I know about 10 year term, but I just heard about a 10 pay plan. What is that?
Answers | 4
Ten year term is temporary coverage for 10 years, as you already know. The premium and death benefit are usually level for that period of time. Notice that we are talking about a term plan when we
refer to this type of coverage? When those in the insurance industry talk about a “10 Pay” plan, we are referring to permanent coverage, not term. Why the “10 pay” terminology? This can get a bit complicated but I will keep it relatively simple. This wording refers to permanent plans such as Universal Life where the policy is custom designed with premium payments for only the first 10 years, but the coverage itself (the death benefit) can go to age 100 or beyond.
Why would anyone desire a policy designed this way? Try this example: you are 55 and want to stop all premium payments at age 65 - but have the coverage last for the rest of your life. I have such a policy. Another reason for doing it this way is that a lifetime of premium, when shifted to only the first 10 years, can cause cash value to accrue faster. Those premium payments are under the interest rate sooner in time than if I waited to pay premiums in the later years on a “continuous pay” plan. One last thing. I pay annually for the plan, and this further accelerates cash accrual since the premium payments occur all at once instead of later on, such as on a monthly basis. You may have noticed that my goal was to maximize cash accrual, whereas in the earlier example the goal was to stop payments at a specific point but keep the coverage going after that point. Kind of like paying your house note off early and still having the house to live in vs paying for your house until the day you die. These are custom designed plans, so you won’t find them as “off the shelf” items, and quoting is a bit more involved. Can we design other pay scenarios? Yes, but it has to do with your goals and what you can afford to do.
Kirby did a good job of defining the "10 pay" permanent life insurance premium design. I would like to add that the policy type that you choose usually falls into (4) types which will drive the potential return on the cash values. Those types are 1-Fixed Rate Universal Life with a 3% current rate of interest that my go up if interest rates rise in the future, 2-Indexed Universal Life with a variable rate of interest credited each year but with no negative values is a down year, the current hypothetical rate is around 6%, 3-Whole LIfe with a combination of guaranteed cash values at 3% and potential dividends that can add to the guarantees, current crediting rates are around 6%, and 4-Variable Universal Life with variable sub-accounts that allows you to invest the cash values in stock, bond, real estate, etc. The hypothetical illustration can range from 0% to no more than 12% with the most common being in the 6 - 8% range.
The key is that the assumed return on the cash values drives the premium being calculated to support the policy and most of the time it is "hypothetical" , your actual results will vary.
I also have this type of policy personally, I choose the Variable Universal Life format. All of the options have advantages so discuss them in detail with a qualified professional.
Permanent plans have options to make an adjustment along the way (non-forfeiture options) that allow you to preserve your investment even though you didn't complete the plan as originally designed. This is not what he had hoped for, but is much better than creating a hardship for the Mr. GenXer when he can least afford it.
The National Association of Insurance Commissioners have designed and require illustrations that emphasize the guarantees and the variable aspects of all life insurance plans. Make sure you understand what's actually guaranteed, so you're not surprised years from now, having accumulated far less than you'd expected.
In short, term insurance covers you for only a certain period and at the end of that period, if you haven't died, it simply goes away. It's available with different lengths of time for the premium guarantee -- typically 10, 20, and 30 years. (and often lets you keep the coverage after the term is up -- but the premium jumps enormously and it's very unusual for anyone to do that).
Term insurance builds up no cash value. There's no "return" on it in the sense of any kind of investment. It's simply a death benefit, no more and no less. You die, your heirs get cash. And relative to the amount of coverage, it's usually quite inexpensive.
Permanent insurance comes in a wide variety of flavors (see the other folks' excellent answers for some of them). What they all have in common is that they build up a cash value and may be kept in force for your entire life. But bear in mind what that looks like from the side of the insurance company - if you're guaranteed to eventually get the payout -- (as far as I know, everyone dies eventually) -- they have to build up enough value within the policy to pay out that eventual claim. That's very different from term life where most term policies expire with nobody ever getting a payout. And that's why, per dollar of death benefit available, a permanent policy will cost a lot more than a term policy.
That said, if you have a need for permanent coverage - there are a variety of scenarios where that makes sense, not the least of which are those related to estate planning issues (i.e., especially for providing liquidity for dealing with liabilities related to the estate, such as buying out a share of a business, or dealing with estate taxes).
But before you buy a policy of any sort - term or permanent - make sure you understand what you're actually buying the policy *for* and whether your need for coverage is temporary or permanent,