Modified Whole Life Insurance Basics – What it is and Who Needs it
Modified whole life insurance is a special type of permanent life insurance offering a much lesser premium, in return for higher premiums, after an introductory period of the first few years (usually five years).
To begin, modified whole life insurance has much in common with traditional life insurance. However, the distinction between the two lies in the premium contract structure. Unlike in Modified Life, premiums in traditional life insurance are flat throughout the whole policy.
Modified Life Premiums
To start, the amount of premium paid is lower in the first years of the policy for a modified whole life insurance plan. This lower premium period typically lasts for the first five to 10 years, depending on the issuer company.
After the expiry of the lower premium duration, the insurance costs for the rest of the insured’s existence are usually a little higher than the traditional whole life insurance policies. Generally, premium amounts only increase once.
Who Benefits from a Modified Whole Life Policy Structure?
First, a target group is families, in which the breadwinners may be at the early stages of their careers. However, they expect an important wage increase shortly. Second, this product may also work well if you have other financial commitments, and you expect to retire within a few years.
Let’s look at why:
- Modified whole life insurance is life insurance with a fixed amount of time flexibility in the payment of premiums. This encourages you to start building a strong insurance policy until you can pay even higher premiums.
- Modified Whole Life insurance policies deliver lower premiums and also offering all the basic benefits of whole life insurance policies. This kind of policy gives young families a huge opportunity to build assets. Even in times when they struggle to achieve their goals.
- Depending on the policy a family can generate cash value, and at the same time be eligible for dividend payments. Another good thing is that the cash value is tax-deferred and money can be lent from the cash value tax-free.
Financial Protection with Flexibility
In addition, Modified Whole Life is a way to create a financial basis that can be used through financial difficulties. It’s not about “if” you are in a difficult time; it’s about “when” you feel it.
You will handle your financial crisis in such times with the cash value accumulated in this policy. It can also provide education for your kids, help supplement pension income, and several other needs. Each of these needs can be funded as low-interest loans and the quality of the policy can still be maintained.
As with traditional life insurance, you have the key advantage of being able to continue with modified whole life insurers that you can pay flexibly, and still the benefits it offers remain assured. This allows families who want to develop their assets without pushing their financial constraints to achieve life-safety.
How it Works
Basically, for the first five years of the policy, the premium for such insurance is paid at a lower rate. Then, it increases after this period – starting from the sixth year of the policy. This will increase the value of the cash inside it and allow it to use its dividends. Also, the cash value does not require taxes, and if money was taken from the cash value, it is tax-free.
Although the modified whole life insurance can sound too good, it also has a major downside, particularly if you invest in it. Modified whole life insurers take a long time to build up cash value compared with whole life insurers.
This form of insurance allows you to receive a range of coverage at a very low rate and also allows you to tailor the policy to fulfill your particular requirements to eliminate the price of coverage that you do not need.
Structuring Your Modified Whole Life Policy
When structuring a policy, you may opt to customize it with riders. Riders you may consider including in your policy include: accidental death, child coverage, disability, and living benefit.
- If the accidental death coverage is included, it may be helpful because the death benefit payment can be raised if you die in an accident.
- Also, child coverage would be good if you have children because the policy is not costly and when they have grown up you can convert from there to permanent life insurance.
- In addition, if you are concerned with losing your work if you are disabled, coverage of your disability will guarantee you do not lose your policy as long as your premiums are covered.
- Another rider you can think about is the living benefit that comes to you if you are one day diagnosed to have a fatal illness and are supposed to die at a certain time, you can use any of the death benefits.
The same usage as traditional whole life insurance is applied to modified premium products. This includes estate planning, the provision of living costs for survivors, the funding retirement, education financing, or the coverage of a mortgage payment after death.
Who Needs Modified Whole Life Insurance?
The modified whole life policy has many suitable candidates. This involves people who want to protect themselves, but have fewer resources to spare. It works well even for those who know that they will be able to access money later in life.
Modified whole life plans are helpful for persons who do not have much to spend on a whole life insurance policy today, but will have in the nearest future. The kind of person requiring this kind of cover often needs life insurance for their whole life.
Someone who has an increasing job and will make more money over time, somebody who does not need help for children in the future and expenditure is going to decrease, or a family who only has one income earner but may have another in the nearest future can be examples of individuals that might be candidates for a modified whole life insurance program.
It may also make sense for business reasons such as key individuals or buy-selling insurance. This is particularly true when a company is young and does not have the operating budget after many more years.
