This page is intended to be used as a tool to help teach the basics and have this material available for easy reference.
Why do I need Life Insurance?
Life insurance is an essential part of financial planning. One reason most people buy life insurance is to replace income that would be lost with the death of a wage earner. The cash provided by life insurance also can help ensure that your dependents are not burdened with significant debt when you die. Life insurance proceeds could mean your dependents will not have to sell assets to pay outstanding bills or taxes. An important feature of life insurance is that no income tax is payable on proceeds paid to beneficiaries. The death benefit of a life policy owned by a C corporation may be included in the calculation of the alternative minimum tax.
How much Insurance do I need?
Before buying life insurance, you should assemble personal financial information and review your family’s needs. There are a number of factors to consider when determining how much protection you should have. These include:
- Any immediate needs at the time of death, such as final illness expenses, burial costs and estate taxes
- Funds for a readjustment period, to finance a move or to provide time for family members to find a job
- Ongoing financial needs, such as monthly bills and expenses, day-care costs, college tuition or retirement.
Although there is no substitute for a careful evaluation of the amount of coverage needed to meet your needs, one rule of thumb used is, buy life insurance that is equal to five to seven times annual gross income.
Basic Life Insurance Options:
When considering life insurance, it’s important to consider the experience and financial strength of the company issuing the policy.
What Do You Want from Your Life Policy?
There are two types of life insurance available today: term and permanent. One is straightforward life insurance with a basic cash payout. The other works a little harder for you. The type you choose will depend on your financial situation and what you’re looking for in an insurance policy.
Permanent Is for Life
One main difference between term and permanent life insurance is that permanent doesn’t expire. As long as premiums are being paid, it stays with you permanently.
The other big difference is that with permanent life insurance, your premiums are invested to produce returns. This gives your policy a cash value, which usually accumulates at a guaranteed minimum interest and is available to help fund retirement, emergencies and more.
The law currently allows your cash value to grow tax deferred. Because of this benefit, a permanent life insurance policy has become more than a protection tool for some people—it’s also a financial tool.
Choosing A Plan
Buying life insurance is not like any other purchase you will make. When you pay your premiums, you’re buying the future financial security of your family that only life insurance can provide. Among its many uses, life insurance helps ensure that, when you die, your dependents will have the financial resources needed to protect their home and the income needed to run a household.
Choosing a life insurance product is an important decision, but it often can be complicated. As with any other major purchase, it is important that you understand your needs and the options available to you.
The main types of life insurance available are term and permanent. Term insurance provides protection for a specified period of time. Permanent insurance provides lifelong protection. To learn more about term and permanent insurance click on the appropriate button at the top of this page.
Frequently Asked Questions About Life Insurance:
1. What happens if I fail to make the required payments?
If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium. After that, the policy will lapse. You may be able to reinstate with evidence of insurability depending on your policy’s provisions. If your policy has sufficient cash value, the company can, with your authorization, draw from a permanent policy’s cash surrender value to keep that policy in force. This does not apply to term insurance because there is no cash value to draw from. In some flexible premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values.
2. What if I become disabled?
Provisions or riders that provide additional benefits can often be added to a policy. One such rider is a waiver of premium for disability. With this rider, if you become totally disabled for a specified period of time, you do not have to pay premiums for the duration of the disability.
3. Are other riders available?
(availability, specifics, and costs of these riders vary by carrier and state.)
- “Accidental death benefit”, provides for an additional benefit in case of death as a result of an accident.
- “Accelerated benefits”, also known as “living benefits.” This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home.
- “Child rider”, provides insurance for all your children, usually from $1,000 to $20,000 of death benefit.
4. When will the policy be in effect?
If you decide to purchase the policy, find out when the insurance becomes effective. This could be different from the date the company issues the policy.
5. How do accelerated death benefits work?
It allows policyholders to receive all or part of the policy’s proceeds prior to death under certain circumstances, including the need for long-term care and confinement to a nursing home. Because payments may affect tax status and Medicare eligibility, and will be deducted from the overall benefits paid later to beneficiaries, policyholders should thoroughly investigate options in advance.
