Life Insurance Overview
Most people think of life insurance in terms of death benefit protection. However, today’s policies also provide the vehicles for meeting other goals, such as saving for retirement and education, paying estate taxes and providing liquidity.
An added bonus of these policies is that most goals can be achieved on a tax-free or tax-deferred basis. In effect, life insurance is one of the few remaining tax shelters available. Using a life insurance specialist will help to explain all of the benefits.
Years ago, life insurance purchases were made almost entirely by men to protect their families. Now, women too, are significant breadwinners, and coverage on their lives has become common. People now protect their family’s lifestyle by insuring both spouses, especially if that lifestyle is dependent on two incomes.
WHAT TYPE OF POLICY IS RIGHT FOR ME?
Term life insurance is best suited to solve a temporary need. For example, you can use the death benefits to provide enough funds for a college education or to pay off the mortgage on your house. Because it is death-only protection, it is less expensive and therefore, more attractive if you are relatively young.
Whole life insurance is best suited for older individuals with a permanent need. For example, whole life can be used to provide funds for paying estate taxes or buying a partner’s business interest if your partner dies before you.
Universal life insurance is for those who want to maintain flexibility concerning both premiums and death benefits. It is also well suited for those who want to build up cash values conservatively.
Variable life insurance is used by those who want to maximize their ability to use insurance as a tax-deferred investment vehicle.
HOW MUCH LIFE INSURANCE DO I NEED?
A commonly quoted rule-of-thumb is that life insurance should equal at least six times your annual after-tax income. However, the real answer depends on your needs and your unique family, business and financial circumstances.
Most people buy life insurance for the following purposes:
- Ongoing needs for support, as a replacement for the deceased’s paycheck
- Immediate cash needs for such expenses as taxes, debts, burial, and estate settlement costs and taxes
- Future financial needs such as college costs and retirement income
To determine the amount of insurance you should have, it is necessary to list all of your financial needs and then perform the calculations. This is where your professional advisor can be of assistance.
LIFE INSURANCE POLICY CHARACTERISTICS
TERM LIFE INSURANCE POLICIES
- Protection for a limited time – generally to 70
- Low initial premium, but rising with each renewal
- Level Death Benefit, unless a reducing benefit plan
- No cash values will accumulate
WHOLE LIFE INSURANCE POLICIES
- Protection continues to age 100, thus the permanent name
- Premium does not increase; may even reduce or cease
- Level or increasing death benefit
- Cash values accumulate on a tax-free basis
UNIVERSAL LIFE INSURANCE POLICIES
- Protection continues to age 100
- Premium amount is flexible, may reduce, and could increase
- Death benefit is flexible, can be reduced if desired
- Cash value growth reflects the interest rate environment
- Policy owner may alter structure to suit future needs
VARIABLE LIFE INSURANCE POLICIES
- Protection continues to age 100
- Premiums can be fixed, but are generally flexible
- Death benefit is flexible, can be reduced if desired
- Cash value growth reflects equity (stock) environment
- Policy owner may alter structure to suit future needs
- Policy owner may shift investments for diversification
VARIABLE UNIVERSAL LIFE INSURANCE (VUL)
- Protection continues to age 100 or 104
- Premium amount is flexible, may reduce or increase
- Death benefit is flexible and may be reduced
- Cash value growth reflects equity (stock) accounts or may be fixed accounts
- Investment allocations may be altered
- Investment deposit allocations may be altered
- Policy owner may alter structure of policy to fit future need
- Premium deposits may be withdrawn on a tax free basis
- Loans may be taken based on policy values, subject to limitations and then current interest charges and credits
PARTICIPATING INSURANCE POLICIES
Policies are written by mutual (and a few stock) companies in such a fashion as to permit the gains from investments, mortality and operating efficiencies to be passed on to the policyowner.
Tom Fischer is a Life Insurance Specialist in Scottsdale, Arizona.
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