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Life Insurance |
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General Information Term Life Insurance Permanent Life Insurance Seniors Juveniles Business Use of Life Insurance Life Insurance Estimator Worksheet
Life insurance is a key component of your family’s financial portfolio. In the event of a premature death, dealing with the loss of a loved one need not also entail dealing with financial hardship. Life insurance proceeds can replace lost income potential, which can be used to meet the immediate financial needs of one’s family, to maintain the standard of living that took a lifetime to achieve and to fulfill future dreams. In addition, life insurance gives one’s family precious time to decide what to do with assets such as a home or family business, thus lessening the need for forced sale. Life insurance is generally purchased to provide for:
-Final expenses -Estate preservation -Medical bills and premiums -Everyday expenses (such as food, utilities and daycare) -Debt payoff (such as credit cards, car and mortgage loans) -Future college and wedding expenses -Cost of caring of elderly parents -Gifts to children and grandchildren -Gifts to favorite charities
How much life insurance is needed will change over one’s lifetime. There is no magic formula, as everyone’s obligations and dreams are unique to them. We do believe everyone should have a base of permanent insurance that will last a lifetime. One way to determine how much insurance you may need is to complete this quick life insurance estimator worksheet to help determine if your current portfolio is adequate. If you don’t want to take the time to complete the worksheet, a quick guideline is 8 to 10 times your current income. Oftentimes, one will need more coverage early on while paying for a mortgage and while one’s children are still financially dependent. As one grows older, needs may shift to final expenses, estate preservation and gifts to grandchildren. Since income and obligations change over time, it is important to review one’s insurance portfolio regularly to be sure that the identified needs and goals are being met.
There are two main types of life insurance policies, term and permanent, both of which provide a tax-favorable death benefit to your beneficiary:
This kind of life insurance plan provides protection for a specified period of time, or “term”, which can be 1 to 30 years. A term policy is generally the least expensive way to purchase life insurance because it is not designed to last for one’s entire lifetime and the policy does not accumulate any “cash value” (that is, cash that accumulates within the policy that can be borrowed against or accessed upon policy termination). In addition, the policy needs to be in effect at the time of death to pay out a benefit. This kind of protection is generally used to cover large obligations during one’s younger, higher incoming earning years while there are dependent children, a mortgage, car loans, college expenses, etc. The reduced premium of “term” insurance makes the purchase of larger policies extremely affordable while one’s family needs the increased level of protection. In fact, as people are living longer the cost of term insurance has dropped dramatically in recent years. Some policies provide options (called “riders”) which provide one or more of the following:
-term life insurance coverage for dependent children -conversion to “permanent” plan of insurance -return of premiums if the insured outlives the term period -pays the premiums if the insured becomes disabled
Not all policies offer all these riders, so it is important to discuss which options may be important in meeting the financial security needs of the family.
Advantages of Term Life Insurance: 1) Initial premiums are less than “permanent” insurance, allowing one to purchase larger amounts while younger and the financial obligations are generally the greatest. 2) Good choice for covering needs that will disappear or diminish over time, such as mortgages, car loans and college expenses.
Disadvantages of Term Life Insurance: 1) Premiums increase as one grows older, or benefits decrease. 2) Coverage may cease at the end of the term, or become too expensive to continue. 3) When the term expires, one will have to demonstrate “insurability” (that is, be healthy enough to re-qualify for coverage) when applying for a new policy. 4) There is no cash value to borrow against. 5) Not the best choice for needs that last a lifetime, such as final expenses, estate preservation and charitable gifts.
This kind of life insurance plan offers permanent, or lifetime coverage. It is intended to cover the financial needs of one’s family that do not diminish over one’s lifetime and/or to provide life insurance protection that accrues “cash value”. Some permanent policies also pay dividends, which can be taken as cash, used to purchase additional insurance, used to increase the cash value of the plan or used to reduce the premium. The premiums for this kind of plan are generally higher than for a comparable amount of term insurance, because one cannot outlive the death benefit so long as the required premiums are paid.
Permanent policies are available in different types, such as Whole Life, Universal Life, Adjustable Life and Variable Life. The policy types differ in how required premium payments are made and how cash values accrue in the policy over time. Some policies provide riders which provide one or more of the following:
-term insurance coverage for dependent children -pays the premiums if the insured becomes disabled -pays an early death benefit in the event of terminal illness and/or confinement to a nursing home -option to purchase additional insurance at specific future dates without having to prove one is still healthy enough to qualify -long-term care rider that allows for 1-4% of the death benefit per month to be used as a reimbursement for qualifying nursing home care, assisted living, adult day care, home health care and/or homemaker services -term insurance coverage for your spouse
Not all policies offer all these riders, so it is important to discuss which options may be important in meeting the financial security needs of the family.
Advantages of Permanent Life Insurance: 1) One cannot outlive the death benefit if the required premiums are paid according to the policy schedule. 2) Premium costs can be fixed or flexible, depending on the type of policy purchased. 3) Policy accumulates cash value that can be borrowed against or accessed upon policy termination, effectively reducing the net cost of the coverage over your lifetime. 4) Future insurability rider can be purchased on some policies, allowing one to increase your death benefit without having to prove one is still healthy enough to qualify. 5) Good choice for needs that last a lifetime, such as final expenses, estate preservation and charitable gifts. 6) Dividend paying policies can be taken as cash, used to purchase additional insurance or used to increase the cash value of the plan or used to reduce the premium.
