What Is a Surrender Charge in Life Insurance?
Permanent life insurance is built to be held for a long time. People who buy it expect to keep the policy for decades, and the way the product is priced reflects that expectation. One consequence is a charge that most buyers do not think about until the day they want out: the surrender charge. It […]
Cost of Insurance (COI) in Life Insurance
Of all the charges inside a permanent life insurance policy, the cost of insurance is the one that matters most and is understood least. Premiums are easy to see, since they leave a bank account on a schedule. The cost of insurance, usually shortened to COI, is quieter. It is deducted from the policy’s cash […]
What Is Underfunding in Life Insurance?
A life insurance policy only protects a family if it is still in force when the insured person dies. For term insurance, keeping a policy in force is simple: pay the premium and the coverage continues. Permanent policies such as universal life and indexed universal life work differently, because the premium is flexible and the […]
What Is Overfunding in Life Insurance?
Most conversations about life insurance focus on avoiding underfunding, the risk of paying too little into a policy and watching it lapse years earlier than intended. Overfunding sits at the opposite end of the spectrum, and it is a term that often confuses people the first time they hear it, since paying more into a […]
What Is the Seven-Pay Test in Life Insurance?
Behind every permanent life insurance policy sits a quiet actuarial calculation that most policyholders never think about until it becomes relevant: the seven-pay test. It is the specific mechanism the tax code uses to decide whether a policy still qualifies as traditional life insurance for tax purposes, or whether it has been funded aggressively enough […]
What Is a Modified Endowment Contract (MEC)?
For most people, life insurance and tax-advantaged access to money go hand in hand. Cash value grows tax-deferred, and withdrawals up to the amount paid in generally come out tax-free. But there is a specific classification, a modified endowment contract, or MEC, that quietly strips away much of this favorable treatment, and it can catch […]
Are Withdrawals Tax-Free in Life Insurance?
Permanent life insurance is often marketed around a genuinely attractive feature: the ability to access cash value during your lifetime, sometimes described casually as a source of tax-free income. Like many financial statements simplified for marketing purposes, this is true, but only within specific limits and under specific conditions. Understanding exactly where the tax-free treatment […]
Common Causes of a Surprise Tax Bill in Life Insurance
Life insurance is often described as tax-free, and in many of its most common uses, that description holds up perfectly well. A death benefit paid to a named beneficiary is generally received free of federal income tax, and cash value inside a permanent policy grows without being taxed year to year the way a taxable […]
Policy Lapse in Life Insurance
A life insurance policy is only useful if it is actually in force when it is needed. Every year, a meaningful number of policies lapse, meaning coverage ends because a premium was not paid or a policy’s internal costs outpaced the funds available to cover them. For a term policy, this might simply mean coverage […]
Can I Have Two Life Insurance Policies?
It is a question that comes up more often than people expect: can you actually own two life insurance policies at the same time? Maybe you bought a policy years ago and your needs have grown since then. Maybe your employer offers group coverage but you want something more permanent on top of it. Maybe […]