Life insurance is very important! We all have good intentions, but if we are no longer alive, can those intentions by carried out? There are many spouses and minor children, businesses and estate planning strategies to consider when choosing the right coverage for you. With some fact finding, we can recommend a plan tailored to your individual needs and advise you accordingly.
Did you know that “qualified plans” can be rolled over into life insurance to provide tax advantages for your retirement? We need to talk!!!
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What is Life Insurance?
Life insurance is a contract between the policy owner and the insurer, where the insurer promises to pay a designated beneficiary a sum of money (the “benefits”) upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. In return, the policy holder agrees to pay a stipulated amount (the “premium”) at regular intervals or in lump sums.
The value for the policy owner is the ‘peace of mind’ in knowing that the death of the insured person will not result in financial hardship.
What is a Life Policy?
Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion.
- Protection policies – designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
- Investment policies – where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms are whole life, universal life and variable life policies.
Types of life insurance
Life insurance may be divided into two basic classes – temporary and permanent or following subclasses – term, universal, whole life and endowment life insurance.
Term assurance provides life insurance coverage for a specified term of years in exchange for a specified premium. The policy does not accumulate cash value. Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else.
There are three key factors to be considered in term insurance:
- Face amount (protection or death benefit),
- Premium to be paid (cost to the insured), and
- Length of coverage (term).
Various insurance companies sell term insurance with many different combinations of these three parameters.
Level Term policy has the premium fixed for a period of time longer than a year. These terms are commonly 5, 10, 15, 20, 25, 30 and even 35 years. Level term is often used for long term planning and asset management because premiums remain consistent year to year and can be budgeted long term. At the end of the term, some policies contain a renewal or conversion option. Guaranteed Renewal, the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured and with a premium set for the insured’s age at that time. Renewal and conversion options can be very important when selecting a program.
A common need for term insurance is for mortgage protection, which is usually a level premium. The face amount is intended to equal the amount of the mortgage on the policy owner’s residence so the mortgage will be paid if the insured dies. This type of coverage is also appropriate for families with minor children to ensure that their daily needs and education are provided for in the event of a parent’s death.
Permanent Life Insurance
Permanent life insuranceis life insurance that remains in force (in-line) until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires OR policies lapse). The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. This means that a policy with a million dollar face value can be relatively expensive to a 70 year old. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
The five basic types of permanent insurance are whole life, increasing whole life, universal life, limited pay and endowment.