Life Insurance
Why Buy Life Insurance?
One of the most loving acts we can commit is to provide a financial cushion for our loved ones in the event of our death. Life Insurance will ensure that your family will not have to worry about covering the costs of your funeral arrangements. You can also provide sufficient funds to meet their needs for mortgage payments, school tuition and debt repayment.
There are three kinds of Life Insurance: Term Insurance, Universal Insurance and Whole Life
Term Insurance is for a specific length of time; most common are 10 and 20 year terms. Policies are generally renewable for another term, at a higher rate as the insured person is now 10 or 20 years older. Live beyond the term period and the policy expires (if not further renewed) and the result is there is no payout of the insured amount.
Term insurance has the advantage of being cheaper than either Whole Life or Universal Life insurance. It is ideal for the family starting out; when family income is generally lower and the needs (especially where there are children in the family) are much higher.
Term insurance is offered as part of a group health benefit plan and is based upon the employer’s choice of a flat amount such as $25,000 or $30,000 or a multiple of the employee’s annual earnings; most common is 1 x annual salary. Should the employee leave the company, the coverage expires. Often this is not nearly enough and families should be looking to purchase their own separate insurance policy.
Term insurance is often purchased by corporations on behalf of key persons and the corporation is the beneficiary. No taxes are payable provided the company has not deducted the premium expense from its income.
An exception: Term-to-100 is term insurance that will pay out to the insured upon attainment of age 100.
Most term policies carry a conversion option, i.e. conversion to a Universal Life or Whole Life policy without additional medical underwriting… the advantage is that you could become unhealthy through the passing years and would otherwise be declined.
Universal Life insurance consists of two components-a life insurance component and a savings/investment component. There is no expiry period on a universal life policy except death or the age of 100 in which case the value of the policy is paid to the insurer or the insurer’s beneficiary.
The insurance component requires premium that covers the pure cost of insurance plus administrative charges.
The savings/investment component takes a portion of the total premium and funnels it into an investment portfolio determined by the insured. It is flexible in that it allows (within limits) the insured to make additional contributions to the investment. The earnings on this investment grow within a tax-sheltered environment and both investment and earnings can be accessed when needed, either in the form of a loan from the insurance company or some banks, or a complete withdrawal. Some tax on the earnings may be assessed.
Universal Life insurance may also be paid up insurance, meaning that the payment plan could be at the insured’s option, payable over a set number of years, after which no further payments are required to keep the policy in force until the expiry period mentioned above.
The client has the choice of purchasing a “fixed” amount of death benefit or “increasing face” consisting of the face amount of the policy plus the cash value.
Whole Life is similar to Universal Life in that it consists of the pure cost of insurance, administrative charges and investment. But there is no say by the policy holder regarding the types of investment made by the insurance company. This may not be a bad thing as insurers are generally more competent at making investment decisions than the average individual.