Guide
Welcome to Amplify’s Guide to Life Insurance!
We built this resource to help you understand how life insurance can protect your loved ones and help you grow wealth you can use while living.
Some
Key Terms
Purchasing life insurance is an important decision. In order for you to get the most out of this guide, here are a few terms you’ll want to know.Policy
A legal contract between an insurance company and a policyholder, in which the insurer agrees to pay a specified sum of money (the "benefit") in the event of a specified loss or event (the "covered peril").Premium
The amount of money that a policyholder must pay to the insurance company in exchange for coverage under a life insurance policy.Death Benefit
The payment made by a life insurance policy to the designated beneficiary(s) upon the death of the insured person.Beneficiary
A person or entity designated to receive the death benefit from a life insurance policy. The person who owns the policy chooses the beneficiary when they purchase the policy.Rider
Additional features or options that can be added to a life insurance policy for an additional cost. Riders allow policyholders to customize their coverage beyond the basic coverage provided by the policy.Cash Value Insurance
A type of permanent life insurance that includes a death benefit and a savings component. Part of the premium is directed into the savings component, which may accrue interest over time and can be accessed via loans or withdrawals.
Life
Insurance
Basics
You have likely come across other forms of insurance such as automotive, home owners, or health insurance. Life insurance works similarly to these products, but focuses on helping people plan for perhaps the biggest change of their life: the end of it.What is Life Insurance?
Life insurance protects your loved ones when you pass away. A life insurance policy is a private contract between you and an insurance company.
In the policy agreement, you agree to make premium payments in exchange for a death benefit to be paid out to your beneficiary if you die while the policy is active.
In the policy agreement, you agree to make premium payments in exchange for a death benefit to be paid out to your beneficiary if you die while the policy is active.
Are there different types of life insurance?
Yes, the two most common types of life insurance are Term and Permanent.Term Life Insurance provides a death benefit in exchange for premium payments (usually paid monthly). It’s called “Term” because it is only active for a specified length of time (e.g. 20 or 30 years). If you die at any point while the policy is active your beneficiaries receive the full death benefit, tax-free. If you don’t die within the specified term there is no pay out.
Permanent Life Insurance offers lifetime coverage up to a specified maturity date (e.g. age 121), and the chance to grow tax-deferred wealth in a cash value account that can be used while the policyholder is alive. If the policyholder lives past the maturity date they receive the value of the policy in a lump sum payment.
Both Term and Permanent Life Insurance policies can lapse (become inactive) if premium payments are missed. This means the policyholder will not receive a death benefit and have to reapply for a new policy. To avoid this and other scenarios that can cause a policy to lapse, policyholders should read their policy carefully before purchasing.
How to
Build Wealth
with Life
Insurance
Many don't see life insurance as a means to accumulate wealth they can use while still alive. This section details how building wealth with permanent life insurance works and why a permanent policy can be a potent addition to your financial strategy.Why do people purchase permanent life insurance?
Permanent Life Insurance can be used to grow tax-efficient wealth that you can leverage while living for things like retirement, additional income, education expenses, starting a business, or whatever future need arises. As a reminder, Term Life policies only provide a payout if the policyholder passes away so they don’t offer the same benefit.
How do I build wealth with a permanent life insurance policy?
The process of leveraging a Permanent Life Insurance policy to build wealth is fairly straightforward. Here are the basic steps:1
Pay Your Premium2
Enjoy your benefits:Build tax-efficient wealth.
The cash value account’s growth is tied to an investment vehicle, determined by the chosen policy type. Since the account is funded with after-tax money, you can enjoy tax-deferred growth, tax-exempt withdrawals, and tax-free loans as long as the policy remains active and compliant with regulations.Protect yourself from the unexpected.
Many policies offer additional coverage options called “riders” that cover long term care costs, serious illnesses, and other scenarios. Additionally, you should consult an attorney to find out if your home state protects cash value from creditor claims and bankruptcy.Use your cash value any time.
Use funds from your cash value account for what you like via withdrawals or loans. No age or use case restrictions to navigate. Any outstanding loans are paid off by the cash value when the policyholder passes away.Enjoy peace of mind.
Live your life knowing your loved ones will be taken care of if something happens to you. Your policy comes with a tax-free death benefit that your beneficiaries can use at their discretion when you pass away.3
Leave a LegacyHow does the cash value grow?
That depends on the type of policy you have, but here are the details for the two most common Universal Life policies Amplify sells.Indexed Universal Life (IUL)Indexed Universal Life (IUL) policies accumulate cash value based on returns linked to the performance of a stock market index. Policyholders can choose which index they want their cash value account to track. Returns are often capped at 8-9% and usually have a floor of 0%.
Variable Universal Life (VUL)Variable Universal Life (VUL) policies invest funds in subaccounts resembling mutual funds. The cash value of the policy fluctuates based on the performance of these subaccounts. VUL policyholders have full control when investing their cash value within the subaccount. Unlike IUL policies, VUL returns have no upper or lower limits, making them riskier but potentially more lucrative.
When can I access my funds?
There is no age restriction or use-case restriction on when you can access your cash value. Typically, you should be able to have limited access to the cash value account after year 2 or 3, but will not be able to access all of the cash inside your account without facing a surrender charge until after year 10-15. Surrender charge rules vary by carrier, and are used to ensure the carrier has enough time to recoup their costs for setting up and managing the policy.Start Building Wealth
Ready to see how much wealth you could build with a permanent life insurance policy? Click below to get started.Get a Quote
Using Your
Cash Value
Cash value is a major perk of Permanent Life Insurance. And the best part is: you can use it while living.Is there a “right” way to leverage cash value funds?
Everyone’s situation is different, but there is a general strategy most people can leverage to maximize the wealth they build in a permanent life insurance policy. This strategy includes funding a cash value account, giving it sufficient time to grow, leveraging low-interest policy loans to access the cash, and then using your death benefit to pay off any outstanding balance when you pass away.
Imagine you’re 35 years old, you bought an IUL policy with $350,000 in coverage and you’re able to pay $400/month in premiums . For now you’ve structured your policy to have an increasing death benefit, meaning your total coverage amount grows as your cash value grows. However, your policy will switch to a level death benefit at age 65 to help you reduce expenses when you retire.
To make things simple, assume $100 of your premium goes to cover the cost of your insurance (the $350K) and any fees associated with your policy. The rest ($300) is put into a cash value account.Fast forward 18 years:You’re 53 years old, your kid is getting ready to go to college, and you and your spouse are finally going to take that long vacation you’ve been planning which will cost you $15,000. Thankfully, you’ve kept your policy active and left the cash value account alone. At the 18 year mark, assuming an average annual return of 6%, you have $114,000* in your cash value account.
At this point you have two options for funding your vacation with your cash value: You could withdraw the money, which would reduce your total account value to $99,000 (which also reduces the amount of money your beneficiaries will receive when you pass away). Or you can take a loan out against your cash value for $15,000, and keep your account value at $114,000. There are benefits and drawbacks to a policy loan.
To make things simple, assume $100 of your premium goes to cover the cost of your insurance (the $350K) and any fees associated with your policy. The rest ($300) is put into a cash value account.
$300
Cash Value Account$100
Cost of Insurance“At the 18 year mark, assuming an average annual return of 6%, you have $114,000* in your cash value account.”
Policy Loan: Pros
- Immediate access to cash without impacting your account value.
- You are not required to pay back the loan. If you opt for this, the loan will be paid off by the death benefit when it is disbursed.
- Policy loans are usually tax free and don't require a credit check.
Policy Loan: Cons
- You will pay interest on the balance. Typically the returns on your cash value are more than enough to cover the cost of interest. This is why many people choose to not pay off their loans.
- If the loan balance gets too high, your policy may be at risk of lapse.
