Are you thinking about getting a life insurance policy? There are many options available. If you’re wondering which path is the right one, here are life insurance basics which can help you get started.
In simple terms, a life insurance policy is a contract between a policyholder and an insurance carrier. Most life insurance policies have four parts:
• Premium payments – What the insured gives to the insurance carrier
• Death benefit – A sum of money the insurance carrier pays to beneficiaries upon the insured’s death
• Cash value – An interest-bearing savings or investment value that’s included in permanent life insurance policies
• Term period – How long the policy provides coverage for
Most life insurance policies require medical underwriting, some policies require financial underwriting. On the medical underwriting side, the potential insured will have to undergo a medical checkup.
What Kinds of Life Insurance are Available?
There are many types of life insurance including whole life, term life, universal life, indexed universal life, and variable life.
Whole Life Insurance
General Guidelines for Life Insurance:
You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to claims paying ability of the issuing company). Whole life insurance can provide coverage for a set period as well as your lifetime.
Your only action after purchase of the policy is to pay the fixed premium. The cash value may be accessible via policy loans or withdrawals. However, this can affect the cash value, death benefit, and even policy guarantees the insurance company gives.
Universal Life Insurance
You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed. In addition, the cash value will grow at a declared interest rate, which may vary over time.
The cash value may be accessed via policy loans or withdrawals. But it can affect the cash value, death benefit, and policy guarantees.
Indexed Universal Life Insurance
Indexed universal life insurance is very similar to universal life insurance. It gives the policyholder a choice of allocating cash value amounts to a fixed account or a fixed-index account. You can pay premiums at any time, in almost any amount but subject to certain limits, so long as the policy expenses and insurance coverage cost are met.
The amount of insurance coverage can be changed. The cash value will grow at an interest rate declared annually and based on the performance of a stock index, which may vary over time. If there are any negative index changes, your cash value is protected. In these ways, it is similar to how a fixed index annuity functions: growth potential linked to rising index values and protection in the case of falling index values.
Indexed universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policyholder can receive. Since they’re seen as a “hybrid” universal life insurance policy, they tend to not be expensive (don’t have much management). They offer greater safety than an average variable universal life insurance policy, but their growth potential is limited compared to variable options.
Term Life Insurance
Term insurance will last a specified amount of time based on a set period. Time periods usually last for 10-30 years, with a 20-year period being the most common. If you were to purchase a 20-year term policy, it would last for 20 years.
If the policy owner passed away within the 20-year term, the death benefit would be paid to the beneficiary. If the policy owner was to decease after the 20-year term, there would be no death benefit.
The premium payments are at a very low cost and there is no cash value. You are purely purchasing for the death benefit only. There is also (ROP) Return of Premium Term Life Insurance which comes at a much higher cost.
Variable Life Insurance
As with whole life insurance, you pay a level premium for life. However, neither the death benefit nor cash value is predetermined or guaranteed. They fluctuate depending on the performance of investments in what are known as subaccounts.
A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be allocated.
Why Get Life Insurance?
People generally take out life insurance policies for four reasons:
• Income supplementation for loved ones upon death
• Adopting a retirement savings strategy
• Tax advantages in general
• Increased resources for retirement, emergencies, and other needs
How Much Coverage Do I Need?
There are many factors to consider:
• How many people depend on you
• What’s your current budget
• How much can you afford
• What’s the purpose of you getting the life policy
• Note: Many people get life insurance as a substitution for their income when they die or for tax advantages
It’s important to consult with a qualified, licensed, professional life insurance agent on these matters before making a decision. Making a quick purchase will likely be disastrous. For instance, say you buy a 20-year term policy in your mid-twenties.
Say over time you had children. When you have to go through medical underwriting again for updated insurance, your new policy will be more costly because you’re older and you’re more likely to have health issues. It shows the value of good choices from the start.
When to Get Permanent Insurance?
Permanent coverage is a way for you to regularly save money and a way for you to leverage wealth. Your policy builds up value as you grow older. In many cases, it's more flexible than term life and designed to change according to your changing needs.
It’ll also help you take care of the people who depend on you financially. A permanent policy may bring more value to a person that has good cash flow. A permanent policy is significantly more expensive than a term policy.
When to Get a Term Policy?
Term life lasts a certain period of time and then must be renewed or replaced in order to continue. This makes it a good choice if you’re unable to afford a permanent policy and only foresee a need for a certain time.
Term life is an excellent choice for young families who have a greater need for insurance when their children are young.
Benefits of Whole Life Insurance vs. Universal Life Insurance
Whole Life Benefits
• The policy never has to be renewed as long as premiums are paid.
• The premiums remain the same through the payment period.
• The accumulating cash values act as a savings element.
• Some policies include the possibility of receiving dividends.
• Non-forfeiture options allow the policy holder to retain some benefits even if unable to pay the premium.
• There are guarantees which last for the life of the contract if premiums are paid.
Universal Life Benefits
• The amount and frequency of premium payments is flexible although there are certain requirements.
• There is also flexibility in the amount of the death benefit, but it is subject to rules requiring the policy to maintain its status as insurance.
• You have the ability to take partial withdrawals from the cash value of the account.
• In most contracts there are guarantees which, if premiums are paid, will last for the length of the contract.
Beneficiaries & Contingent Beneficiaries
A beneficiary is the person or entity you name to receive your death benefit. Beneficiaries are often spouses, children and other family members, but you can name a friend or even a charity. Usually you name a secondary or contingent beneficiary to be next in line to receive your benefit if your first beneficiary dies before you.
If you believe life insurance may fit your situation, consulting with a financial professional may help with making a decision. Contact us today to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals.