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Life insurance is a contract binding a life insurance
company to compensate a beneficiary for the death of a person insured. If
the insured dies the company will provide a cash payment to the beneficiary.
Life insurance is used to protect the economic value of a human life with
regards to those who may be financially dependent upon it. |
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Life insurance has many uses for both individuals and
businesses. Some common uses include:
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Individual Uses
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 | Funeral - Life insurance proceeds can ensure that there is
enough money for proper funeral and burial expenses. |
| Debt - Personal bills, credit card debt, student loans, and
personal notes can be covered by life insurance in the event of an
individual's death. |
| Mortgage Protection - The proceeds of a life insurance policy
can pay off the balance of a mortgage or provide an income stream to pay
monthly mortgage or rent payments. |
| Income Replacement - In the event of an individual's death life
insurance proceeds can provide a supplemental income stream to ensure that
the surviving family members are able to maintain the same standard of
living. |
| Education - Life insurance proceeds can ensure that the
education costs of the insured's children are covered. |
| Taxes - Federal estate and state inheritance taxes can be
pre-funded using life insurance to preserve the value of an estate.
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| Donations/Gifts - An individual can use a life insurance policy
to fund a donation to a charity or leave a gift to a family member.
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Business Uses |
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| Key-Person - A life insurance policy can be used to protect a
business from the loss of income and profits caused by the death of a key
employee. |
| Business Continuation - Life insurance can be used to fund a
buy/sell agreement or stock redemption plan to enable a partner or group
of employees to buy the business interest of a deceased partner. |
| Business Loans - Life insurance protection on a key employee or
business owner can be used pay off the debts of a business in the event of
that individual's death. |
| Employee Benefits - Life insurance protection for employees is
commonly included in company employee benefits plans. |
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There is no magic formula to determine how much life
insurance you should have; however, there are a number of factors that
should be considered when estimating how much life insurance you should
carry. They include: |
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| Final Expenses – These could be unpaid hospital bills, funeral
expenses, unpaid debts, probate costs, and estate and inheritance taxes.
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| Readjustment Fund – This may be used to cushion the immediate
lifestyle adjustment that a family must make when a loved one dies. The
family may be forced to move, or the surviving spouse might have to look
for a new job. In addition, a working spouse may find it difficult to
return to work immediately after the death of a partner. The readjustment
fund allows for adequate bereavement due to loss. |
| Supplemental Income – After the readjustment period, there
should be a consistent income stream to help pay for the family's living
expenses, such as mortgage payments, monthly bills, and daycare.
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| Educational Funds – Adequate funds should be available for the
childrens' education. This might include elementary school, high school,
and college. |
| Retirement Fund – There should also be adequate funds available
to ensure that the spouse can retire comfortably. |
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These are some factors that you should consider
carefully when estimating how much life insurance you need. Everyone's life
insurance needs are different but, in general, an individual's needs are
greatest from the time they start their careers or a family until they reach
retirement, at which time many individuals' needs for life insurance
diminish. It is important to remember that you should review your life
insurance needs annually to account for changes in your family's lifestyle.
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Term Life Insurance |
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Term life insurance provides protection for a specified period of time. A
death benefit is paid to the beneficiary if the insured dies within a
specified period of time while the policy is still in force. Many term life
insurance plans can be converted to permanent life insurance plans without
evidence of insurability. Two types of term life insurance
are yearly
renewable term and level premium term. |
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Yearly renewable term life insurance has premiums that are initially
low; however, the premiums increase substantially as the insured gets older.
These plans have diminished in popularity due to the introduction of level
premium term life insurance. |
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Level premium term life insurance has premiums which remain level
over a specified period of time. These plans have premiums that remain level
for a period of 5, 10, 15, 20, 25, and 30 years. After the initial level
period expires, the annual premium increases each year, subject to a
guaranteed maximum. |
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Although the initial premium of a level term policy is higher than the
initial premium of a yearly renewable term policy, the level term policy
generally costs much less over a specified period of time. For example,
compare the premiums between a yearly renewable term plan and a 20-year
level premium term plan for $500,000 of life insurance. |
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PREMIUMS FOR $500,000 OF LIFE INSURANCE, 35 YEAR OLD, MALE
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Year |
Yearly RenewableTerm |
Level Premium Term |
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1 |
$315.00 |
$495.00 |
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2 |
$325.00 |
$495.00 |
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3 |
$345.00 |
$495.00 |
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4 |
$380.00 |
$495.00 |
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5 |
$455.00 |
$495.00 |
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6 |
$525.00 |
$495.00 |
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7 |
$600.00 |
$495.00 |
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8 |
$710.00 |
$495.00 |
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9 |
$815.00 |
$495.00 |
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10 |
$925.00 |
$495.00 |
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11 |
$2295.00 |
$495.00 |
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12 |
$2375.00 |
$495.00 |
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13 |
$2455.00 |
$495.00 |
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14 |
$2540.00 |
$495.00 |
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15 |
$2625.00 |
$495.00 |
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16 |
$2715.00 |
$495.00 |
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17 |
$2955.00 |
$495.00 |
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18 |
$3225.00 |
$495.00 |
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19 |
$3535.00 |
$495.00 |
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20 |
$3890.00 |
$495.00 |
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TOTAL |
$34,005.00 |
$9,900.00 |
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These rates are
for demo purposes only. Actual rates may vary due to underwriting
guidelines. |
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The cash outlay of the level premium term is less than 1/3 of the total cash
outlay for the yearly renewable term. |
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In general, term life insurance is suitable when your life insurance needs
are temporary or your life insurance needs are long-term but your budget
does not permit the higher premiums of permanent life insurance. |
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Whole Life Insurance |
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Whole life insurance is permanent life insurance and provides protection for
life. As long as premiums are paid, a death benefit is paid to the
beneficiary. The premiums for whole life insurance policies are designed to
remain level over time. In addition, these policies accumulate cash values
on a tax-deferred basis. The rate of return on whole life insurance cash
values is dependent upon a number of factors including the results of an
insurance company's investment performance. Cash values can be used for a
variety of options: |
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| The policy can be surrendered at anytime for the cash surrender value.