In our fictional scenario, let’s say you decide to take out a loan, and you have the vacation of a lifetime.Fast forward another 12 years. You are 65 and retiring.As you’ve aged, the cost of your $350,000 in coverage has grown expensive. This is simply because the older you get, the more of a risk you are to the insurance carrier. Luckily you structured your policy to switch from an increasing death benefit to a level death benefit at this time. Switching death benefit options allowed you to lower the coverage amount on your policy from $350,000 to the absolute minimum. This reduced your risk to the carrier, thereby lowering your premium. Your cash value was not impacted by this change, but your overall death benefit was reduced.
Assuming your average annual return rate stayed around 6%, you have around $290,000* in your cash value account now. If that return rate holds steady going forward, your cash value will generate roughly $17,000 each year. This should be enough money to cover your premiums and loan interest while still growing your cash value without any out-of-pocket contributions from you.
Fast forward one more time to the day you die.Sad, we know, but it has to happen to complete this scenario. In retirement, you took out another loan to finish paying off your mortgage, so you passed away with roughly $50,000 outstanding in loans and interest. Your cash value grew to $375,000* in that time. (Remember: the growth rate slowed because you were using the returns to pay for your premiums and loan interest). The $50,000 loan balance is paid off by the death benefit, and your beneficiaries receive the remaining cash value ($325,000) plus the face value of your policy tax free. While we can’t guess what the face value of your policy will be when you die, it will certainly be an additional amount your beneficiary will receive on top of your accumulated cash value.*Please note, estimating the amount of money in your cash value account at any point is difficult and depends on several factors such as the policy type, fees associated with your policy, the performance of the vehicles your cash value’s growth was tied to, and how much of the cash value you used already. This number is purely for educational purposes.
Assuming your average annual return rate stayed around 6%, you have around $290,000* in your cash value account now. If that return rate holds steady going forward, your cash value will generate roughly $17,000 each year. This should be enough money to cover your premiums and loan interest while still growing your cash value without any out-of-pocket contributions from you.
“If your return rate holds steady going forward, your cash value will generate roughly $17,000 each year.”
Know Your
Coverage
Needs
When it comes to figuring out how much life insurance coverage you need, there are two factors to consider: the amount of coverage you have and how your coverage works.What is the coverage amount?
Both Term and Permanent life insurance policies have a coverage amount (also known as the death benefit of your policy). This is the amount of money your beneficiaries receive if you pass away while the policy is active. At Amplify, we also factor the cash value component of Permanent Life policies into the coverage amount because most people use those funds the same way they would use their death benefit (e.g. pay off a mortgage, retirement income, etc.)
How Your Coverage Works
The relationship between the type of policy you have and when you pass away has a huge impact on how “covered” you really are. Some of the mechanics to keep in mind include:Length of CoverageSome policy types only cover you for a limited period of time, whereas others provide lifetime coverage (up to age 121).When Funds are AccessibleSome policies only provide a death benefit (i.e. they only help your beneficiaries if you die while the policy is active), whereas others provide a death benefit and a cash value component that can be used while you’re living.The good news is that you have options when it comes to how and when you can access your coverage. The bad news is that it’s not always clear how much money you’ll need and when, so it’s important to pick a strategy that gives you flexibility and ensures you have funds when you actually need them.If you’re not sure how much coverage you need, or which product is best for you, here is a helpful method for getting an estimate.
Easy Way to Estimate Core Life Insurance Coverage
- List a goal.
- Estimate how much money is required to achieve that goal.
- Think through whether that goal is a one-time event or a recurring expense.
- Total up the amount. This is a good estimate for your coverage needs.
GoalPay off Mortgage
Funds Required$500,000 Once
GoalReplace my income until retirement
Funds Required$75,000 Yearly for 20 years.
GoalPay for kid’s college
Funds Required$50,000 Twice
GoalTotal
Funds Required
$500,000
($75,000 x 20)
($50,000 x 2)
= $2,100,000
Goal | Funds Required | Frequency |
|---|---|---|
| Pay off Mortgage | $500,000 | Once |
| Replace my income until retirement | $75,000 | Yearly for 20 years. |
| Pay for kid’s college | $50,000 | Twice |
| Total | $500,000 ($75,000 x 20) ($50,000 x 2) = $2,100,000 |
Additional coverage you might want to consider
Along with your core coverage, many life insurance policies offer additional protections called riders. It is difficult to estimate how much coverage you should plan for this purpose, but it’s important to look for the availability of these features in the policy you choose.
