The
Basics
Why do I need Life Insurance?
Life insurance is an essential part
of financial planning. One reason most people buy life
insurance is to replace income that would be lost with
the death of a wage earner. The cash provided by life
insurance also can help ensure that your dependents
are not burdened with significant debt when you die.
Life insurance proceeds could mean your dependents will
not have to sell assets to pay outstanding bills or
taxes. An important feature of life insurance is that
no income tax is payable on proceeds paid to beneficiaries.
The death benefit of a life policy owned by a C corporation
may be included in the calculation of the alternative
minimum tax.
How much Life Insurance do I need?
Before buying life insurance, you
should assemble personal financial information and review
your family's needs. There are a number of factors to
consider when determining how much protection you should
have. These include:
- any immediate needs at the time
of death, such as final illness expenses, burial costs
and estate taxes;
- funds for a readjustment period,
to finance a move or to provide time for family members
to find a job
- ongoing financial needs, such
as monthly bills and expenses, day-care costs, college
tuition or retirement.
Although there is no substitute
for a careful evaluation of the amount of coverage needed
to meet your needs, one rule of thumb used is buy life
insurance that is equal to five to seven times annual
gross income.
If you want to be more precise,
Give us a call and we can help you determine the appropriate
amount.
Choosing
A Life Insurance Plan
Buying life insurance is not like
any other purchase you will make. When you pay your
premiums, you're buying the future financial security
of your family that only life insurance can provide.
Among its many uses, life insurance helps ensure that,
when you die, your dependents will have the financial
resources needed to protect their home and the income
needed to run a household.
Choosing a life insurance product
is an important decision, but it often can be complicated.
As with any other major purchase, it is important that
you understand your needs and the options available
to you.
The main types of life insurance
available are term and permanent. Term insurance provides
protection for a specified period of time. Permanent
insurance provides lifelong protection.
Additional
Life Insurance Points
What happens if I fail to make the
required payments?
If you miss a premium payment, you
typically have a 30- or 31-day grace period during which
you can pay the premium. After that, the policy will
lapse. You may be able to reinstate with evidence of
insurability depending on your policy's provisions.
If your policy has sufficient cash value, the company
can, with your authorization, draw from a permanent
policy's cash surrender value to keep that policy in
force. This does not apply to term insurance because
there is no cash value to draw from. In some flexible
premium policies, premiums may be reduced or skipped
as long as sufficient cash values remain in the policy.
However, this will result in lower cash values.
What if I become disabled?
Provisions or riders that provide
additional benefits can often be added to a policy.
One such rider is a waiver of premium for disability.
With this rider, if you become totally disabled for
a specified period of time, you do not have to pay premiums
for the duration of the disability.
Are other riders available? (* availability
and specifics of these riders vary by carrier and state.)
- "Accidental death
benefit", provides for an additional benefit
in case of death as a result of an accident.
- "Accelerated benefits",
also known as "living benefits." This rider
allows you, under certain circumstances, to receive
the proceeds of your life insurance policy before
you die. Such circumstances include terminal or catastrophic
illness, the need for long-term care or confinement
to a nursing home.
- "Child rider",
provides insurance for all your children, usually
from $1,000 to $20,000 of death benefit.
When will the life insurance policy be in effect?
If you decide to purchase the policy,
find out when the insurance becomes effective. This
could be different from the date the company issues
the policy.
How do accelerated death benefits
work?
It allows policyholders to receive
all or part of the policy's proceeds prior to death
under certain circumstances, including the need for
long-term care and confinement to a nursing home. Because
payments may affect tax status and Medicare eligibility,
and will be deducted from the overall benefits paid
later to beneficiaries, policyholders should thoroughly
investigate options in advance.
By using medical tests are insurers
trying to eliminate any applicant likely to develop
a serious health condition?
Medical tests can provide accurate
and current information about an applicant's health,
thus enabling insurers to charge premiums that reflect
the level of risk an applicant represents. Because some
health conditions are easily managed through proper
medication, therapy or lifestyle changes, medical information
sometimes makes it possible for insurers to cover applicants
who might not otherwise be insurable. More serious or
incurable conditions present an enormous risk that an
insurer simply cannot assume.
What should I consider in naming life
insurance beneficiaries?
- Always name a "contingent,"
or secondary, beneficiary, just in case you outlive
your first beneficiary.
- Select a specific beneficiary,
rather than having the proceeds of your life insurance
paid to your estate. One of the great advantages of
life insurance is that it can be paid to your family
immediately. If it is payable to your estate, however,
it will have to go through probate with the rest of
your assets.
- Be very clear in wording beneficiary
designations. Naming specific children may exclude
those born later. If your child dies before you, do
you want the proceeds to go to that child's children?
Changing the beneficiary designation is easy, but
you have to remember to do it.
Does it make sense to replace a life insurance policy?
Think twice before you do, because
in many situations it may not be to your advantage.
Before dropping any in-force policy, make sure your
"new" policy is paid for and in effect and
first consider:
- If your health status has
changed over the years, you may no longer be insurable
at preferred or standard rates.
- Even if both policies pay "dividends,"
it may be years before the new policy's dividends
equal those of your present one.
- If you replace one cash-value
policy with another, the cash value of the new policy
may be relatively small for several years and may
never be as large as that of the original one. There
may also be a period wherein a surrender charge is
applicable on the first policy.
- You should ask for a detailed
listing of cost breakdowns of both policies, including
premiums, cash surrender value and death benefits.
Compare these as well as the features offered by both
policies.
- If you
decide to surrender or reduce the value of the policy
you now own and replace it with other insurance,
be sure your new policy is in force before you cancel
the old one.
As a single person, do I need life insurance?
The answer almost always is yes.
You may want to consider these options:
- Disability income insurance
- especially important for self-supporting singles
without sizable assets, this can replace a good part
of the income you would lose if you were unable to
work because of accident or illness. If you don't
have long-term disability coverage at work, it would
be wise to consider an individual policy designed
to replace at least 60 percent of your income.
- Health insurance - if you don't
have on-the-job coverage, an individual policy is
your first line of defense against ever-escalating
medical and hospital costs. You can keep premium costs
down by electing a large deductible, thereby "self-insuring"
as much as you can afford.
- Life insurance - even if
you have no dependents now, you may later. If you
buy now when you are younger and healthier, you can
"lock in" lowest-cost coverage, including
guaranteed insurability.
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