By Joanthan Askew
Who needs life insurance?
If there are people who depend on one person's income as the principal financial support, then the principle person needs life insurance to protect the dependant's from financial loss. Older couples also may need life insurance to protect a surviving spouse against the possibility of the retirement savings being exhausted by unexpected medical expenses. And if persons have substantial assets then they need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations.
Purchasing Life Insurance
The modern mindset to life insurance has changed. Now many fill out applications for life insurance through websites or fill out applications that was mailed to them and they receive their policies online or through the mail. Are these methods wise? Life insurance is an important purchase. One should be well informed, educated to what will fit their needs and goals.
As you will read on life insurance is an important asset to a financial portfolio or financial plan. Having a professional asset in choosing the correct coverage will help a person achieve their goals and will meet an important need or several needs. Consulting with a professional also will help persons see some other avenues of need that may be open when purchasing life insurance. In other words, do not be reluctant to discuss a purchase of life insurance with a professional (life insurance agent). Although many large companies provide life insurance packages on the internet or through the mail, the coverage may be insufficient in meeting your needs and goals. Talking to a professional agent will help in making the best decision on purchasing life insurance that will meet needs and accomplish attaining financial goals.
How Much Life Insurance is Needed?
Life insurance is based on replacing a principle persons income for the benefit of dependents if do to the death of the principle. A formula of between five and ten times the principles annual salary is often used to calculate how much coverage is needed. Another method is to purchase life insurance based on individual needs and goals. Determine what goals or needs are to be meet with life insurance; also determine the principles unique income replacement needs. Insurance benefits are generally income tax free and if chosen wisely it will support ones own lifestyle. Start off by determining the principles net earnings after taxes. Then add up all personal expenses such as food, clothing, recreation, memberships, vacations etc. The balance shows annual income that the life insurance will need to replace. You will want a death benefit amount which, when surrendered to the beneficiary or others, will provide income annually to cover this amount. Then, add to the balance one-time expenses such as college tuition for children or paying any debt that is incurred, like credit cards, car notes, or mortgage.
It is important to estimate the final expenses such as estate taxes, medical costs, and funeral costs.
Types of Life Insurance
Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy's cash value tax-free.
Cash value can be accessed at any time through policy "loans". Since these loans decrease the death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit only. If the dividend option: Paid up additions is elected, dividend cash values will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary. Universal Life is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also highly flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn. You may also have the option to change face values. Universal life policies typically offer a guaranteed return on cash value, usually at least 4%. You'll receive an annual statement that details cash value, total protection, earnings, and fees.
Universal life policies guarantee, to some extent, the death proceeds, but not the cash function - thus the flexible premiums and interest returns. If interest rates are high, then the dividends help reduce premiums. If interest rates are low, then the customer would have to pay additional premiums in order to keep the policy in force. When interest rates are above the minimum required, then the customer has the flexibility to pay less as investment returns cover the remainder to keep the policy in force. The universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible. The internal rate of return is usually higher because it moves with the financial markets. Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it.
The disadvantages to this type of life insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.
Term Insurance Term life insurance or term assurance is the original form of life insurance and is considered to be pure insurance protection because it builds no cash value. This is in contrast to permanent life insurance such as whole life, universal life, and variable universal life.
Term life insurance provides coverage for a limited period of time, the relevant term. After that period, the insured can either drop the policy or pay annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed by, for example, an earthquake or fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is "pure" insurance without any investment options. Benefits are paid only if you die during the policy's term. After the term ends, your coverage expires unless you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent insurance without a medical exam.
Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract.
Endowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier.
Joint life: Either a term or permanent policy insuring two or more lives with the proceeds payable on the first death.
Survivorship life or second-to-die life: Life insurance policy insuring two lives with the proceeds payable on the second (later) death.
Single premium whole life: Life insurance policy with only one premium which is payable at the time the policy is issued.
Modified whole life: A whole life policy that charges smaller premiums for a specified period of time after which the premiums increase for the remainder of the policy.
Saturday, June 7, 2008
Life Insurance - Are You Covered
By Mark A. Weiss
We seldom think past our lives in this world, and perhaps spend more time concentrating on our pensions than thinking about life insurance. Planning properly for your dependents in the unfortunate event of your death, can help to spare them from any unnecessary financial burden. Many of us automatically presume that we will live a long, healthy and happy existence, and planning for the possibility of our death is not something we ever think about. If you have any dependents, it is very important to consider how they would cope financially if you died unexpectedly. You need to make sure that you leave any dependents in a financially secure position, which will hopeful enable them to stay in their present home and pay important bills without any additional worry.
