In its most simple definition, Life Insurance is a contract between a policyholder and an insurance company. In return for a regularly-paid premium, the insurance company promises to pay the policyholder a pre-specified amount of money upon the death of the person named in the Life Insurance policy as the “insured.” It’s important to note that the policyholder and the “insured” don’t have to be the same person.
This is the amount of death benefit stipulated in the policy.
This is the amount of money paid to the beneficiary upon the death of the insured.
A policy beneficiary is the person (or persons) who receives the death benefit upon the death of the insured. Without a named beneficiary, the policy itself dictates who receives the payout. These automatic beneficiaries are stipulated by the policy terms. Such automatic beneficiaries could include:
- Other family members
- Your estate
If your estate becomes the beneficiary, it becomes subject to estate taxes. This is a compelling reason to have named beneficiaries on the policy.
As with the need to annually reassess your coverage needs, it’s important to also regularly review your beneficiaries list. Has someone died? Has there been a birth? Have you recently gotten married or divorced? All of these, along with other life events, can cause a need to change your named beneficiaries.
You can always name a new primary beneficiary. However, if you’ve named a contingent beneficiary (also called a secondary beneficiary) in the policy, this new person will become the primary beneficiary.
In contrast to Permanent Life Insurance policies, Term Life Insurance policies don’t build cash values over time. These policies provide coverage for a pre-determined number of years, which is called the “term.” The term is specified in the insurance contract. The primary advantage of Term Life Insurance compared to Permanent policies is cost: Term Life policies are typically significantly less expensive.
A Permanent Life Insurance policy provides coverage for the insured’s entire lifetime. In contrast to Term Life polices, Permanent Life policies build cash value over time. Assuming the policyholder keeps premiums paid and up-to-date, Permanent Life policies guarantee a payout upon expiration. There are three primary types of Permanent Life Insurance policy:
- Whole Life – These policies provide coverage throughout the lifetime of the insured. Policyholders can take out loans from these policies once they’ve accrued a significant cash value.
- Universal Life – These policies also provide coverage throughout the lifetime of the insured. They also offer flexible premium amounts, as well as flexible face value amounts. Universal Life Insurance is especially beneficial as part of a retirement portfolio or for achieving long-term financial goals.
- Variable Life – The cash value and death benefit of these policies varies depending on an underlying investment into which premiums are consigned. Premiums may be invested in stocks, bonds, and/or money market funds. Like any other such investment, these policies carry a certain amount of risk, but any earnings accrue tax free until payout.
What would happen to your family if you died unexpectedly or after a long illness? Would there be sufficient money for your spouse to pay the bills? What about sending your kids to college? What about your own student loans? What about your funeral and its associated costs?
Would there be sufficient money to cover all these expenses without requiring loans or, worse, driving your household to bankruptcy? Life Insurance can help provide solutions to these problems. It can provide the security of knowing your family will be taken care of if you leave them behind.
My company provides automatic Life Insurance coverage as part of my benefits package. Do I need more coverage?Expand
Although Life Insurance through your job is a valuable benefit, such coverage is usually limited to between $10,000 and $20,000. For most people—especially those with families—this is far from sufficient coverage. Additionally, unless you take out premium coverage from your job, you’ll likely lose coverage if you switch jobs. As such, Life Insurance as a work benefit should be considered supplemental coverage.
My company offers additional Life Insurance coverage for a premium. Should I take out this coverage?Expand
The answer to this question is a definite “maybe.” It depends on your company’s size, how many employees it has, and other factors. How many of your company’s employees have opted for premium Life Insurance coverage? These factors will have an impact on the group-based rates your company can offer for optional policies.
Before purchasing any kind of life insurance, it’s important to “shop around,” comparing rates, policy types, etc. Call us. Our large pool of providers allows us to do the shopping around for you. Chances are, we can find you a comparable policy with comparable—if not better—rates than those offered through your job.
Exact calculations of the amount of coverage you need are difficult. However, you can make dependable estimates based on a number of factors. Ask yourself:
- What percentage of my family’s income comes from my salary?
- If I died, could my family live without my salary?
- If I died, how much money would be available to my family through my 401k and other retirement savings?
- How old are my children? How long will be it before they go to college?
- How much money have we already saved for my children’s college education?
- How much are our monthly bills? Our mortgage payment?
Remember: The prices of just about everything rise over time. You need to take inflation into account when making coverage estimates. For instance, if your children are young and won’t go to college for 10 or more years, the price of a college education will probably be significantly greater by the time they graduate high school.
