Individual Life Insurance
Individual life insurance is primarily designed to protect against
the financial loss that the death of a loved one can create. A
life insurance policy will help them meet the financial needs
that your income would have normally covered.
There are two types of individual life insurance policies, term
life insurance and cash value insurance. Both term life insurance
and cash value insurance offer an income tax-free death benefit
to designated beneficiaries.
Before purchasing a life insurance policy, you should consider
your financial situation and the standard of living you want to
maintain for your dependents or survivors. For example, who will
be responsible for your funeral costs and final medical bills?
Would your family have to relocate? Will there be adequate funds
for future on-going expenses such as daycare, mortgage payments,
or college?
Term Life Insurance
Term life insurance is coverage you buy for a specific time period.
This period could be as short as one year or provide coverage
for a specific number of years, such as 5, 10, 20, or 30 years,
or up to a specified age like 60 or 65.
If you die during the term period, the company will pay the face
value of the policy to your beneficiaries. If you live beyond
the term period you had selected, no benefit is payable. As a
rule, term policies offer a death benefit with no savings element
or cash value. If you have a limited amount to spend, and only
need insurance for a specified period of time, you can get more
coverage by buying term life insurance than cash value insurance.
Term insurance is generally less expensive and therefore it may
be more practical for people who need large amounts of coverage
for a specific period.
Please remember that the cost of term insurance increases as
you get older, which may make it more expensive than cash value
insurance in the long run. Term insurance ends if you stop paying
premiums or at the end of the term unless the policy has a “renewable”
provision that allows you to continue coverage when the term expires.
A term policy may also have a “convertible” provision
which allows you to exchange the term policy for a cash value
policy without providing evidence of insurability.
There are several variations of term life insurance. The most
common are level term, decreasing term and increasing term. With
level term the death benefit and the premium remains the same
for the term of coverage. With decreasing term, the death benefit
decreases each year while the premium remains level. This type
of coverage is often purchased in conjunction with a debt, such
as a mortgage, which decreases over time. Increasing term starts
at one amount and increases at stated intervals by some stated
amount or percentage. The premium also increases as coverage increases.
Cash Value Insurance
Cash Value Insurance combines death benefits with a cash accumulation
feature. The buyer of a cash value policy typically pays more
in the early years than for term insurance, but the premium not
needed to pay for the cost of the death benefit accumulates with
interest within the policy. If the policy is surrendered before
the insured person dies, there may be a cash value payable to
the policy owner less any outstanding loans placed against the
policy and any stipulated surrender charges.
If all premiums are paid, cash value insurance usually lasts
for the entire life of the insured and pays death benefits to
the beneficiaries named in the policy upon the insured’s
death. It is extremely important to make certain the beneficiaries
designated in the policy are, in fact, the individuals (or trusts)
you want to receive the death benefits. As families change through
marriage (or divorce), births, adoptions, deaths etc. it is your
responsibility to review your policy and update your beneficiaries
if necessary.
Some of the most popular types of cash value insurance are whole
life insurance (also known as straight life, ordinary life, or
permanent life insurance); universal life insurance; variable
life and variable universal life.
Whole Life Insurance
Whole life insurance is designed to provide coverage for your
entire lifetime unlike term insurance which provides protection
for a specified time period. To keep the premium level, the premium
at the younger ages exceeds the actual cost of protection. This
“extra” premium builds a reserve (cash value) which
helps pay for the policy in later years as the cost of protection
rises above the premium. Under some policies the premiums are
required to be paid for a set number of years while other policies
require premiums to be paid throughout the policyholder’s
lifetime. There are several variations of traditional whole life
insurance that are beyond the scope of this discussion.
Universal Life Insurance
Universal life insurance is the most flexible of all the various
kinds of policies because it treats elements of the policy separately.
Universal life policies allow you to change or skip premium payments
or change the death benefit more easily than any other policy.
It works by treating the three elements of the policy, premium,
death benefit and cash value separately. Cash values are accumulated
by crediting premium payments and interest to a fund from which
deductions are taken for expenses and cost of insurance. Interest
rates are linked to an external index such as Treasury bills.
Because the cash value element of this type of policy is interest
sensitive, predictions of future life costs are highly dependent
upon the accuracy of interest rate projections.
Variable Life Insurance
Variable life insurance has a death benefit that varies in relation
to the investment experience of the assets underlying the policy.
A higher rate of return on the invested fund will cause the death
benefit to increase, while a low or negative return on the invested
fund will cause the death benefits to decrease.
Variable Universal Life Insurance
Variable universal life insurance combines the flexibility of
universal life with the investment account features of variable
life insurance.
How Do I Decide Which Policy Is Best For Me?
Having a qualified, experienced agent is essential when purchasing
any type of life insurance policy. Let one of our qualified agents
assist you with your financial planning needs analysis. We will
consider factors such as your marital status, number of dependents
and cost for their support, future education needs, current and
anticipated family income and your current assets and debt obligations
among other things. We will help you decide which policy works
best for you and help you determine the proper amount of coverage
necessary to accomplish your goals. For assistance with your insurance
needs please go to “Contact Us”.