6. By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?
Medical tests can provide accurate and current information about an applicant’s health, thus enabling insurers to charge premiums that reflect the level of risk an applicant represents. Because some health conditions are easily managed through proper medication, therapy or lifestyle changes, medical information sometimes makes it possible for insurers to cover applicants who might not otherwise be insurable. More serious or incurable conditions present an enormous risk that an insurer simply cannot assume.
7. What should I consider in naming life insurance beneficiaries?
- Always name a “contingent,” or secondary, beneficiary, just in case you outlive your first beneficiary.
- Select a specific beneficiary, rather than having the proceeds of your life insurance paid to your estate. One of the great advantages of life insurance is that it can be paid to your family immediately. If it is payable to your estate, however, it will have to go through probate with the rest of your assets.
- Be very clear in wording beneficiary designations. Naming specific children may exclude those born later. If your child dies before you, do you want the proceeds to go to that child’s children? Changing the beneficiary designation is easy, but you have to remember to do it.
8. Does it make sense to replace a policy?
Think twice before you do, because in many situations it may not be to your advantage. Before dropping any in-force policy, make sure your “new” policy is paid for and in effect and first consider:
- If your health status has changed over the years, you may no longer be insurable at preferred or standard rates.
- Even if both policies pay “dividends,” it may be years before the new policy’s dividends equal those of your present one.
- If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original one. There may also be a period wherein a surrender charge is applicable on the first policy.
- You should ask for a detailed listing of cost breakdowns of both policies, including premiums, cash surrender value and death benefits. Compare these as well as the features offered by both policies.
- If you decide to surrender or reduce the value of the policy you now own and replace it with other insurance, be sure your new policy is in force before you cancel the old one.
9. As a single person, do I need insurance?
The answer almost always is yes. You may want to consider these options:
- Disability income insurance – especially important for self-supporting singles without sizable assets, this can replace a good part of the income you would lose if you were unable to work because of accident or illness. If you don’t have long-term disability coverage at work, it would be wise to consider an individual policy designed to replace at least 60 percent of your income.
- Health insurance – if you don’t have on-the-job coverage, an individual policy is your first line of defense against ever-escalating medical and hospital costs. You can keep premium costs down by electing a large deductible, thereby “self-insuring” as much as you can afford.
- Life insurance – even if you have no dependents now, you may later. If you buy now when you are younger and healthier, you can “lock in” lowest-cost coverage, including guaranteed insurability.
10. What Are My Life Insurance Options?:
Also known as straight life, whole life is the simplest form of permanent life insurance. You’ll pay the same amount of premium for the rest of your life. (Start young and the less expensive the premiums will be.) Your cash value will accumulate based on a guaranteed rate. As long as your policy is current, you can borrow against the cash value at the current policy loan interest rate.
This type of insurance is broader than whole life in that it gives you more flexibility. You pay a set initial premium, but after that you decide when and how much you want to pay (subject to certain limits, of course). How does this work? The insurance company simply charges the insurance cost from your cash value account. You can even skip payments as long as you know your cash value is adequate enough to cover the insurance costs. You can also increase or decrease your death benefit amount without buying a new policy.
With variable life, you pay a fixed premium amount, but you have the option of investing your premiums in one or more sub-accounts ranging from conservative to more risky. Your cash value is not guaranteed as it is with whole life. Instead, it will vary based on the performance of your investment choices. The good news is you have potential for higher levels of growth. The bad news is your cash value could decrease. Even so, your death benefit protection is not in jeopardy as long as you meet the conditions slated in your contract.
Variable Universal Life*
This option combines some features of variable and universal policies to create a more flexible life insurance product. As with universal life policies, you decide, after the initial premium, when and how much more you want to pay into your policy. You can adjust the death benefit, plus you have the wide range of investment options as with variable life. Again, your cash value will increase or decrease depending on the performance of your investment choices.
About Permanent Life Insurance
There are also different types of permanent life insurance, all of which provide a cash value. The most basic way to break them down is into fixed and variable. With fixed, your cash value earns a fixed rate of return. With variable, you have more control over how your cash value is invested, and you return may vary.
Get a quote and find out how affordable great protection for your family can be. Call our office today at 1-877-643-2056.