This largely depends on a number of factors, including your age, the age of your children, the amount of money remaining on your mortgage, how much you’ve saved for retirement, and other factors.
For example, the younger your children are, and the higher the amount remaining on your mortgage, the longer you’ll want to stretch your coverage. Also, if you’ve got lots of money saved for retirement, you probably won’t need coverage for as long a time. Call our office. We’ll be happy to review your coverage factors and needs in depth.
This depends on a number of factors, including:
- Your age
- General health condition
- Type of policy you choose (i.e., Whole, Term, or Universal Life)
- Your status as a smoker or nonsmoker
- Length of coverage you choose
Is there anything I can do to make Life Insurance coverage for me and my family less expensive?Expand
There are a number of steps you can take to make your premiums as low as possible:
Buy coverage as early in life as possible. Premiums generally rise as you get older.
- Don’t smoke.
- Maintain a healthy weight and diet.
- Consider buying a combination of Term and Whole Life Insurance to get your rates down to affordable levels. Term Life is generally more affordable than Whole Life.
- Consider group coverage through your job. Depending on the size of your company, such coverage can be surprisingly affordable—especially for Term Life.
I’ve heard there are certain tax advantages associated with Life Insurance. Is that true? What are they?Expand
Yes. Life Insurance coverage offers a number of tax-based benefits. For one, any death benefit paid to your beneficiaries is generally exempt from taxation at the local, state, and federal levels. If you’ve purchased a Permanent Life Insurance product, its cash values accrue on a tax-deferred basis; you won’t pay taxes on those monies until receiving a payout. Additionally, any loans or withdrawals you make on a Permanent Life policy won’t be taxed.
Over the course of a lifetime, your coverage needs will be extremely fluid. That’s why it’s important to annually or even bi-annually assess your current coverage and needs. Have those needs changed over the last year?
Additionally, certain life events also require immediate reassessment of your coverage requirements. Consider adjusting your coverage if you:
- Get married
- Get a divorce
- Make a new home purchase
- Refinance your mortgage
- Welcome a new child or grandchild
- Have a child or grandchild about to enter college
- Start providing care or financial assistance to a family member
- Need to ensure long-term care for a family member
My provider requires a medical exam to gauge my “insurability” before a policy can be issued. What is insurability?Expand
Insurability is a measure of how suitable the prospective insured is for coverage. Insurability is based on your overall health and the presence of any diseases or other health conditions.
To take out a Life Insurance policy on you, the prospective policyholder must have an insurable interest in your life. Those with insurable interest usually include family members, but can also, in some cases, include employers, business partners, certain organizations, and even major creditors.
No. As the policyholder on your own life, you can name any beneficiaries you want.
My agent told me that my permanent policy will be “fully paid up” when I turn 65. What does fully paid up mean?Expand
Once your policy reaches “fully paid up” status, you want need to pay any further premiums, but will nonetheless receive coverage for the rest of your life—unless you withdraw money on the policy.
On a fully paid up policy, the insurance company uses the cash value to pay the premiums. You will no longer need to pay premiums to be covered for the rest of your life. However, if you take cash from the policy, you might be required to resume paying premiums or have to opt for a smaller death benefit.
You should be able to calculate your current cash value by reviewing tables laid out in the policy contract. You can also call our office, and we’d be glad to quote your current cash value.
Generally, no one. Although some policies pay both the death benefit and the cash value at the time of death, typical policies only pay the stipulated death benefit. In other words, with most policies, the cash value at the time of death is irrelevant. It’s important to note that, if you take out a loan on the policy that’s outstanding at the time of death, your beneficiary will receive a payout that’s less that the policy’s face amount.
An accelerated death benefit allows a terminally-ill insured person to receive a significant part of the death benefit while still alive. It’s important to note, however, that the amount taken out will be subtracted from the death benefit, as will interest on the early payout.
Most providers will require a medical exam before issuing a standard Life Insurance policy. If you’re in reasonably good health, this is a good thing. Policies that don’t require a medical exam tend to be far more expensive.
Policy riders add additional benefits to an existing Life Insurance policy. In most cases, riders must be purchased separately from the primary policy.
Yes. Life Insurance coverage for children can generally be added to existing policies as a rider.
This depends on the type of policy purchased, and the number of steps required to finalize coverage. Approval can take between several days and several weeks.