Life Insurance
Life Insurance can be very easy to understand.
Just about everyone needs life insurance. What's more, no federal income tax is collected on life insurance proceeds to a beneficiary. Life insurance is basic financial protection for your family. Because families are different and circumstances are different, types of life insurance are different.
The role of life insurance is to provide a lump sum of money (the "death benefit") in the event of your death to:
• Cover your debts, including the mortgage
• Provide an income while the family makes the transition to continuing without you
• Provide a nest egg for family or a favorite charity
• Make sure children have money for post-secondary education
• Provide money to pay for burial expenses
The truth is losing someone you love is always difficult. But the emotional struggles shouldn't be compounded by financial difficulties. Life insurance helps make sure the people you care about will be provided for financially, even though you aren't available to care for them yourself.
To help you understand how life insurance might apply to your particular situation. Below we've outlined a number of different scenarios. Whether you're young or old, married or single, have children or not, take a moment to consider how life insurance might fit into your financial plans.
You're Married
Most families depend on two incomes to make ends meet. If you died suddenly, could your family maintain their standard of living on your spouse's income alone? Probably not. Life insurance makes sure your plans for the future don't die when you do.
You're a Single Parent
As a single parent: you're the caregiver, breadwinner, cook, chauffeur, and so much more. Yet nearly four in ten single parents have no life insurance whatsoever, and many with coverage say they need more. With so much responsibility resting on your shoulders, you need to make doubly sure you have enough life insurance to safeguard your children's financial future.
You're a Stay-At-Home Parent
Just because you don't earn a salary doesn't mean you don't make a financial contribution to your family. Childcare, transportation, cleaning, cooking and other household activities are all important tasks, the replacement value of which is often severely underestimated. Some surveys have estimated the value of these services at over $40,000 per year. Could your spouse afford to pay someone for these services? With life insurance, your family can afford to make the choice that best preserves their quality of life.
Your Kids Are Self-supporting and Your Mortgage is Paid Off
As the years go by, you may feel the need for life insurance has passed. But just because the kids are through college and the mortgage is paid off doesn't mean Social Security and your savings will take care of whatever lies ahead. If you died today, your spouse will still be faced with daily living expenses. What if your spouse outlived you by 10, or even 30 years? Would your financial plan, without life insurance enable your spouse to maintain the lifestyle you worked so hard to achieve? Would you be able to pass on something to your children or grandchildren?
You're Retired
Did you know that depending on the size of your estate your heirs could be hit with a large estate tax payment alter you die (up to 48% of your estate, depending on your state). The proceeds of a life insurance policy arc payable immediately, allowing heirs to take care of estate taxes, funeral costs, and other debts without having to hastily liquidate other assets, often at a fraction of their true value. Life insurance proceeds are also generally income tax free to a beneficiary and can be arranged to avoid probate. Finally, if your insurance program is properly structured, proceeds from your life insurance policy won't add to your estate tax liability.
You're a Small Business Owner
Besides taking care of your family, life insurance can protect your business. What would happen to your business if you, one of your fellow owners, or perhaps a key employee died tomorrow? Life insurance can help in a number of ways. For instance a life insurance policy can be structured to fund a "buy-sell" agreement. This ensures the remaining business owners have funds to buy the company interests of a dcceased owner at a previously agreed upon price. That way the owners get the business and the family gets the money. To protect a business in case of the death of a key employee, "key person insurance" payable to the company provides the owners with the financial flexibility needed to either hire a replacement or work out an alternative arrangement.
You're Single
Most single people don't need life insurance because no one depends on them financially. But there are exceptions. For instance some single people provide financial support for aging parents or siblings. Others may be carrying significant debt they wouldn't want to pass on to family members who survive them. If you're in such a situation, you should own life insurance because you wouldn't want your loved ones to be burdened financially in the event of your premature death.
Different types of insurance meet different needs.
Term Insurance
Term insurance may be attractive to those who have an immediate need over a specified period of time and who wish to select the largest death benefit which their premium dollar can purchase over that period. Term insurance pays a death benefit only if you die during its term. Coverage expires at the end of a specified term, which depends on the type of policy you purchase, unless your policy permits you to renew it for a further term, or you have a contractual right to convert it to permanent life insurance. Term insurance does not build up cash value.
Universal Life
For some people, Universal Life insurance provides the flexibility they want. Like whole life insurance, a universal life policy builds your cash value which is available to you at all times - through the premiums you pay and the interest earned. However, universal life coverage offers three valuable features in addition to the cash value build-up:
• Flexible Premiums – Not only can you choose the premium you want to pay (within the minimum needed to keep the policy in force and the maximum allowable), you can change the amount at any time.
• Flexible Death Benefit – Universal life insurance allows you the flexibility to increase or decrease your life insurance death benefit within the same policy. As your income and assets increase, your coverage can be increased to protect them without having to buy another policy to supplement your original one.
• Guaranteed Minimum Interest Rate on Cash Value – The policy's accumulation value comes from the timely payment of premiums over the life of the contract. The monthly cost of insurance, policy loads and administration fees are deducted from this account. The remaining cash value accumulates, tax-deferred. The interest rate is guaranteed not to fall below a minimum rate as described in the policy.
Indexed Universal Life
Although equity indexed annuities have been around for a number of years, equity indexed universal life (EIUL) insurance is a relative newcomer to the life insurance marketplace. EIUL is variation of universal life (UL) insurance, a popular policy type because you can increase or decrease your death benefit as your needs change and your premiums can be adjusted accordingly. UL policies also build a cash value against which you could borrow or even use to pay your premiums.
Whole Life
Whole Life is a permanent life insurance, which may accumulate cash value on a tax-deferred1 basis over time. This cash value can be borrowed against if need be. Generally, premiums remain at a fixed level for the entire length of the contract and the contract has a specified death benefit. Many people appreciate this feature, because it means their premiums will never go up, regardless of age or health, once the policy is issued (a particular advantage if you're young).
This type of coverage also "locks in" your insurability as long as your insurance remains in force, which means you don't have to worry about an increase in the cost of your insurance if you acquire certain medical conditions in the future. Your coverage, your premium and your benefit are assured.
So what's the next move?
A key to understanding life insurance is to have one person you can trust. As a representative of numerous insurance carriers we can help you choose the right insurance for your life and help you understand how insurance fits into an overall financial strategy. For more Info contact us.