UNDERSTANDING THE BASICS OF LIFE INSURANCE
What are the types of life insurance policies available?
There are many types of life insurance including; Whole Life, Universal Life, Indexed Universal Life, Variable Life and Term Life:
You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to claims paying ability of the issuing company). Your only action after purchase of the policy is to pay the fixed premium.
You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
Indexed Universal life:
You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at an interest rate declared annually and based on the performance of a stock index, which may vary over time. What is Indexed Universal Life: Indexed univeral life insurance is a lot like universal life insurance. An indexed universal life insurance policy gives the policy holder the opportunity to allocate cash value amounts to either a fixed account or fixed index account. Indexed universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policy holder can receive. Since these policies are seen as a "hybrid" universal life insurance policy, they are usually not very expensive (due to lack of mangement), and are safer than an average variable universal life insurance policy. However, the upside potential is also limited when compared to variable policies.
As with whole life, you pay a level premium for life. However, neither the death benefit nor cash value are predetermined or guaranteed; they fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be invested.
Will last for a certain term of time. If you were to purchase a 20 year term policy it would last for 20 years. If the policy owner was to pass away within the 20 year term the death benefit would be paid to the beneficiary. If the policy owner was to decease after the 20 year term there would be no death benefit. The premium payments are at a very low cost and there is no cash value. You are purely purchasing for the death benefit only. There is also (ROP) Return of Premium Term Life Insurance which comes at a much higher cost.
How do I determine the amount of coverage I need?
There are many factors that need to be considered before purchasing Life Insurance. It's affected by how many people depend on you, what your current budget is, and how much you can afford. It's best to consult with a qualified licensed professional agent before making these types of decisions. Example: I ran into an old friend that is now 40+ years old that had purchased a 20 year term policy back when he was in his mid 20's, before he had any children. I asked him, why did you buy only a 20 year term policy? His answer was "that is what my agent told me I needed". He now has 3 children all under 10 and he needs to go through underwriting again in order to purchase the necessary insurance. The new policy will most likely be much more expensive because he is much older and could possibly have health issues. That is just one minor example of how important it is to purchase the correct policy and the correct amount from the start.
Why should I purchase permanent insurance?
Permanent coverage is a way for you to regularly save money and a way for you to leverage wealth. Your policy builds up value as you grow older. In many cases, it's more flexible than term life and is designed to change according to your changing needs. It will also help you take care of the people who depend on you financially. A permanent policy may bring more value to a person that has good cash flow. A permanent policy is significantly more expensive than a term policy.
When should I purchase a term policy?
Term life lasts a certain period of time and then must be renewed or replaced in order to continue. This makes it a good choice if you are unable to afford a permanent policy and only foresee a need for a certain time. Term life is an excellent choice for young families who have a greater need for insurance when their children are young.
Why do people own life insurance?
People own life insurance to provide death protection, or to increase their savings. The cash surrender value accumulation can be used as a disciplined savings plan. The money accumulated could also be used to provide for education, retirement, emergencies or any opportunities that may arise.
What are some advantages of permanent insurance?
- You gain long-term cash accumulation.
- The values for your premium and death benefit can be guaranteed.
- You have an increasing death benefit.
- You can receive funding during disability.
- You get life long insurance protection.
- The values may be sheltered from creditors.
- The proceeds at death are generally tax free.
- You have more flexibility and higher funding limits than some qualified plans.
- There are no early withdrawal penalties or forced distributions.
What are the benefits of whole life vs. universal life insurance?
The benefits of whole life are:
- The policy never has to be renewed as long as premiums are paid.
- The premiums remain the same through the payment period.
- The accumulating cash values act as a savings element.
- Some policies include the possibility of receiving dividends.
- Non-forfeiture options allow the policy holder to retain some benefits even if unable to pay the premium.
- There are guarantees which last for the life of the contract if premiums are paid.
The benefits of universal life are:
- The amount and frequency of premium payments is flexible although there are certain requirements.
- There is also flexibility in the amount of the death benefit, but it is subject to rules requiring the policy to maintain its status as insurance.
- You have the ability to take partial withdrawals from the cash value of the account.
- In most contracts there are guarantees which, if premiums are paid, will last for the length of the contract.
What are beneficiaries and contingent beneficiaries?
A beneficiary is the person or entity you name to receive your death benefit. Beneficiaries are often spouses, children and other family members, but you can name a friend or even a charity. Usually you name a secondary, or contingent beneficiary to be next in line to receive your benefit if your first beneficiary dies before you.
If you feel life insurance may fit situation; consulting with a trusted independent Safe Money Advisor may make product selection and the accomplishment of your goals a much easier process.
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