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| The policy owner can take out a loan and use the cash value as
collateral. |
| The policy can be changed to a reduced death benefit amount that is
paid up. |
| The cash values may be used to pay premiums for a certain period of
time. |
| The cash surrender value can be used to supplement retirement income.
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Whole life insurance policies are valuable because they
provide permanent protection and accumulate cash values that can be used for
emergencies or to meet specific objectives. |
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The cash values of whole life insurance policies may be affected by a life
insurance company's future performance. Some factors that influence a life
insurance company's performance are expenses, mortality experience, and
investment performance. |
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Universal Life Insurance |
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Universal life insurance is permanent life insurance. As long as premiums
are paid, a death benefit is paid to the beneficiary. These policies are
different from whole life insurance policies because they offer the policy
owner some flexibility to change the premium payments and death benefit. The
death benefit may be increased subject to insurability or decreased, and the
premiums can also be increased and decreased as well as skipped.
Universal
life insurance policies may be purchased with one of two different death
benefit options. One is a level death benefit and the second is an
increasing death benefit. Although premium payments are flexible, a
universal life policy will usually have a target premium which is the
suggested annual premium payment. The target premium for some companies is
sufficient to keep the policy in-force to age 100; however, this is not
guaranteed. Universal life insurance policies also accumulate cash values on
a tax-deferred basis. These cash values tend to be interest-sensitive and
can be used for a variety of options: |
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| The policy can be surrendered at anytime for the cash surrender value.
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| The policy owner can take out a loan and use the cash value as
collateral. |
| The policy can be changed to a reduced amount paid-up whole life
policy. |
| The cash values may be used to pay premiums for a certain period of
time. |
| The cash surrender value can be used to supplement retirement income.
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Universal life insurance policies are valuable because
they can provide permanent protection and accumulate cash values that can be
used for emergencies or for meeting specific objectives. For those who
prefer flexibility, universal life insurance provides more options than
whole life insurance. |
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The cash values of universal life insurance policies may be affected by a
life insurance company's future performance. Some factors that influence a
life insurance company's performance are expenses, mortality experience, and
investment performance. |
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Variable Life Insurance |
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Variable life insurance is permanent life insurance and provides protection
for life. As long as premiums are paid, a death benefit is paid to the
beneficiary. The premiums for variable life insurance policies are designed
to remain level over time. In addition, these policies accumulate cash
values on a tax-deferred basis with the potential for higher rates of return
than traditional whole life policies. Variable life insurance policies' cash
values vary with the investment results of funds chosen by the policy owner.
The policy owner is given a choice of investment options which are usually
stock, bond and money market funds. Unlike whole life insurance policies
which have guaranteed cash values, the cash values of variable life
insurance policies are not guaranteed. The cash values of variable life
insurance policies can be used for a variety of options: |
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| The policy can be surrendered at anytime for the cash surrender value.
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| The policy owner can take out a loan and use the cash value as
collateral. |
| The cash values may be used to pay premiums for a certain period of
time. |
| The cash surrender value can be used to supplement retirement income.
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Variable life insurance policies are valuable because
they provide permanent protection and may accumulate cash values; however,
these policies carry more risk than traditional whole life insurance
policies. Individuals considering purchasing a variable life insurance
policy should be experienced investors in equity investments. |
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The cash values of variable life insurance policies may also be affected by
a life insurance company's future performance. Some factors that influence a
life insurance company's performance are expenses and mortality experience. |
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Variable Universal Life Insurance |
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Variable universal life insurance is permanent life insurance. As long as
premiums are paid, a death benefit is paid to the beneficiary. These
policies are different from variable life insurance policies because they
offer the policy owner some flexibility to change the premium payments and
death benefit. The death benefit may be increased or decreased, and the
premiums can also be increased and decreased as well as skipped. Variable
universal life insurance policies may be purchased with one of two different
death benefit options. One is a level death benefit and the second is an
increasing death benefit. In addition, these policies accumulate cash values
on a tax-deferred basis with the potential for higher rates of return than
traditional whole life policies. The cash values of variable universal life
insurance policies vary with the investment results of funds chosen by the
policy owner. The policy owner is given a choice of investment options which
are usually stock, bond and money market funds. Unlike universal life
insurance policies which have guaranteed cash values, the cash values of
variable universal life insurance policies are not guaranteed. The cash
values of variable universal life insurance policies can be used for a
variety of options: |
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| The policy can be surrendered at anytime for the cash surrender value.
