“You Don’t Buy Life Insurance Because You Are Going to Die, But Because Those You Love Are Going to Live” - Unknown

Intro

Life Insurance – Protects against the unknown and unpredictable life events.  For those who are dependent upon you, and your income, life insurance is the primary way they can continue to live until they are financially independent.  Life Insurance can bridge the gap between essential financial needs and be financially autonomous.

Simple FAQs

What is life insurance?

In its most simple format, life insurance is a contract between the life insurance company, and the policy owner.  The Policy owner pays the insurance company a premium, and upon death the insured (usually the policy owner as well), the appointed beneficiary receives a lump sum payout.

Who Can Buy Life Insurance?

Any adult can purchase life insurance.  Especially if the policy owner is the insured, he or she can choose the beneficiary and enter a contract with the insurance company.

Who Can be the Beneficiary?

Anyone the policy owner appoints to be the beneficiary.  Usually, it is a person financially dependent upon the insured person, but it can be the policy owner, or another family member as well.  If the policy owner is also the beneficiary, then another person is the insured.              

Example: Father buys and owns the policy.  Mother is the insured.  Their dependent child is the beneficiary.

Who Can Be the Insured?

Anyone can be the insured, where there is an insurable interest, and their consent and signature are upon the records of the policy.               

Example: Husband buys and owns the policy.  Spouse is the insured.  Spouse signs and gives consent, as Husband is financially dependent on Spouse’s income to run the household.

How Can Life Insurance be purchased?

Life insurance can be purchased through an agent, or via an online site, that may have reputable insurance companies.

Financial advisors are required to have their life insurance license and can provide more value and advice than an online site, and perhaps even more so than a stand-alone life insurance agent.  A financial advisor’s job is to know the entire financial background, history, and needs of an applicant.  The advisor can then guide upon which type of insurance to purchase, and even help design the insurance solution for the applicant’s needs. The policy purchased should fit into the applicant’s financial portfolio.

How Much Life Insurance Is Needed?

How much insurance should be purchased, and for how long?  We believe in the F.I.E.D.S system.   This helps to determine an accurate amount of life insurance for the beneficiary to receive.

 F = Final/Funeral Expenses:  If the loved ones of a deceased individual do not have enough resources to pay the final expenses of a burial or cremation, that cost can be added to the policy purchased.  The average funeral cost with burial is between $7,000 and $12,000.  The average cost of a funeral with cremation is between $6,000 and $7,000.

 I = Income Replacement: This step is usually done last. After calculating all the other needed insurance amounts for final costs, debt replacement, education needs, and special expenses, this leftover amount is the amount that would need to last the beneficiary over the course of time.  It can be an amount that will be invested at a fixed rate of return, drawing only the income, or the income plus principal. 

For Example, if a 30-year-old beneficiary received a $1,000,000 death benefit, invested it at 4% per year, and only used $40,000 of it per year, then the principal will last forever.  However, if that same $1,000,000 were invested at 4%, but $60,000 was needed per year to live, the funds would be used up in 28 years.  This will usually be the largest component of the policy.

E = Education: If there are minor children, or soon to be college bound children, this is the amount the policy owner and insured would like to incorporate into the policy and earmarked for higher secondary education.  With rising tuition cost, most people do not have enough saved for college. Life insurance is a way to ensure your children will get the education needed even after the passing of a parent. 

D = Debt: When a person of insurable interest passes away, the beneficiaries can be left with a mountain of debt, and not enough income to make the payments.  A main goal of life insurance for the policy owner and possibly the insured, is to wipe of any debts that the beneficiaries would be not be able to afford.  Examples would be a home mortgage, credit cards, auto loans, and even student loan debt.

S = Special Expenses: Special expenses can be anything of importance to the family or beneficiaries.  The special expense could be a wedding, bar mitzvah, quinceañera, or a special gift for a loved one.  The portion of the death benefit could be earmarked for future insurance needs like long-term care insurance, disability insurance, or even an annuity, which is another insurance product.

How Long Should the Insurance Policy Be in Force?

As most insurance policies are set for specific terms (Term Insurance). This is a question that leaves many applicants either under insured, or eventually un-insured if they do not pick the correct plan.  Insurance premiums can increase in cost as the policy face amount increases, or by the longevity of the policy in place.  Generally, one should gage the need for life insurance time by when the beneficiary can be expected to be financially independent, or when the insured has saved up enough assets that would pass onto the beneficiary.  A financial advisor can create a financial plan to assist with this decision if needed.

What are the Types of Life Insurance?

Life Insurance falls into two main categories, and then within those categories, are additional sub-categories.  It can become overwhelming, so a reputable financial advisor or insurance agent can properly guide on what is best.

• Temporary Insurance: Also knows term life insurance.  Term life is a fixed-priced premium for a set 10, 15, 20, 25, or 30 years.   There are even a couple of companies that offer 40-year term insurance.  At the end of the term, the insurance does not actually cancel.  The policy owner can still choose to pay the premium after the term limit, but the premium can be whatever the going market rate is.
  Term Life Insurance does not accumulate cash value.
  Term life insurance does not contractually obligate the owner to pay.  If the owner fails to pay or chooses not to pay, the policy simply lapses and is eventually canceled. 
  • Riders To Term Life Insurance: Term insurance does not have any real sub-categories, instead it has what the industry calls riders.  These riders help to accentuate the policy, to better fit the policy holder’s needs.  Examples of more popular riders are:
    1. Return of Premium – For an additional premium per year, all of the premium will be returned to the owner at the end of the term if the insured does not pass away.  This ensures the payor of the premium that no money was wasted after the term period ends.
    2. Accidental Death Benefit Rider – If the insured dies by an accident or bodily harm due to an accident, the death benefit paid out can be up to twice the amount of the original death benefit.
    3. Waiver of Premium Rider – The owner and payor of the policy become disabled and unable to pay.  This rider ensures the policy will not be canceled.  Particularly a great value if the premium is high, to begin with.
    4. Accelerated Death Benefit Rider (Living Benefit) – in some cases, there is no additional charge for this rider.  If the insured is struck with a terminal illness or disability, the insured can use a portion of the death benefit while living.  The beneficiary will receive the death benefit, less the accelerated amount, less any interest or other cost associated. 
    5. Long Term Care: Aside from a straight long-term care policy, a long-term care rider policy is a specific life insurance policy with the intent that the death benefit will be used during the lifetime of the insured, to pay for long-term care. The insured does not need to be terminally ill but can use this living benefit for specific long-term care needs.  Any unused portion can be issued as a tax-free death benefit to the beneficiary.
• Permanent Life Insurance: Permanent life insurance is exactly what it sounds like.  It is in force for the entire life of the insured and does not expire until its canceled, or payment has stopped.  There are a few types of permanent life insurance policies.
  • Whole Life Insurance: This is the most known and purchased permanent life insurance policy.  The policyholder will buy this policy on themselves or the insured for the entire life span of the insured.  They understand that they will have to pay a premium for the entire duration they own this policy. 
    1. Why does one purchase Whole Life Insurance?  A Whole Life policy accumulates cash value, which can be used at a later point.  The cash can increase tax-deferred and sometimes be used tax-free.  The cash value inside the policy earns a dividend, which can be used to pay future premiums.  The main hope with whole life insurance is that the dividends will eventually pay the premium, and the policy will pay for itself.  However, whole life insurance can be expensive, and the money spent on a premium does not purchase a policy as large as a temporary policy. Term policies do not grow cash value.
  • Universal Life Insurance: Universal life can be broken down into three categories:
    1. Guaranteed Universal Life:  This is better known as whole life, without dividend and cash value growth.  It is like temporary / term insurance but will last the life of the insured.  In most cases, it will be until age 120 or 121.  The benefit of a GUL Policy is that it is more affordable than whole life because it does not accumulate cash value in most cases and does not pay dividends.
    2. Index Universal Life: Like whole life insurance, this policy accumulates cash value.  The cash value accumulates by earning interest based on a stock market index.  Usually, the index is the S&P 500 or a blend of the other indexes.  There is more potential for cash accumulation vs whole life, but if the markets do not perform, the cost of insurance can derail that potential.  The cost of insurance is higher than a whole life policy as well.  Indexed life insurance is designed more as an investment with life insurance built-in, whereas straight whole life is more of a pure insurance product.
    3. Variable Universal Life: Same concept as Indexed Universal life insurance.  The key difference here is that a Variable Universal life insurance policy will accumulate cash by using market-related investments such as mutual funds.  The upside potential is much higher than Index Universal Life or Whole Life Insurance, but there is a risk of loss as well if the funds do not perform.  It is another kind of tax-deferred investment like Index universal life insurance.

What Type of life insurance should I Purchase, and what is the best design for me?

When deciding which kind of life insurance product to purchase or invest in, it is always best to get the advice of a sound financial advisor to weigh the pros and cons of each.  Your financial position, age, and overall health will all play a factor in the type of policy one will need.  If it's pure protection and you are sure that after 20 or 30 years, you will have accumulated enough outside wealth to leave behind, you may choose a straight term policy.  If you are not sure, you may choose some whole or guaranteed universal life, and some term life.               

There is even a strategy that is called laddering.  As we age, and accumulate more wealth and pay down debt, we may need less insurance.  A ladder policy will combine 2 or 3 policies into one.  The larger policies are purchased for shorter terms and the smaller policies for longer terms.  As time goes by, the shorter but larger face value policies will drop off, leaving you with one smaller but longer-term policy.  The strategy here is to create a more affordable way to purchase life insurance vs a straight term life insurance policy.  Whatever is decided, it is wise to get counsel from an experienced life insurance broker and/or financial advisor.

What If I Purchase the Wrong Kind of Life Insurance?

Fear not.  All insurance companies have a free look period.  You can cancel your policy and have the refund of the premium.  The period is usually ten to thirty days from the day you receive your policy. 

If you wish to cancel your policy after the free look period, the refund amount will vary, and upon when you choose to cancel. If you wish to cancel in the first year still, term policies will pro-rate the amount of insurance used and refund the unused amount for that year.  Whole life insurance or other permanent policies will have cash surrender values, and usually, in the first few years, it is zero dollars or an amount much less than the accumulated premiums due to the cost of insurance.  In any of the cases, life insurance is a contract that really holds the life insurance company accountable if the insured passes away during the policy period.  The policyholder is not obligated to keep paying at any time.  The financial risk to the policyholder is just lost premiums and the opportunity cost of other investments.  The more time that passes to purchase a replacement policy, the price of the new policy will be associated with the new-age at the time of the new application.  Purchasing the wrong policy, though you are not locked into any contract, can be a costly decision, especially if the policy face amount is less than needed for family protection.

What Are Other Types of Insurance Products?

Though not life insurance, Annuities are considered insurance vehicles, and are used for specific investment objectives and retirement needs. 

Annuity Definition: An annuity is a financial contract between the annuity/insurance company, and the investor.  The annuity will invest the premium amount based upon the kind of annuity purchased.  The financial institution has an obligation to the investor in ways of guaranteed payments, or other contractual obligations based upon the contract and type of annuity. 

              Annuities are typically used by retiree or persons close to retirement.  They are also used by persons who may not have save enough for retirement and want a guaranteed income stream, or by those who want a guaranteed return that other market investment cannot offer.

Annuities are tax deferred products.  They can be invested into by other pretax monies such as an IRA / Or Roth IRA, or post tax money from one’s checking or savings account.  The earnings inside of the Annuity are tax deferred until withdrawn. So, an Annuity-IRA is basically double tax protection.

              Anyone with a cash value life insurance policy who wants to create a guaranteed income stream and does not need the life insurance benefits anymore can do a tax-free exchange of the life insurance policy into an annuity.

Type of Annuities.

              Fixed Annuities: To keep this simple, a Fixed Annuity (FA), is most likely compared to a Certificate of Deposit (CD).   Interest earned on a CD is taxable even if reinvested, and interest earned in an FA is tax deferred until withdrawn.  Both have similar rates of return and are considered conservative investments.  They have low to no fees, protect and preserve principal, and both have a withdrawal penalty based on a contract with the annuity company or bank.  This period is usually called the surrender period, and not to be confused with the early withdrawal age of 59.5 the IRS has mandated.

              Indexed Annuities:  Indexed annuities, also knows as Fixed Indexed Annuities are a more complex product.  Index, as well as Variable Annuities could have their own presentation, but for simplicity’s sake, an Index Annuity is a product that is tied to the market, but still aims to protect principal.  The money invested to the index annuity, is tied to a particular stock market index or a blend of indexes.  As the market goes up, interest is earned based upon the growth of the market.  If the market goes down, the principal is usually protected on the downside.  The catch is that there is usually a cap on the upside, and a longer surrender period.  Some also have fees, so even in down years, one can lose money.

              Indexed Annuities are perhaps the most popular of the 3 annuity types, as they offer attractive upside, and limit the downside.  It is still a complex product, that can be sold in many different combinations depending upon the annuity carrier.  There is also something called riders to the annuity plan.  Riders are enhancements to a policy, that can custom fit one’s needs.  Examples of annuity riders are: Guaranteed life-time income, guaranteed death benefit, cost of living adjustments, or long-term care rider.

              Variable Annuities:  These are just like Fixed Indexed Annuities, except the investment is put into sub-categories of mutual funds or direct market investments instead of being mirrored to an index.  Variable annuities are more tailored for full upside potential while offering tax-deferred growth.  These are more suited for investors who wish to shelter other capital gains and dividends year to year, and their overall tax exposure.  The risk of a VA is like that of any other market security, as the investment could be lost due to market conditions.                Annuities have their benefits, and their costs as well.  it is always good to analyze what is best for your own financial portfolio as there is no one-size-fits-all with investments.

In Summary, Life insurance and Annuities can fit one’s needs very well, and in many cases, are needed investments.  We encourage you to call us to help you, and our focus is to educate our clients into informed decisions and not have any buyers’ remorse.