 Life Insurance Protects Your Family
Peace of Mind and Big Tax Benefits
Clear, Quick and Easy Info
Life insurance provides for the people you care about, when you're not there to take care of them.
If someone depends on you financially, chances are you need life insurance.
Life insurance provides cash for your family after your death. This cash, known as the death benefit, replaces your income and can help your family with daily living expenses, mortgage payments, funeral expenses and the cost of college.
 Who Needs Life Insurance?
Does your family depend on two incomes? Perhaps you’re a single parent who wants to provide for your children. Maybe you are a stay-at-home parent and caregiver, or are planning for a secure retirement. No matter the circumstances, life insurance provides security when you can't. It is a valuable financial planning tool.
A life insurance policy can help pay the bills, continue a family business, finance a children’s education and protect your spouse’s retirement, when you are not there to help with these burdens.
How Much It Will Cost Depends on You
How much you pay for life insurance, the premium, depends on how old you are, whether you are male or female and whether or not you smoke, because these factors affect longevity. The insurance company also considers your health and family health history to determine your cost. This process is called “rating.” Sometimes a medical examination is required.
The insurance company uses all the premiums to create a pool of money from which it can pay claims and finance its operations. By pooling the risk of a large group of customers, insurance companies can accurately predict their expenses. Insurance companies are required by law to maintain large reserves to guarantee they can meet their future obligations to their customers. Insurance companies invest the bulk of the funds to pay future claims.
Who is Your Beneficiary?
When you purchase life insurance, you specify the beneficiary who will receive the payment in the event of your death. The beneficiary can receive the proceeds from the insurance policy as a lump sum or as an annuity with regular payments. In most policies, you have the right to change your beneficiary.
Important Tax Benefits of Life Insurance
When life insurance payments are made to the beneficiary, they are exempt from federal and state income tax. They also bypass probate court, and are available quickly. But if you specify your estate as the beneficiary of the insurance policy, the payment could be subject to federal and state estate and inheritance tax. For these reasons, it is important to name a person as your beneficiary, rather than have the insurance payments made to your estate.
The life insurance premiums you pay are not deductible for income tax purposes.
Life Insurance is a Legal Contract
A life insurance policy is a legal contract. There are various terms and riders in an insurance contract. Before you buy, know if the face amount will remain constant or decline. Find out if the premium remains level over time or changes.
The terms of the contract describe the limitations of the insured events. The policy may have specific exclusions, when the company will not pay off. Death as a result of war, riot or civil commotion may be excluded from the policy. A fraudulent claim invalidates the policy. Most policies will not pay anything for death by suicide during the first two years of coverage. Some policies will not cover anyone who dies during risky activities, like parachuting, flying an airplane, professional sports, or involvement in a military war. A common policy add-on, or rider, is the accidental death rider, which pays twice the amount of the policy face value if death results from accidental causes.
Another common rider is the premium waiver rider, which waives future premiums if the insured becomes disabled.
Term Insurance
There are two general types of life insurance, term insurance and permanent insurance. Term life insurance covers you for a specified period of 5, 10 or more years, the “term”. The policy only pays if you die within the covered period. The policy has no cash value. Premiums for term insurance are lower than for other types of life insurance.
Term life insurance meets the needs of young families for financial security if the income earner dies. The premiums are much lower for young people. When children are grown, the need for insurance is less, and there are usually other financial assets to provide security for the beneficiary in the event of your death. If you want to have life insurance coverage throughout your lifetime, the total premiums on term life insurance will be about equal to the permiums on permanent life insurance.
The only disadvantage to term insurance is that you may not be able to replace the term insurance when it expires, if you have become uninsurable in the meantime. You can specify that the policy include a renewal guarantee.
What Is Permanent Life Insurance?
The second type of life insurance is permanent. Permanent life insurance covers you for your entire life, as long as you pay the premiums. The insurance company cannot cancel your permanent life insurance, unless your application is fraudulent. Permanent life insurance builds cash value over time for you. If necessary you can borrow the cash value, but you must repay it with interest. You can receive some of the cash value if you discontinue the policy. However, the cash value and the rate of return are relatively small, and do not compare well with other investment options. Consequently, independent financial advisors suggest that renewable term insurance is the best life insurance policy for most people.
There are three kinds of permanent life insurance- Whole Life
- Limited Pay Life
- Universal Life
Whole Life Insurance
Whole life policies are the simplest plan for permanent insurance. They stay in effect your whole life, as long as you pay the premium, and they build a small, but predictable, cash value based on the policy schedule.
Limited-Pay Life Insurance
Another type of permanent insurance is Limited-Pay life insurance. With this policy, you pay higher premiums for a shorter period of time. Then the policy is paid up, and no more premiums are required. The insurance policy covers you the rest of your life. You can choose to make payments for 10 years, 20 years or until you reach age 65.
Universal Life Insurance
Universal life policies are a newer idea in insurance. They pay a fixed rate of interest on the cash value of the policy. The interest can be used to help pay the premiums. Thus the premium you pay changes from time to time, depending on the interest your policy earns. If interest rates are high, then the dividends help reduce premiums. If interest rates are low, then the customer will have to pay a higher premium to keep the policy in force. The universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible, but not known in advance. The internal rate of return is usually higher because it moves with the financial markets. The disadvantage lies in the uncertainty of the cash value and the premiums you pay.
I hope life brings you much success. I wish you a very happy day.
----- Surfer Sam
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