How much Life Insurance do I need?
Life insurance may be one of the most important purchases you'll ever make. In the event of a tragedy, life insurance proceeds can help pay the bills, continue a family business, finance future needs like your children's education, protect your spouse's retirement plans, and much more. If you're considering securing you and your family’s financial future, we would be happy to review your current situation and offer a few ideas on how you can protect it!
Term Insurance is the most affordable type of insurance when initially purchased and is designed to meet temporary needs. It provides protection for a specific period of time (the "term") and generally pays a benefit only if you die during the term. This type of insurance often makes sense when you have a need for coverage that will disappear at a specific point in time. For instance, you may decide that you only need coverage until your children graduate from college or a particular debt is paid off, such as your mortgage.
GUL, or Guaranteed Universal Life, is Universal Life insurance with a guaranteed level premium and guaranteed level death benefit to age 95 that can be extended to age 121. The policy owner may pay level premiums as with a Term Life policy and be covered with a guaranteed death benefit for the age selected. GUL’s also offer the advantage of “Living Benefits” in case of critical, chronic or terminal illness. Some insurance carriers also offer a GUL with a Return of Premium feature where after 15, 20 or 25 years all or a major portion of premiums paid in are returned to the owner thereby cancelling the death benefit. This is a useful feature if at some point the owner decides that life insurance is no longer needed.
An Indexed Universal Life Insurance (IUL) owner can take advantage of a Market or Equity Index (such as the S&P 500) increase for interest crediting to the cash value of the policy without exposure to risk from a market index decrease. Because there is no risk of market exposure decrease there is a cap placed on the amount of the market index interest crediting. The total amount of cash value is credited with interest based on increases in an equity index (but it is not directly invested in the stock market).
Indexed universal life (IUL) insurance lets the policyholder decide how much cash value to assign to either a fixed account or an equity-indexed account. IUL insurance policies offer a number of well-known indexes, such as the S&P 500 or the Nasdaq-100. IUL’s also offer the possibility of tax deferred cash accumulation while still providing a death benefit.
People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index may use IULs as key person insurance for business owners, premium financing plans, or estate-planning vehicles.
Whole Life Insurance is a life insurance contract with level premiums that has both an insurance and an investment component. The insurance component pays a stated amount upon death of the insured. The investment component accumulates a cash value that the policyholder can withdraw or borrow against. As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build-up tax-deferred.
The type of Life Insurance you choose will be related to your current financial capacity and your long term goals and objectives. There are basically three Life Insurance objectives to consider in personal financial planning:
(1) “Temporary Coverage” needed for anticipated debts and obligations if something were to happen to the insured over a pre-determined number of years, such as 20 or 30 years. Typically the insured wants to be sure that the mortgage, debts and college expenses for children are covered with something extra to cover the costs of living for the bereaved spouse giving that individual time to make adjustments in the absence of the insured. Term Life Insurance with a 20 to 30 year term is considered desirable, especially when there are budget limitations. Most insurance companies will allow for the term policy to be converted to a permanent life-time policy that they offer without additional underwriting. Naturally, the exercise of a conversion will result in higher premiums.
(2) “Legacy Planning” where the insured wants to guarantee that the beneficiaries receive a tax free inheritance, not subject to probate delays, at the passing of the insured. Guaranteed Universal Life (GUL) policies will guarantee coverage up to age 121. Most carriers will also offer “Living Benefits” allowing the insured to receive access to part of the death benefit amount while living in the event of a heart attack, stroke or cancer. Premiums will be four to five times higher than the Term Insurance quote. However, there is a carrier that will allow a return of premium at the 20 and 25 year mark. These policies will not build appreciable cash value. If your financial circumstances allow, GUL’s are excellent for Legacy Planning but do not have a “cash value” accumulation component.
(3) “Retirement Planning” where the insured wants to use the accumulated “cash value” for a source of income in retirement. Whole Life and Indexed Universal Insurance meets this desire in addition to providing a guaranteed death benefit. Premiums are yet again higher. But the annual crediting of interest credits and dividends will allow the insured to accumulate wealth tax deferred in the form of cash value that can later be paid out as monthly income to the insured. Loans may also be taken against the cash value for emergency use or college planning. Accessing cash in the policy will reduce the death benefit, but again the death benefit goes to the beneficiary tax free and without delays associated with probate. These policies also offer “Living Benefits.”
Life Insurance is also useful for Business Planning. Key Person Insurance coverage can help protect your company in the case of an untimely death or disability of a top salesperson, executive or business owner. Life Insurance may also be used to fund a “Buy-Sell” agreement where there are multiple owners or partners, for a more complete discussion and review of the use of Life Insurance for Business Planning Contact Richard.