How to
Compare Products
Before any significant purchase it’s wise to see how different options compare with each other. There are a lot of life insurance products available to you, but we will focus on the few that meet Amplify’s ethical and quality standards.Is there a helpful way to compare?
Life insurance policies are first and foremost a way to protect your loved ones when you pass away. Some policy types also offer you a chance to build tax-efficient wealth that can be used while you’re alive. These elements of protection and tax-efficient wealth building are a great place to start when comparing products. Because they are very distinct functions, we will approach each element separately.
Protection
To start, let’s look at how different insurance products protect you and your loved ones. Key factors to consider include the length of coverage, cost of premiums, the death benefit amount and whether it is fixed or flexible, access to tax-advantaged growth opportunities, and living benefits.Coverage Length
Do you want coverage for your lifetime or only a specific period of time? Permanent policies technically mature when the policyholder turns 121 years old. Term policies expire at the end of the specified “term”.Premium Cost
Life is expensive, we get it. If cost is the most important concern, then Term Life insurance is likely the right option for you. If, however, you have more financial flexibility a permanent life policy can unlock some really powerful benefits.Death Benefit Amount
As you age, your financial needs may change, so having the ability to flex your death benefit up or down may be useful for some.Tax Efficient Growth
Having an additional way to grow wealth tax-free can protect you and your loved ones down the road. Not all policy types offer this.Type of Cash Growth
Permanent policies that offer cash growth can also offer different risks and rewards. Certain policies trade off some growth to prevent losses. Others are tied right to the market, with unlimited potential to go up or down in value. This could influence when you borrow from your account.Living Benefits
Riders can provide financial support for things like chronic or terminal illness. Since life insurance is designed to pay out when you die, people living with these conditions are often left to pay for the associated costs out of pocket. Many permanent life policies have certain riders included.Variable Universal Life | Indexed Universal Life | Term Life | Combo: Universal Life + Term | |
|---|---|---|---|---|
| Coverage Length | Lifetime | Lifetime | Limited | Lifetime |
| Premium Cost | Flexible | Flexible | Low | Flexible |
| Death Benefit Amount | Flexible | Flexible | Fixed | Flexible |
| Tax-Efficient Growth | Yes | Yes | No | Yes |
| Type of Cash Growth | Unlimited | Floor and Ceiling | None | Flexible |
| Living Benefits Included | Yes | Yes | No | Yes |
Tax-Efficient Wealth Building
Now let’s look at how some insurance products compare against other financial vehicles in terms of their ability to grow your wealth, how you access that wealth, what you can use the money for, and how the taxes work for each option. You’ll notice that Term Life Insurance is not included in this table because there is no cash value component to a Term policy.Purpose
Many tax-advantaged savings vehicles come with strict use-case guidelines. It’s important to understand the rules before contributing to any vehicle because you may only be able to use that account for specific items.Contribution Limit
Some growth tools (including permanent life insurance) have limits on how much you can contribute each year. The key question is whether the limit is a fixed amount (like a 401(k) or IRA) or if the limit is flexible.Investment Risk & Reward
There is always risk when it comes to investing. Consider whether the vehicle you are investing in has any floor or ceiling when it comes to how your money shrinks or grows.Early Access Penalties
Many tax-advantaged vehicles penalize you for accessing your funds too soon. These penalties may be regulated by the government or the administrator of the account, so it’s important to consult a tax or legal advisor before taking action.Taxes Incurred
Vehicles funded with “pretax” dollars will typically be taxed when you access those funds. Vehicles funded with “after-tax” dollars can grow and be accessed without any additional taxes if all of the regulations on that vehicle are followed.Tax-Free Loans
This is a feature of some tax-advantaged accounts, and is a benefit of certain permanent life insurance policies like IUL and VUL. Leveraging low-interest loans allows you to use your saved funds without actually removing any money from your account.Variable Universal Life | Indexed Universal Life | 401(k), IRA | Roth IRA | Brokerage | Savings, Money Market | |
