How Much Life Insurance is Right for Me?
Life Insurance Overview
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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 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.
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.
Permanent Life Insurance
Permanent insurance provides lifelong protection and is known by a variety of names. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, it could be the wrong type of insurance for you.
Most permanent policies including whole, ordinary, universal, adjustable and variable life have a feature known as "cash value" or "cash surrender value." This feature, which is not found in most term insurance policies, provides you with some options:
- You can cancel or "surrender" the policy -- in total or in part -- and receive the cash surrender value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
- If you need to stop paying premiums, you can often use the cash surrender value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live if there is sufficient cash value.
- Usually, you may borrow from the policy, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.
- The interest crediting rate and therefore cash values of many life insurance policies may be affected by your carrier's future experience, including mortality rates, expenses and investment earnings.
- Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash surrender value is the amount of available cash when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.
Types of Permanent Insurance
There are many different types of permanent insurance. The major ones are described below:
Whole Life or Ordinary Life
- This was the most common type of permanent life insurance. It was sold by Mutual Life Insurance Companies, however, some stock life insurance companies do offer a derivative product they call Whole Life. It is Life insurance that is kept in force for a person's whole life as long as the scheduled premiums are maintained. All Whole Life policies build up cash values. Most Whole Life policies are guaranteed* as long as the scheduled premiums are maintained. The variable in a whole life policy is the dividend which could vary depending on how well the investments and other business criteria of the insurance company are doing. If the company is doing well and the policies are not experiencing a higher mortality than projected, values are paid back to the policyholder in the form of dividends. Policyholders can use the cash from dividends in many ways. It can be used in three main areas: to lower premiums, to purchase more insurance or to pay for term insurance.
Universal Life or Adjustable Life
- This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health (Decreasing does not lower premiums.)
- This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments held in a separate account. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward. You will receive a prospectus in conjunction with the sale o a variable product.
- The cash value of a variable life policy is not guaranteed*, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.
- Some policies guarantee* that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.
Advantages and Disadvantages of Permanent Insurance
- As long as the necessary premiums are paid, protection is guaranteed* for your entire life or to a specific age / maturity.
- Premium costs can be fixed or flexible to meet personal financial needs. (Loans, withdrawals and other transactions may affect the premiums required)
- Policy accumulates a cash value that grows on a tax-deferred basis that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash surrender value to pay premiums or use the cash surrender value to provide paid-up insurance.
- The policy's cash surrender value can be surrendered -- in total or in part -- for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person's life-time or for a specific period of time.)
- Required premium levels may make it hard to buy enough protection.
- It may be more costly than term insurance if you don't keep it long enough.
Permanent Policy - Points to Consider
- Are the premiums within my budget? Be sure you want to spend the money for this type of long-term coverage.
- Can I commit to these premiums over the long term?
- If you don't plan to keep the product for many years, consider another type of policy.
- Cashing in a permanent policy after only a couple of years can be a costly way to get insurance protection for a short term.
What does the policy illustration show?
What does the policy illustration show? An illustration shows policy premiums, death benefits, cash values and information about other items that can affect your cost of obtaining insurance. Your policy may provide for dividends to be paid to you as either cash or paid-up insurance. Or it could provide for interest credits that could increase your cash value and death benefit or reduce your premium. These items are not guaranteed*. Your costs or benefits could be higher or lower than those illustrated, because they depend on the future financial results of the insurance company. With variable life, your values will depend on the results of the underlying portfolio of investments.
Some figures are guaranteed* and some are not. Remember that the insurance company will honor the guaranteed* figures, subject to its financial strength.
If your policy is a variable life policy, be sure that the interest rate or rate of return assumed is reasonable for the underlying investment accounts to which you choose to allocate your premiums. It is important to keep in mind that an illustration is not a legal document. Legal obligations are spelled out in the policy itself.
Term Life Insurance
Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Level term products are the most popular plans purchased today. The level term can be from 5 years to 30 years. The premium and death benefit are designed to stay level during the term of the contract. The premiums can be either guaranteed* or not guaranteed. When purchasing a level term life insurance policy be sure you are aware of the guaranteed* premium period. Once you have been approved and placed the policy in force with the first payment, the insurance company is obligated to keep the policy in force as long as you keep paying the premiums. You are not obligated to pay, but once you stop paying, the policy will lapse after usually a 30 day grace period. Some term insurance policies can be renewed when you reach the end of a specific period which can be from one to 30 years. The premium rates increase at each renewal date. Most policies require that evidence of insurability be furnished at renewal for you to qualify for the lowest available rates.
Advantages and Disadvantages of Term Insurance
- Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.
- It's good for covering specific needs that will disappear in time, such as mortgages or car loans.
- The new 20 and 30 year products can provide coverage as long as most people might need life insurance.
- Premiums increase as you grow older, after the term selected expires, providing it renews past that term.
- Coverage may terminate at the end of the term or may become too expensive to continue.
- Generally, the policy doesn't offer cash value or paid-up insurance.
- How long can I keep this policy? If you want the option to renew the policy for a specific number of years or until a certain age, what are the terms of renewal of the contract.
- When will my premiums increase? Annually? Or after a longer period of time, such as five or 10, 15, 20, 30 or even 40 years?
- Can I convert to a permanent policy? Some policies allow you to convert the policy to permanent insurance without a medical exam, regardless of your physical condition at the time of the conversion. These policies are known as "convertible term."
Here are a few tips to keep in mind when purchasing a life insurance policy:
Take your time. On the other hand, don't put off an important decision that would protect your family. Make sure you fully understand any policy you are considering and that you are comfortable with the company and product.
After you have purchased an insurance policy, keep in mind that you may have a "free-look" period usually 10 days after you receive the policy during which you can change your mind. During that period, read your policy carefully. If you decide not to keep the policy, the company will cancel the policy and give you an appropriate refund. Review the copy of your application contained in your policy. Promptly notify the agent or the company of any errors or missing information.
We can help you review your policy, determine if your coverage is adequate given any changes in your situation.
For more information or to receive a quote, please click-on Contact us Today!