policy. In addition to this, there are very high surrender charges in the early life of the policy. Insurance experts advise reading the prospectus thoroughly before purchasing a variable universal life insurance policy. One of the reasons is because there are a number of upfront “charges” outlined in the fine print that may be overlooked.

2. Immortality is cheaper: Premiums are very high on this policy because they are used to cover the cost of insurance, in addition to the mortality and expense charges of the investment funds. The insurance premium is also subject to “loads” or deductions that are used to cover state and federal taxes on premiums.

3. Only the Shadow knows! You must have a better than average understanding of the stock market and how it works. The investment component of this policy includes stocks, bonds and securities, which create a high degree of risk because your cash value and the security of your death benefit can be impacted by the performance of your investments in the stock market.

4. Scared of the dark: Again, it is crucial that you read the prospectus provided with this policy before making any investment decisions since it is your responsibility to manage the accounts.  If the investments take a dive, so will the value of this policy.

5. Under their spell: Unscrupulous insurance agents love this policy because there are so many upfront costs that add to their commission and often they may omit crucial information required to keep the policy valuable to the policyholder. Insurance experts suggest you shoot for a variable universal life insurance policy that has a guaranteed death benefit, so if the cash value starts to decline, you won’t lose the death benefit.

This article was originally published by Life Quotes, Inc.