Everything a policy does not do

Nothing on this website is an illustration. An illustration is a specific document, produced by the insurance company on your real age, health class and funding, showing guaranteed and non-guaranteed columns side by side. It is the document to read before signing anything. What is on this site is the mechanism and published figures, which is a different and smaller thing. Ask us for the illustration and ask to be walked through the charge columns specifically.

Life insurance policies have a contestability period, usually the first two years after the policy starts. During that window the company can review your application if a claim is filed. If an answer was wrong about something that mattered to whether they would cover you, they can reduce the payout or deny it. After that window they generally cannot, except for fraud, and only where state law allows. This is the reason to answer every health and lifestyle question completely, even the ones that feel small.

Nearly every life insurance policy excludes death by suicide during the first two policy years. In a few states the period is one year. If it happens in that window, the company generally returns the premiums that were paid instead of paying the death benefit. The exclusion is written into the contract and is not something an agent can waive.

Guaranteed issue means the company will not turn you down for health reasons. It does not mean the full benefit is payable immediately. These policies almost always carry a graded death benefit. Say death is from natural causes during roughly the first two years. The company then returns about 110% of the premiums paid, rather than paying the face amount. Accidental death is usually covered in full from day one. This is the trade for not answering health questions. It is also the most important thing to understand before you choose guaranteed issue over a policy that asks a few questions and costs less.

Every policy comes with a free look period, also called the right to examine. It starts when the policy is delivered to you and runs between ten and thirty days depending on your state, and on whether the policy is replacing another one. If you return it inside that window you get your money back and the policy is treated as though it never existed. No reason is required and nobody has to approve it.

Permanent policies carry a surrender charge in the early years. It applies if you cancel the policy, or take out more than the contract allows. It typically runs ten to fifteen years, shrinking each year until it reaches zero. It is a charge from the insurance company and it is completely separate from anything the IRS does. So when we say there is no early-withdrawal penalty at any age, that is true, and it is a statement about tax law. It is not a claim that early access is free. Your illustration shows the surrender charge schedule year by year, and it is worth reading before you decide how much to put in.

A policy loan is untaxed while the policy stays in force, which is the whole reason the strategy works. It is still a loan. Interest is charged, and any interest you do not pay gets added to what you owe. The loan and its interest reduce the death benefit until they are repaid. If the loan plus interest ever grows larger than the cash value, the policy can lapse. A policy that lapses with a loan on it can create a taxable gain. That tax bill arrives in a year when no money is coming in to pay it. This is the failure mode of the strategy, and it is why the funding and the borrowing have to be planned together rather than decided separately.

Federal law limits how much premium can go into a policy relative to its death benefit. Cross that line and the policy becomes a Modified Endowment Contract. A MEC keeps its death benefit, still free of income tax. But withdrawals and loans are then taxed on the gain first, and can carry a ten percent penalty before age 59 and a half. The change is permanent and it cannot be undone. A properly designed policy is built to stay under the line on purpose, and the illustration shows the maximum.

An indexed universal life policy pays its costs out of the cash value every month. The cash value has to cover them. If it cannot, the policy lapses and the coverage ends. That happens when funding stops, when too much has been borrowed, or when the credited interest comes in low for a long stretch. It is not a product that runs itself once it is opened. This is why the funding period matters more than the illustrated rate.

You may be thinking about replacing a policy you already own. You may be thinking about a 1035 exchange. That is the rule that lets you move cash value from an old policy into a new one without triggering a tax bill. Either way, state rules require a replacement notice and a written comparison of the two policies. Ask for both. Replacing is sometimes the right move and sometimes it is not, and the comparison is what shows which. Two things are worth knowing first. A new policy starts a new contestability period and a new surrender charge schedule. And the old policy cannot be brought back once it is gone. Do not cancel anything until the new policy is issued and in force.

Insurance is regulated state by state. Policy forms, riders, rates and even the length of the free look period change depending on where you live, and some products are not offered in some states at all. Anything described on this site is a general description of how a product category works, not a statement that a specific policy is available to you. Where you live is one of the first things we check.

Every guarantee in a life insurance policy, including the floor, the death benefit and any guaranteed values, is backed by the insurance company that issued it and by nothing else. It is not insured by the FDIC, not guaranteed by a bank, and not guaranteed by any government agency. This is why the financial strength of the carrier matters and why we look at it before we look at the illustration.