Another explanation why a modified whole life coverage is beneficial for budget members is that it is necessary to receive insurance coverage while an individual is young. When individuals are healthy, they both ensure that they are insurable in the future and that the premium costs over time are as minimal as possible, since a younger person most likely achieves an entity’s superior health status.
Weigh All Options Before Considering Modified Whole Life
A modified product offers individuals an inexpensive way of achieving these objectives and provides their beneficiaries with the same degree of protection.
However, we should only consider modified whole life insurance when we are completely certain that NO complete coverage option is available. I hope you’ve worked with a broker who weighed all of your choices before proposing a modified whole life insurance plan! Unfortunately, there is a big risk that you will get a short deal if you dealt with a captivating agent instead.
Health Conditions That Suit Modified Whole Life Insurance
While many conditions of health are adapted to \modified whole life policies, I will concentrate on the most common conditions of health.
1. Cognitive Memory Disorders
In most cases, cognitive memory disorders are approved with modified whole life insurance policies because no first-day full coverage would be permitted with any cognitive memory disorder.
2. Kidney Failure
In particular, if you are in dialysis, most insurance firms won’t offer you complete coverage for the first day. You have modified whole life insurance as an alternative or a type of problem coverage guaranteed.
3. Supplemental Oxygen Usage
You must look for no-question life insurance while using an oxygen tank to supplement your breathing as no company will want to cover you from day one.
4. Terminally Ill
Modified whole life coverage is most useful if you are terminally infected, in a hospital, or confined to your wheelchair.
Is Modified Whole Life a Good Product?
There are many reasons why Modified Whole Life Insurance is a smart decision:
- Modified Whole Life coverage is equally as important to the whole life policy
- Death benefit guaranteed
- Accumulation of tax-deferred f cash value
- The right to borrow cash value on a tax-free basis
- The ability to earn dividends as declared by the firm.
Something that you must always remember is that the younger you are, the lower your premiums are, so it makes sense for you to purchase when you are younger. The premiums are set by the use of actuarial tables, because the longer the probability that you live, the more premium you pay.
Often, your health is probably excellent when you are young; this may not be necessary to wait until you have the revenue to support a modified whole life coverage program.
There is a lot of rivalry amongst life insurance companies, so many different types of deals overwhelm the mailboxes every day. With their low prices, guaranteed coverage, level benefits for insurance terms, and much more, these deals look enticing.
Nevertheless, please ask a licensed agency to help you to search for these good offers. I would be very cautious about any of these policies as very little are really what they represent in your mailbox.
Since the first years are smaller, Modified Whole Life not only gives you a break as you struggle to make a respectable salary, the dollars you pay when the premium upward changes are soft dollars.
This kind of policy has many facets as a winning policy. In early policy years, a lower premium could influence the amount of cash, but it is negligible when you consider the “time value money.”
Modified Whole Life vs. Graded Premium Life Insurance
Graded premiums are commonly acquired as a final remedy for individuals with severe health conditions who do not / cannot have traditional coverage. In comparison to traditional policies, these policies appear to be very costly. Some individuals cannot afford life insurance, at least at the standard premium, due to health conditions. Often the Graded benefit life insurance is the option for these individuals.
The graded whole life insurance may be a marvelous thing if you know that you will live for at least two years or more but not as much for those who may die during that period, The only thing paid as a benefit is usually the percentage specified during the first year, a little more during the second, or maybe only the premiums, interest and dividends are paid.
Graded Whole Life plans typically require no exams, testing, or questionnaire which means they have another advantage, and these are usually the ones you will hear that insurer cannot cancel your coverage at any time.
In essence, a graded whole life plan provides an option to either paying higher premiums due to health conditions or not getting life insurance. The advantage, however, is obvious, if you have a disease that could lead to your death in the first two years, you may want to make sure that is right.
But even when the other route is not covered, it may be the only real choice for others by putting money into a savings account.
Do Your Due Diligence
If you are looking at an insurance package for a Graded Whole Life, read all documents to ensure every bit of fine print is known – many of these policy variations are very significant. No specification is available on how they are run and often these are bought in units.
These units will decrease in value over time or may not, so you want to be sure of something else. As always, it’s the easiest way to know if your graded whole life insurance is for you, or you should find a way to cover yourself, despite your health problems.
Often the cost is equivalent, so don’t instantly think you’re going to need a graded package. Sometimes graded life insurance will cost you more than it pays for. Fortunately, if you live long and prosperous, that will happen. In that case, your premiums can surpass your heirs’ death benefit.
If you could qualify for a standard life insurance plan but did not know it, you would also overpay for a graded policy. It doesn’t mean that you cannot enroll in life-insurance that pays a death payout on day one simply because your medical condition preexists.
