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What is Life Insurance


It seems you may have some questions about Life Insurance and what it may protect. We will be going over a few things just to get you familiar with What Life Insurance is and the benefits.
In short, Life insurance is an approved contract between an insurance company and the policy owner. A life insurance policy guarantees the insurance company pays a designated sum of money to the named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.
The beneficiaries are able to use the proceeds from the life insurance policy for whatever they may choose. Most typically, the funds will be used to pay off outstanding debts, funeral costs or a college fund. One of the key items to keep in mind while shopping for Life Insurance is that the intention is to help take care of your family or beneficiaries after you are no longer able to provide for them.

 

Two Primary Types of Life Insurance

The two main types of Life Insurance policies are Term Life Insurance and Permanent Life Insurance. 

Term Life Insurance is typically the most accessible and most popular type of life insurance to purchase. The policy is typically for a set amount of years, ranging from 10 – 30 years and depending on the type you choose, you may not even need a medical exam. If you happen to pass away before the term period has ended, the policy issuer will pay out the funds to your beneficiaries or family member, tax free. Otherwise, if you are still alive when the term of the policy ends, then you may have the option of renewing it annually but the cost will more than likely be higher than what your previous monthly payments were. Here are some options for Term Life Insurance: 

  • Decreasing term life insurance is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate. 
  • Convertible term life insurance allows policyholders to convert a term policy to permanent insurance. 
  • Renewable term life insurance provides a quote for the year the policy is purchased. Premiums increase annually and are usually the least expensive term insurance in the beginning 

Permanent Life Insurance you can have the option for coverage for your whole life without any term limits. The types of policies that are typically associated with Permanent Life Insurance are called Whole Life Insurance and Universal Life Insurance. While these policies typically cost more, they usually last longer than Term Life Insurance and they can build cash value. Here are some more details on the the options for Permanent Life Insurance: 

  • Whole life insurance is a type of permanent life insurance that accumulates cash value. Cash-value life insurance allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums. 
  • Universal Life (UL) is a type of permanent life insurance with a cash value component that earns interest. Universal life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time and designed with a level death benefit or an increasing death benefit. 
  • Indexed universal (IUL) is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component. 
  • Variable universal life insurance allows the policyholder to invest the policy’s cash value in an available separate account. It also has flexible premiums and can be designed with a level death benefit or an increasing death benefit.

 

How Much Life Insurance to Buy 

Many factors can affect the cost of life insurance premiums. Certain things may be beyond your control, but other criteria can be managed to potentially bring down the cost before applying. 

After being approved for an insurance policy, if your health has improved and you’ve made positive lifestyle changes, you can request to be considered for change in risk class. Even if it is found that you’re in poorer health than at the initial underwriting, your premiums will not go up. If you’re found to be in better health, then you can expect your premiums to decrease .

 

Step 1: Determine How Much You Need 

Think about what expenses would need to be covered in the event of your death. Things like mortgage, college tuition, and other debts, not to mention funeral expenses. Plus, income replacement is a major factor if your spouse or loved ones need cash flow and are not able to provide it on their own. 

There are helpful tools online to calculate the lump sum that can satisfy any potential expenses that would need to be covered. 

What Affects Your Life Insurance Premiums and Costs? 

 

Step 2: Prepare Your Application 

What Affects Your Life Insurance Premiums and Costs? 

  • Age: This is the most important factor because life expectancy is the biggest determinant of risk for the insurance company. 
  • Gender: Because women statistically live longer, they generally pay lower rates than males of the same age. 
  • Smoking: A person who smokes is at risk for many health issues that could shorten life and increase risk-based premiums. 
  • Health: Medical exams for most policies include screening for health conditions like heart disease, diabetes, and cancer and related medical metrics that can indicate risk. 
  • Lifestyle: Dangerous lifestyles can make premiums much more expensive. 
  • Family medical history: If you have evidence of major disease in your immediate family, your risk of developing certain conditions is much higher. 
  • Driving record: A history of moving violations or drunk driving can dramatically increase the cost of insurance premiums. 

 

Life Insurance Buying Guide 

Life insurance applications generally require personal and family medical history and beneficiary information. You will also likely need to submit to a medical exam. You will need to disclose any preexisting medical conditions, history of moving violations, DUIs, and any dangerous hobbies such as auto racing or skydiving. 

Standard forms of identification will also be needed before a policy can be written, such as your Social Security card, driver’s license, or U.S. passport. 

 

Step 3: Compare Policy Quotes 

When you’ve assembled all of your necessary information, you can gather multiple life insurance quotes from different providers based on your research. Prices can differ markedly from company to company, so it’s important to take the effort to find the best combination of policy, company rating, and premium cost. Because life insurance is something you will likely pay monthly for decades, it can save an enormous amount of money to find the best policy to fit your needs. 

 

Benefits of Life Insurance 

There are many benefits to having life insurance. Below are some of the most important features and protections offered by life insurance policies. 

Most people use life insurance to provide money to beneficiaries who would suffer a financial hardship upon the insured’s death. However, for wealthy individuals, the tax advantages of life insurance, including the tax-deferred growth of cash value, tax-free dividends, and tax-free death benefits, can provide additional strategic opportunities. 

 

Avoiding Taxes 

The death benefit of a life insurance policy is usually tax-free. 

Wealthy individuals sometimes buy permanent life insurance within a trust to help pay the estate taxes that will be due upon their death. This strategy helps to preserve the value of the estate for their heirs. Tax avoidance is a law-abiding strategy for minimizing one’s tax liability and should not be confused with tax evasion, which is illegal. 

Who Needs Life Insurance? 

Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policyholder. Here are some examples of people who may need life insurance: 

  • Parents with minor children. If a parent dies, the loss of their income or caregiving skills could create a financial hardship. Life insurance can make sure the kids will have the financial resources they need until they can support themselves. 
  • Parents with special-needs adult children. For children who require lifelong care and will never be self-sufficient, life insurance can make sure their needs will be met after their parents pass away. The death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child’s benefit.2 
  • Adults who own property together. Married or not, if the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance may be a good idea. One example would be an engaged couple who take out a joint mortgage to buy their first house. 
  • Seniors who want to leave money to adult children who provide their care. Many adult children sacrifice time at work to care for an elderly parent who needs help. This help may also include direct financial support. Life insurance can help reimburse the adult child’s costs when the parent passes away. 
  • Young adults whose parents incurred private student loan debt or cosigned a loan for them. Young adults without dependents rarely need life insurance, but if a parent will be on the hook for a child’s debt after their death, the child may want to carry enough life insurance to pay off that debt. 
  • Children or young adults who want to lock in low rates. The younger and healthier you are, the lower your insurance premiums. A 20-something adult might buy a policy even without having dependents if there is an expectation to have them in the future. 
  • Stay-at-home spouses. Stay-at-home spouses should have life insurance as they have significant economic value based on the work they do in the home. According to Salary.com, the economic value of a stay-at-home parent would have been equivalent to an annual salary of $162,581 in 2018. 
  • Wealthy families who expect to owe estate taxes. Life insurance can provide funds to cover the taxes and keep the full value of the estate intact. 
  • Families who cant afford burial and funeral expenses. A small life insurance policy can provide funds to honor a loved one’s passing. 
  • Businesses with key employees. If the death of a key employee, such as a CEO, would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee. 
  • Married pensioners. Instead of choosing between a pension payout that offers a spousal benefit and one that doesn’t, pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization. 
  • Those with preexisting conditions. Such as cancer, diabetes, or smoking. Note, however, that some insurers may deny coverage for such individuals, or else charge very high rates. 

 

How Life Insurance Works 

A life insurance policy has two main components—a death benefit and a premium. Term life insurance has these two components, but permanent or whole life insurance policies also have a cash value component. 

  • Death benefit. The death benefit or face value is the amount of money the insurance company guarantees to the beneficiaries identified in the policy when the insured dies. The insured might be a parent, and the beneficiaries might be their children, for example. The insured will choose the desired death benefit amount based on the beneficiaries’ estimated future needs. The insurance company will determine whether there is an insurable interest and if the proposed insured qualifies for the coverage based on the company’s underwriting requirements related to age, health, and any hazardous activities in which the proposed insured participates. 
  • Premium. Premiums are the money the policyholder pays for insurance. The insurer must pay the death benefit when the insured dies if the policyholder pays the premiums as required, and premiums are determined in part by how likely it is that the insurer will have to pay the policy’s death benefit based on the insured’s life expectancy. Factors that influence life expectancy include the insured’s age, gender, medical history, occupational hazards, and high-risk hobbies. 
  •  Part of the premium also goes toward the insurance company’s operating expenses. Premiums are higher on policies with larger death benefits, individuals who are at higher risk, and permanent policies that accumulate cash value. 
  • Cash Value. The cash value of permanent life insurance serves two purposes. It is a savings account that the policyholder can use during the life of the insured; the cash accumulates on a tax-deferred basis. Some policies may have restrictions on withdrawals depending on how the money is to be used. For example, the policyholder might take out a loan against the policy’s cash value and have to pay interest on the loan principal. The policyholder can also use the cash value to pay premiums or purchase additional insurance. The cash value is a living benefit that remains with the insurance company when the insured dies. Any outstanding loans against the cash value will reduce the policy’s death benefit. 

 

Life Insurance Riders and Policy Changes 

Many insurance companies offer policyholders the option to customize their policies to accommodate their needs. Riders are the most common way policyholders may modify or change their plans. There are many riders, but availability depends on the provider. The policyholder will typically pay an additional premium for each rider or a fee to exercise the rider, though some policies include certain riders in their base premium. 

  • The accidental death benefit rider provides additional life insurance coverage in the event the insured’s death is accidental. 
  • The waiver of premium rider relieves the policyholder of making premium payments if the insured becomes disabled and unable to work. 
  • The disability income rider pays a monthly income in the event the policyholder becomes unable to work for several months or longer due to a serious illness or injury. 
  • Upon diagnosis of terminal illness, the accelerated death benefit rider allows the insured to collect a portion or all of the death benefit. 
  • The long-term care rider is a type of accelerated death benefit that can be used to pay for nursing-home, assisted-living, or in-home care when the insured requires help with activities of daily living, such as bathing, eating, and using the toilet. 
  • A guaranteed insurability rider lets the policyholder buy additional insurance at a later date without a medical review. 

Borrowing Money. Most permanent life insurance accumulates cash value that the policyholder can borrow against. Technically, you are borrowing money from the insurance company and using your cash value as collateral. Unlike with other types of loans, the policyholder’s credit score is not a factor. Repayment terms can be flexible, and the loan interest goes back into the policyholder’s cash value account. Policy loans can reduce the policy’s death benefit, however. 

Funding Retirement. Policies with a cash value or investment component can provide a source of retirement income. This opportunity can come with high fees and a lower death benefit, so it may only be a good option for individuals who have maxed out other tax-advantaged savings and investment accounts. The pension maximization strategy described earlier is another way life insurance can fund retirement. 

If you have any questions, comments or concerns about life insurance please reach out to one of our highly informed agents at Sirrel, LLC. Please call at 541-703-8384 or use the Contact Us section of our website.