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| The policy owner can take out a loan and use the cash value as
collateral. |
| The cash values may be used to pay premiums for a certain period of
time. |
| The cash surrender value can be used for retirement income.
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| Tax-free exchange for guaranteed income
products |
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Variable universal life insurance policies are valuable because they can
provide permanent protection and may accumulate cash values; however, these
policies carry more risk than traditional universal life insurance policies.
Individuals considering purchasing a variable universal life insurance
policy should be experienced investors in equity investments. |
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The cash values of variable universal life insurance policies may also be
affected by a life insurance company's future performance. Some factors that
influence a life insurance company's performance are expenses and mortality
experience. |
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Second-to-Die or Survivorship Life Insurance |
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A second-to-die life insurance policy insures the lives of two people,
typically a husband and a wife. The death benefit is not paid to the
beneficiary until the death of the second insured. These life insurance
policies are generally available as either whole life insurance or universal
life insurance policies, and premiums are often less expensive than buying
two life insurance policies. |
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Second-to-die life insurance policies are effective tools often used by
wealthy individuals in estate planning. They can be used to pay for estate
taxes. By removing the proceeds of a life insurance policy through the use
of gifting policies and third party ownership, a life insurance policy can
be used to pay for estate taxes. Careful planning by your tax and legal
counsel, coupled with a properly structured second-to-die life insurance
policy, can help you preserve your net worth. |
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Single Premium Life Insurance
The concept of
Single Premium Life Insurance is
quite simple. The insured pays a one time, lump sum payment ($10,000 or
$25,000 or $50,000 or more) and receives a fully paid life insurance
contract. There is a minimum death benefit. The amount of this death benefit
depends on the individual and the amount originally deposited. Ordinarily,
the full premium goes into the accumulation or cash value account. An
interest rate is applied to the cash value annually. It may fluctuate over
time. However, it is always subject to a guaranteed minimum interest rate.
Generally, the insurance company charges an annual fee to cover
administrative expenses and mortality risks.
This policy is generally viewed as a long term policy. This is because
the insurance company generally charges a hefty amount if you take your
money out during the first few years. You may, however, take a loan out
against the policy. And usually, the terms are very favorable to the
insured. Usually, the insurance company structures these policies to meet
federal tax law criteria so that the death benefit is free of income tax to
the beneficiary
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A beneficiary is a person or entity named to receive a
portion of the death benefit of a life insurance policy. The owner of a life
insurance policy may name multiple beneficiaries, and most insurance
companies permit the policy owner to change beneficiaries.
There are two types of beneficiaries: primary and contingent. A primary
beneficiary has the first claim to the proceeds of a life insurance policy
should the insured die. There may be more than one primary beneficiary and
the proceeds do not have to be shared equally. The policy owner of a life
insurance contract may also name a contingent or secondary beneficiary. The
contingent beneficiary has claim to a portion of the death proceeds should
the primary beneficiary(s) be removed or die prior to the death of the
insured. There may also be more than one contingent beneficiary.
Many individuals designate a spouse as the primary beneficiary of their
life insurance policy and the children as contingent beneficiaries. You
should consult with an estate-planning attorney prior to making a minor
child a beneficiary of a life insurance policy. In addition, anyone
contemplating making their estate the beneficiary of their insurance policy
should use extreme caution and consult with an estate planning attorney
prior to doing so. |
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The life insurance policy owner may designate a specific
settlement option to be paid upon his or her death. If the policy owner does
not choose a specific option, the beneficiary(s) will be given a number of
choices. These usually include:
| Lump Sum Payment: The death proceeds of a life insurance policy
are paid to the beneficiary(s) in one lump sum payment. |
| Fixed Period Payments: The death proceeds of a life insurance
policy are paid to the beneficiary(s) for a fixed period.
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| Life Income with Installments Certain: The death proceeds of a
life insurance policy are paid to the beneficiary(s) in installment
payments through a certain period. After the certain period, payments will
continue to be made throughout the beneficiary's lifetime but the payment
may vary from the payments during the certain period. |
| Interest Payments: The death proceeds of a life insurance
policy remain with the insurance company and the company pays the
beneficiary interest payments. |
| Fixed Installments: The death proceeds of a life insurance
policy are paid to the beneficiary(s) in fixed installments until the
proceeds and interest on the unpaid balance of the proceeds are exhausted.
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| Single Premium Annuity: The proceeds of a life insurance policy
are used to purchase a single premium annuity from the insurance company.
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