Life Insurance: Planning Today for Tomorrow
Life insurance can be a source of funds for your spouse, children, business partners or
other beneficiaries during an extraordinary time of change. Some of the more common
needs that life insurance can help with are:
- Income Replacement: Are you the primary wage earner in your family?
- Final Expenses: Is your family prepared for the high expense of funeral services and final medical care?
- Debt Repayment: Do you have a mortgage, credit card debt or any outstanding financial obligations that your family may be burdened with?
- Child Care: Do you have children or dependants who would require care in your absence?
- College and Educational Expenses: Do your children or grandchildren have plans to attend college or seek additional career training?
- Charitable Contribution: Are you currently contributing to a charity, cause or organization? Have you considered leaving a final contribution?
- Business Continuation: Are you currently an owner of or a partner in a business? Have you considered leaving funds to help continue the business without you or giving your family the option of exiting the business comfortably?
- Wealth Transfer: Do you have plans in place to preserve your wealth and transfer your assets to subsequent generations?
- Estate Tax: Have you considered and planned for the federal tax burden your family may incur when your estate is transferred?
Basic Life Insurance Terms
Life insurance is simply a contract between you and a life insurance company. You pay a premium and the life insurance provider pays a benefit to your predetermined beneficiaries upon your death.
Some basic life insurance terms you should know are:
Insured: Person whose life is insured
Policy Owner: Person who owns the life insurance contract
Premium: Amount paid for the contract
Beneficiary: Person or entity identified by the policy owner to receive the death benefit
Death Benefit: Amount of money to be paid to the beneficiary at the death of the insured
Cash Value: Cash accumulated within the life insurance contract
Your Life Insurance Options
There are two main types of life insurance available:
term and permanent.
- Term life insurance provides protection for a specific period of time.
- Permanent life insurance provides protection for a lifetime.
Term Life Insurance
Term life insurance is the most basic of life insurance options. For a specified premium, you receive a contract to pay a death benefit to your beneficiary in the event of your death during a specified period, or term. Most term insurance has a convertibility option, allowing you to convert a term contract to permanent insurance during the specified premium payment period.
Common term life insurance options include:
- 10-year term
- 15-year term
- 20-year term
- 30-year term
- Annual renewable term
- Customized year term
- Return of premium term
Permanent Life Insurance
Permanent life insurance provides a death benefit for your entire life and gives you the ability to accumulate tax-deferred cash value within the contract for as long as the policy is enforce. Many variations of permanent life insurance are available in today's market.
Some of the most common are:
Whole life insurance is the original form of permanent life insurance, providing a death benefit for your whole life based on a specified premium obligation. Whole life provides for contract guarantees in premiums, cash value accumulation and death benefit, with little flexibility. Whole life contracts may or may not include dividend payments.
Universal life provides for flexibility within the contract. You have the ability to customize death benefit, length of coverage, premium obligation and cash value accumulation. Many variations of universal life exist in the current market:
Current Assumption Universal Life: Assumes current interest rates to illustrate cash value accumulation within the contract. The premium and death benefit remain flexible.
No-lapse Guarantee/Secondary Guarantee: Guarantees the death benefit for your lifetime, or a specified period, as long as the minimum premium is paid.
Indexed Universal Life: This is similar to current assumption except the cash accumulation within the contract is based upon the performance of a stock index, such as the S&P 500, or multiple indices. Premiums and death benefit remain flexible.
Variable Universal Life: This is similar to current assumption except the cash value accumulation in the contract is based upon the investment options you choose. The investment prospectus should be consulted for more information on the investment options and risks associated with purchasing this kind of life insurance.
Comparing Basic Types of Insurance
||Limited premium, limited protection period
||Guaranteed death benefit, cash value and premium; no flexibility
||Flexible death benefit with potential cash value accumulation options
||Level for specified period
||Level and inflexible
||Level or increasing
||Level, increasing or decreasing
||Guaranteed at a fixed rate
||Available at current rate assumptions based on index tracking or on separate account investments; flexible
Other Factors to Consider
Industry rating agencies evaluate the financial strength of life insurance carriers and publish this information to help you assess a carrier's reputation and its current ability to meet contractual obligations. This information is readily available online or through your insurance professional.
Underwriting is the process of evaluating expected mortality in an effort to appropriately price life insurance for an individual. You may be asked to complete a questionnaire(s), provide medical records, visit a physician for an exam or provide additional personal information so a carrier can determine how much your insurance will cost.
Most life insurance contracts allow for the addition of extra benefits by adding a rider to the contract*. Ask about riders available on the life insurance you are considering.
Life insurance can potentially provide an income tax-free death benefit and tax-deferred cash accumulation. For more information, consult with your financial planner or CPA.