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 Life insurance is a topic that's not always easy to talk about. Making this topic even more difficult to discuss are the stories you hear about such as aggressive insurance salespersons telling you what you need. But you always need to keep one thing in mind - a life insurance policy is an important part of your family's financial contingency plan.
Financial Planning and Life Insurance
In fact, life insurance plays a very important role in your family's financial future. No one likes to think about it, but just when you need it most your life insurance policy becomes an asset that can help eliminate the financial burden or pain your family and loved ones might feel from the sudden loss of income.
And keep in mind that while most people purchase insurance policies to provide money to their dependents, life insurance can play other roles too. For example, the money might go to a charity or to help pay the costs to settle an estate or pay taxes. In a business setting, life insurance can be used to protect business partners or shareholders.
Life insurance policies themselves are often divided and marketed along three lines: term insurance, whole life insurance and universal life insurance plans. From these three different types of life insurance polices insurance carriers have created many more offerings, but these are the basic types of policies in existence today.
Whole Life Insurance Policy
Whole life insurance polices are designed to protect you for your "whole life." This is sometimes referred to as permanent life insurance. Whole life policies generally have a guaranteed insurance benefit and also have a guaranteed tax-deferred cash value.
Because of the cash value that builds up with whole life insurance policies, the premiums on these policies will be higher than that of a term life insurance policy.
Term Life Insurance Policy
Term life insurance policies provide perhaps the widest range of personal and business needs when it comes to life insurance. That's because term insurance provides the most coverage for your premium dollar.
By their very nature, term life insurance polices are not considered permanent life insurance. Policies are often sold in 10, 15, 20 or even 30 year lengths. In this type of arrangement, the premiums are often level and guaranteed for the length of the policy.
At the other extreme are one year renewable term policies where the premium escalates each year as the policyholder ages. This type of life insurance policy is considered the most efficient insurance you can buy because you are paying exactly what it costs for life insurance each year.
Universal Life Insurance Policy
Universal life insurance policies also provide permanent life insurance plus they usually carry a guarantee against premium lapse. Universal life policies also frequently carry a guaranteed minimum interest crediting feature and a potential for a tax deferred cash value fund accumulation.
Universal life insurance policies are perhaps the most flexible form of life insurance that you can buy. You can find universal policies that offer multiple benefit options - such as a survivorship plan that covers two individuals. Because of this flexibility and accumulating cash value, universal policies are often used for estate planning and business continuity planning.
Cashing in a Life Insurance Policy
There are times when a policyholder needs access to the cash value of their insurance policy - this is often referred to as the surrender value of the policy. When cashing in a life insurance policy, any gain on the policy will be taxed as ordinary income. The gain on a policy is calculated as the difference between the premiums you've paid and the cash value of your policy.
Some insurance plans allow policyholders to take loans out against the cash value of their policies and even transfer ownership of the policy to another person. Anytime a policy is cashed in or sold there can be federal and / or state income tax consequences or serious impact on your estate. You should always consult a tax professional before cashing in a life insurance policy, transferring or selling a policy.
Advances on Life Insurance
There are times when a policyholder might want access to their life insurance benefit while they're still alive. Riders are often added to policies that allow for access to the money; however, even with this rider certain conditions must be met, for example:
- You might need to be confined to an eligible nursing home for a certain length of time and are expected to be permanently confined.
- You might need to be terminally ill and be expected to live less than six months.
- You might need a vital organ transplant and have six months or less to live without the transplant.
Such advances on life insurance are sometimes referred to as Living Needs Benefits. The insured usually has to meet a number of conditions and the insurance policy must be in-force as of the settlement date. Lapsed policies are usually not eligible for an advance.
The exact procedure for an advance on a life insurance policy will also vary by state. For example, in Massachusetts a Living Needs Benefit is not available and cannot be added to a policy. Advances on life insurance are also not available in Minnesota to new purchasers over age 65 until the policy has been in force for one year. The nursing home option is not available in New York or the District of Columbia.
Evaluating Life Insurance Policies
It's pretty easy to compare term policies from different insurance companies. Your premiums should be spelled out and the benefit should be clear. As long as the features such as these are pretty much identical, you can make a direct comparison of the premiums - this makes choosing the right policy much easier.
With whole life insurance and universal life insurance policies, evaluating policies is not so straightforward. Each insurance company will make certain assumptions, guarantees and projections in their policies. Understanding these assumptions and guarantees can help you evaluate individual policies, for example:
- Cash Value - What are the projections for cash value and what is the rate of return assumed for those projections? Do those rates of return seem reasonable?
- Policy Dividends - Are the dividends used in the projections in line with dividends paid in the recent past?
- Borrowing / Loans - Do those projections use policy loans to help pay premiums?
- Surrender Charges - How much does the company charge if a policy is terminated?
Finally, you can also pick a policy by simply assessing the insurance company itself. For example - Is the company stable and financially strong? There are independent companies that rate insurance companies in terms of financial strength. Those rating companies include A.M. Best Company, Standard and Poor's and Moody's Investor Service.
And don't forget to ask questions if you don't understand something a salesperson is telling you. Don't leave a term or condition of your insurance policy up to interpretation when you can get the answer spelled out by an insurance agent.
How Much Life Insurance to Buy
Now that you've got a better understanding of the types of insurance policies offered, it's time to get in touch with an insurance agent. But before you do, it might be a good idea to have run through some life insurance calculations before you meet. This way you have a good understanding of the process of you'll be going through to figure out how much life insurance you need.
To help you get a jump start on that number crunching exercise, we've developed several insurance calculators that can help:
About the Author - Life Insurance Policies
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