Life Insurance

You need life insurance if anyone depends on your lost income. It solves may problems in both personal and business situations.

Personal Needs:
If you are a parent, you many need life insurance on your own life to enable a surviving spouse to raise the children. When you are older, you many n eed life insurance if you are financially responsible for an aging parent or want to provide funds to take care of final expenses, debts or taxes.

A rough rule of thumb suggests buying protection equivalent to FIVE TO EIGHT TIMES YOUR ANNUAL INCOME. Your needs may vary according to your financial assets and liabilities.

Life insurance can solve your heirs' immediate and long-term needs.

  • Immediate needs would include: funeral expenses, unpaid medical bills, debt and taxes, as well as the time to readjust to a new life-style.
  • Long-term it will help provide: for the maintenance and care of a disabled child or elderly parent, college expenses and, in general, providing the means to your heirs to live the life in which they are accustomed.

Business Needs:
Life insurance is often the solution to:

  • Replace a key person and provide the funds to cover the costs of locating and training a replacement.
  • To fund Buy/Sell agreements
  • To provide collateral for business loans, etc.

 

There are two types of Life Insurance - Term and Permanent

 

Term Insurance
Provides protection for a specified period of time, typically from 20 to 30 years. It pays a death benefit only if you die during this term. Some policies can be automatically renewed at the end of the coverage period, and some can be converted to permanent insurance without the need for a medical exam.

--Advantages of term policies include:
More insurance for less money because premiums are lower then those for permanent insurance, and you can afford to buy more coverage when you need it the most.

Specified periods of coverage make term insurance ideal for covering specific short-term financial needs such as a college education or a mortgage loan.

--Disadvantages of term policies include:
Premiums increase at each policy renewal date, becoming very expensive later in life.

There is no savings feature (cash value), only a death benefit if you die while the policy is in force.

You could outlive your coverage, because term insurance is generally not renewalble after age 70 or 75.

 

Permanent Insurance
Provides lifelong protection as long as you continue to pay premiums. The premiums are based on your age at the time of purchase and generally remain level; they do not increase with age.

Because premiums remain level, permanent insurance is more expensive then term insurance. The policy accumulates cash value, which may be refundable upon surrender of the policy. While the policy is in force, cash values can be borrowed against or used to pay premiums.

There are four basic types of permanent insurance:
1. Whole Life - has a fixed guaranteed instant rate and develops guaranteed cash values.

2. Universal Life - has more fexibility. Within certain limits, you can change the death benefit, the amount of premium and payment frequency. Unlike Whole Life, this is an "interest driven" policy, which normally pays a minimum guaranteed interest of 4% to 4.5%. If the interest rates are continuously low, additional premiums may have to be paid to avoid a lapse of coverage.

3. Variable Life - has death benefits and cash values that vary with the performance of an underlying portfolio of investments that you select. The death benefit and cash value are not guaranteed. They can go down as well as up, although there may be a guaranteed minimum death benefit.

4. Variable Universal - combines the premium and death benefit flexibility of universal life with the investment flexibility and risk of variable life. 

Key things to know about life insurance:

  • Life insurance proceeds are generally income tax free
  • The proceeds of many permanent life insurance policies can be used to ease the financial burden of catastrophic illness, terminal illness or long-term care. These "accelerated benefits" may be offered as part of the basic policy or as a rider to an existing policy.
  • As the holder of a permanent life insurance policy,  you may borrow up to the cash value at an interest rate (fixed or adjustable) stated in the policy. Any unpaid interest is added to the loan. Any unpaid loan, including interest, will be deducted from the death benefit.
  • The cash value can be used to pay premiums for a period of time, keeping the stated death benefit, or it can be used to purchase paid-up insurance in a lesser amount with no further premiums due.
  • In addition to naming a specific beneficiary to receive the proceeds to your life insurance policy (permanent or term), you should name a secondary or "contingent" beneficiary just in case you outlive the first beneficiary. If there is no living benficiary, the proceeds will be paid to your estate and have to go through probate proceedings, resulting in a possible delay before your family receives the money. If the proceeds go tin the estate, these proceeds may be subject to estate taxes.
  • On all of the above policies, rider are available at an additional cost to cover: disability waiver of premium, double indemnity for accidental death, guaranteed purchase options, as well as spouse and child riders.

Source: Insurance Information Institute