Life insurance is a personal insurance plan taken out by an individual against their own life, which ensures that funds are made available to their spouse and/or family in the event of their death - it could also be used to protect a mortgage, estate or business. It involves the payment of regular premiums to the insurance company and, in the unfortunate event of death, will pay out either a lump sum or a regular income to the "trustee" or next of kin.
It is not only the long-term financial requirements of your family that need considering, such as, household bills, education fees, etc., it is also the short-term requirements, such as funeral costs, that need to be considered. There are obviously many life insurance policies available to suit your individual requirements and that is why it is important to "shop around" until you find the right one. You can easily obtain quotes online to give you an idea of the monthly premiums, but do always read the small print first.Although there are many different types of policies with different levels of cover available, this list will hopefully give you some idea of the main ones that are on offer:
Family Income Benefit Life Insurance - This is one of the least expensive forms of life insurance and it actually pays out an income rather than a lump sum. Following the death of the policyholder, it will provide the dependents with a monthly payment until the end of the policy's term.
Mortgage Life Insurance - This can be taken out on a single or joint life and is designed to pay off the mortgage in the event of the person's death - the cash sum being paid out on the first claim only.
Whole Life Insurance - This policy is not set to a specific term and will continue to protect the interests of the policyholder until they die or surrender the policy.
Level Term Life Insurance - This policy remains level for a fixed term and you can select its duration, which is generally 10, 15, 20 or even 30 years. Once the term is selected you can't usually change it until the policy expires.
Income Protection Insurance/ Accident and Sickness Insurance / Redundancy Insurance/ Critical Illness Insurance and Long Term Care Insurance - These are just a selection of other individual policies that are available and they do exactly as they say- covering you for a multitude of other problems that may arise whilst you are alive. If you are ever unfortunate enough to be made redundant, become injured at work, develop a short-term or long-term illness preventing you from working for a period of time, etc., then these policies could all be very beneficial to you by replacing valuable loss of earnings. Policies, like Critical Illness Insurance, can be taken out on their own or linked in with another plan - however, they have been under criticism in the past due to their reluctance to pay out when required. Although these policies can be very worthwhile, they can also be rather off-putting due to their rather large premiums.
We seldom think past our lives in this world, and perhaps spend more time concentrating on our pensions than thinking about life insurance. Planning properly for your dependents in the unfortunate event of your death, can help to spare them from any unnecessary financial burden. Many of us automatically presume that we will live a long, healthy and happy existence, and planning for the possibility of our death is not something we ever think about. If you have any dependents, it is very important to consider how they would cope financially if you died unexpectedly. You need to make sure that you leave any dependents in a financially secure position, which will hopeful enable them to stay in their present home and pay important bills without any additional worry.
Life insurance is a personal insurance plan taken out by an individual against their own life, which ensures that funds are made available to their spouse and/or family in the event of their death - it could also be used to protect a mortgage, estate or business. It involves the payment of regular premiums to the insurance company and, in the unfortunate event of death, will pay out either a lump sum or a regular income to the "trustee" or next of kin.
It is not only the long-term financial requirements of your family that need considering, such as, household bills, education fees, etc., it is also the short-term requirements, such as funeral costs, that need to be considered. There are obviously many life insurance policies available to suit your individual requirements and that is why it is important to "shop around" until you find the right one. You can easily obtain quotes online to give you an idea of the monthly premiums, but do always read the small print first.Although there are many different types of policies with different levels of cover available, this list will hopefully give you some idea of the main ones that are on offer:
Family Income Benefit Life Insurance - This is one of the least expensive forms of life insurance and it actually pays out an income rather than a lump sum. Following the death of the policyholder, it will provide the dependents with a monthly payment until the end of the policy's term.
Mortgage Life Insurance - This can be taken out on a single or joint life and is designed to pay off the mortgage in the event of the person's death - the cash sum being paid out on the first claim only.
Whole Life Insurance - This policy is not set to a specific term and will continue to protect the interests of the policyholder until they die or surrender the policy.
Level Term Life Insurance - This policy remains level for a fixed term and you can select its duration, which is generally 10, 15, 20 or even 30 years. Once the term is selected you can't usually change it until the policy expires.
Income Protection Insurance/ Accident and Sickness Insurance / Redundancy Insurance/ Critical Illness Insurance and Long Term Care Insurance - These are just a selection of other individual policies that are available and they do exactly as they say- covering you for a multitude of other problems that may arise whilst you are alive. If you are ever unfortunate enough to be made redundant, become injured at work, develop a short-term or long-term illness preventing you from working for a period of time, etc., then these policies could all be very beneficial to you by replacing valuable loss of earnings. Policies, like Critical Illness Insurance, can be taken out on their own or linked in with another plan - however, they have been under criticism in the past due to their reluctance to pay out when required. Although these policies can be very worthwhile, they can also be rather off-putting due to their rather large premiums.
Subscribe to:
Posts (Atom)