|---|---|---|---|---|---|---|
| Purpose | Flexible | Flexible | Retirement | Retirement | Flexible | Flexible |
| Contribution Limit | Flexible depending on coverage amount | Flexible depending on coverage amount | Yes | Yes | No | No |
| Investment Risk and Reward | No floor, No ceiling | Floor: 0% Ceiling: 8-9% (usually) | No floor, no ceiling | No floor, no ceiling | No floor, no ceiling | 0% floor. Ceiling depending on the institution. |
| Early Access Penalties | No, however a surrender charge may apply for the first 10-15 years | No, however a surrender charge may apply for the first 10-15 years | Yes if before age 59 1/2 | Yes if before age 59 1/2 | No | No |
| Taxes Incurred | Only if withdrawing more than your cumulative payment amount | Only if withdrawing more than your cumulative payment amount | When accessing any amount | Only on early withdrawal | On any gains when securities are sold | Yearly on interest |
| Tax-Free Loans | Yes | Yes | In limited circumstances | In limited circumstances | No | No |
Amplify
Recommends
Universal Life
Universal Life is a type of permanent life insurance that offers both coverage and wealth building opportunities in one product. With a Universal Life policy, you get lifetime coverage (up to age 121), plus a cash value component that grows tax-deferred and can be accessed tax-free for any purpose.Universal Life: Security and Flexibility
Amplify recommends that individuals consider their needs and goals through the lens of having the long term coverage and flexibility of a policy like Index Universal Life (IUL) or Variable Universal Life (VUL). These policies will likely cost more up front compared to just purchasing a Term policy, but can end up costing less in the long run and provide more financial flexibility than a Term policy can.
At Amplify we understand IUL and VUL policies are not a fit for everyone. However, it’s difficult to overstate how powerful these policies can be for qualified individuals seeking life insurance coverage. Here is a recap of the key benefits these policies offer:
It’s always best to discuss your options and goals with a qualified life insurance advisor before making a decision. Your agent will be able to tell you what type of policy or policies you qualify for and how much it will cost you.
- Lifetime coverage (up to age 121): You’re always covered and you don’t need to worry about reapplying later in life.
- Access to tax-deferred growth with no age or use case restrictions: Flexibility when it comes to when and why you leverage your funds. And the best part is there are ways to use this money tax-free.
- Wealth building opportunities for all risk appetites: Whether you prefer steady growth with no downside or you prefer to risk potential losses for larger potential gains, there is a Universal Life policy that will match your preferences.
- Flexible death benefit and premiums: With IUL and VUL policies you are not locked in to a specific death benefit amount or premium amount. These can change in step with your preferences or needs as you age.
- Easily pair with a Term policy: IUL and VUL policies can offer a significant amount of life insurance coverage. If, however, you need additional coverage beyond what an IUL or VUL can provide, it’s very easy to purchase a Term policy to supplement your short-term coverage amount.
Why not go big on a Term policy?
To some, the “simplest” strategy when it comes to life insurance is to apply for the biggest Term policy available to you (e.g. 30 year Term with $2M in coverage), and then invest the money you would have spent on a Universal Life policy elsewhere. This approach is often referred to as “Buy term, invest the rest”. In theory, this gives you the coverage you need immediately at the lowest possible cost. At Amplify we think Term Life Insurance can be useful, but no matter how much coverage you get with a Term policy, we see a few potential problems with this approach:- You don’t know how long you are going to live, and if you outlive your policy you will have to apply for a new one
- Life insurance gets more expensive as you get older
- The only way you (or, realistically, your beneficiaries) gain from this approach is if you pass away before the Term expires
The Bottom Line
When it comes to buying life insurance, it’s important to assess your goals, your timeline, and ultimately your risk tolerance. With a Universal Life insurance policy like IUL or VUL, you can protect your loved ones from unexpected events and provide yourself flexibility in the long term via a cash value account that can be used while you are living.It’s always best to discuss your options and goals with a qualified life insurance advisor before making a decision. Your agent will be able to tell you what type of policy or policies you qualify for and how much it will cost you.