Disadvantages of Permanent Life Insurance: 1) Premiums are higher than for the same amount of term insurance, making it more difficult to purchase the entire amount of protection needed. 2) If the policy is surrendered pre-maturely, the net cost of the policy may be higher than term insurance would have been for the same death benefit for the same period of time. 3) Not the best choice for covering needs that will disappear or diminish over time, such as mortgages, car loans and college expenses.
Life insurance and annuities are key components of a senior’s financial portfolio. But, what happens if additional life insurance coverage is unexpectedly needed later in life? Even after the mortgage and cars notes have been paid off and the kids have left the nest, the reasons a senior may be looking for additional coverage are as unique as he or she is. Here are a few typical examples for needing additional life insurance coverage:
- Pay final medical bills and expenses - Estate preservation - Income for surviving spouse - Gifts to grandchildren - Legacy gifts to favorite charities
After the decision to purchase additional insurance is made, the two questions seniors ask most often: “Can I afford it?” and “Will I medically qualify for it?” Needs that arise later in life are usually of a permanent nature, so permanent insurance is usually the appropriate choice. As the baby boomers are starting to retire and the parents of the baby boomers are living longer, it is no surprise that our population as a whole is aging. Living longer mean greater financial needs for more years than many anticipated back in the 50’s, 60’s, 70’s and 80’s when today’s seniors were purchasing life insurance to cover their growing families. It is likely that much of the coverage seniors had earlier in life was term insurance that has now expired or become too expensive to maintain.
Of course, healthy seniors have full range of product choices, but what about those with not-so-perfect health histories? Fortunately, today there are many quality insurance companies that specialize in the needs of seniors. Specialty products offer “simplified issue”, meaning the health standards are slightly reduced and/or fewer health questions are asked. Some policies provide a full death benefit from day one, while others offer a reduced death benefit for a period of time before full benefits are payable. While not all seniors can medically qualify for life insurance, simplified issue does enable more seniors than ever before to acquire the additional coverage they need.
Many life insurance plans offer options (called “riders”) that allow, under certain circumstances, for the early payout of a portion of the death benefit while the insured is still alive, including diagnosis of a terminal illness and/or confinement to a nursing home. Not all policies offer these riders, so it is important to discuss which options may be important in meeting the financial security needs of the family.
There are great reasons to cover children and grandchildren with permanent life insurance: - Permanent life insurance is much less expensive when purchased young. - Cash values have a greater opportunity to accumulate. - Future insurability can be assured with a “rider” allowing purchase of more insurance at certain intervals without having to re-qualify medically. -Makes a great wedding or college graduation gift.
Juvenile coverage can also be purchased as a term insurance rider on a parent’s policy.
Business Use of Life Insurance
Securing Debt: Many business owners need to borrow funds to meet their start-up and on-going cash flow obligations. Life insurance taken out on the principal(s) will assure the lender that funds needed to repay the obligation will be available should the business owner(s) die. In addition, vendors and customers are more likely to continue their relationship in the event of the death of a principal if life insurance proceeds are available to avoid prolonged disruption in business activity.
Business Continuation: Life insurance can play a key role in funding a business continuation plan. Often the revenue stream from a small family-owned business, or the sale price of that business, is intended to provide the future financial security for the heirs. However, the “good will” of the business owner himself/herself is integral to the value of the business. If the business owner has passed away and a forced sale is necessary, the sale may be made at a significantly discounted price. Life insurance equal to the value of the business will provide the cash needed to hire competent employees to carry on or will make up for lost sale revenues if sold at a discount. But, most importantly, life insurance proceeds payable directly to the heirs will buy the family precious time to decide what to do with their business.
When there is more than one principal owner, life insurance is the least expensive way to fund a buy-sell agreement. A buy-sell agreement is an agreement between owners to buy out a deceased owner’s share of the business in the event of death. This type of agreement assures the remaining owner(s) will retain 100% control of the business in exchange for the deceased owner’s family receiving a pre-determined business valuation (in the form life insurance policy proceeds).
Estate Preservation: Many family owned businesses have much of the value of their estate tied up in the business. If other funds cannot be found to pay any estate tax due, the business may have to be sold upon the death of the owner. Such “forced” sales are often made at a discounted rate. Life insurance to cover estate tax obligations will assure the family that they will not have to sell the business to pay estate taxes.
Key Person Insurance: Most businesses have certain employees whose expertise and relationships are essential to the smooth operation of the business and/or are responsible for revenue generation. Life insurance taken out on such a key employee will provide the business with funds to replace temporarily lost income and to cover the cost of hiring and training a replacement.
Executive Bonus Plans (Section 162 Plans): Employers look for ways to retain and reward their key employees. Under this arrangement, a permanent type life insurance plan is taken out on the key employee. The employer pays a tax-deductible premium, which is considered to be a taxable bonus to the employee. The employee owns and controls the policy and its cash value, which accumulates tax-free until cashed in to supplement retirement or, if the employee dies, a death benefit is payable to the employee’s assigned beneficiaries. We encourage employers to consult with their tax advisor before beginning a Section 162 Plan.
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