It is worth testing other forms of coverage before choosing graded life insurance. That way you can see if you qualify and can also save money. When faced with a serious illness, that’s not to say that you’re left out with life insurance. You may have received a dishonest letter that denies your policy. However, this is not the end of the road. You can still consider an alternative known as graded whole life insurance.
Graded life insurance takes about two years to wait for a life insurance payout. If you pass away, your heirs also receive some compensation during this period. You’re going to get the amount you paid in interest premiums.
Your heirs are given the full benefit of death, whether you die through natural or injuries if you live past the two or even three years of wait.
Who are Good Candidates for Graded Premium Insurance?
Graded whole life policy plans are for people with advanced medical conditions but are not life-threatening instantly.
They are mostly for people over 50 years old with health problems, although younger people may also be disqualified from other life insurer requirements, such as:
- Parkinson’s disease
- Coronary artery disease
Pros of a Graded Whole Life Insurance Policy
You can wonder why you should spend two or three years in a life insurance plan without payment. But there are also upsides to these policies:
- The ordeal of a medical examination is normally saved for you. This is a bonus, as the examination could have revealed that your rates were going to rise significantly.
- Approval is quicker than the usual full underwriting phase
- Premiums would be the same over the period, which is additional for those with a fixed income. It is also great for breadwinners since in later years they normally have higher payments.
- There is no waiting time if death is accidental.
Cons of Graded Whole Life Insurance Policies
Graded plans are a high risk in the eyes of an insurer. The firms advertise to customers who are denied for chronic conditions by most insurance companies.
This is why the insurance company’s financial risk is reduced by a delayed benefit span.
In comparison to other policies, companies often charge higher prices for graded policies. Depending on your age and coverage, you will pay up to $200 a month, even though policies vary considerably.
On the bright side, most insurers would allow you to adjust your coverage. You could reduce the death allowance, so the premium would lower to fit your budget.
Mistakes to Avoid
The conditions of a graded life insurance contract often seem too good to be true. If you surpass the two-year threshold, the business pays back your premiums plus interest. There’s a total policy payout after two years. How do you make money from the insurer?
One response is that life insurance firms make more money than the premiums themselves from the investments. Life insurance firms made $145 billion in 2018 from premium, while investments made large $187 billion. Unfortunately for the user the comparatively high cost cannot be afforded, so they just stop paying and many people let it go, so the insurers make money on graded policies. That means that the policyholder lost his insurance cover, and only the cash surrender value of the policy is returned.
This is generally much lower than the premiums charged or the death benefit earned by their heirs. Health conditions depend on the carrier, but Parkinson’s disease, systemic lupus, liver disease, or COPD may put your client in a graded plan for example.
This is normally the case; you have to consult with the carrier of your choice. As an example, Equitable would not give the graded policy a full mortality advantage until the fourth year.
If non-accidental death happens within two years, only a fraction of the death benefit will be paid by the policy.
1. When a death occurs in the first year, maybe only 30% of the death benefit is paid.
2. In the case of non-accidental death, 70 percent of the death benefit is accounted for in year two.
3. Death pays 100% of the death benefit in year three or later.
Examples of “Accidental Death”
In case you were wondering, here are some examples of accidental death in insurance language:
- Car accident
- Fire-related death
- Firearms (excludes acts of war and suicide)
- Industrial accidents
- General accidents (medical professional mistakes, falling objects, air transport injury, etc.)
Examples of “Non-Accidental Death”
“Non-accidental deaths” include:
- Old age
In general, a graded life insurance plan is close to no risk for you when you have a progressive disease, are disabled, or stay in a nursing home. Your heirs receive the payment of your interest premium or receive a death benefit that is greater than what you have paid.
Final Thoughts on Modified Whole Life
Both graded and modified whole life insurance can be good options for certain situations. In addition, they are also designed for seniors. Often, they come with a simplified and trouble-free application process. Typically, we see simplified issues for Final Expense Insurance.
In summary, shopping for life insurance policy can be confusing, so getting help from a professional is always a good idea. The application process can also be frustrating and difficult, especially if your medical record is not so perfect. This is because by issuing plans to individuals who are older or those with health conditions, insurance providers assume substantial responsibility. In addition, some companies also refuse to cover people with certain specific problems. For example, Cardiac bypass is one such issue, but that does not mean that a life insurance policy can’t be bought.
As a result, we recommend that you consult with an unbiased agent to compare your choices taking into account both price and profit periods. This is the most effective and comfortable way to shop life insurance companies.
To answer any questions, an independent agent will shop on your behalf around a dozen or more carriers and help you make a good decision based on your unique needs. Find an agent here.