What You Need To Know About Life Insurance
If others depend on you for financial support, part of your financial plan should include how you will provide for them in the event of your death. Life insurance pays out if the person insured under the policy dies. The money goes to the policy’s beneficiary, who is named by the person who buys the coverage. There can be more than one beneficiary.
To help you decide which option is the best for you, GDI Insurance Agency, Inc. has covered the basics on life insurance.
The Basics of Life Insurance
If you are married, it’s important for both spouses to have a life insurance policy. If both people bring in an income, a death can be a difficult financial loss. Also, if a stay-at-home parent should pass away, expenses such as childcare and other domestic items can create financial hardship, too.
Here are basic types of life insurance: term life insurance and permanent life insurance. The type of policy that best suits you will depend on your unique needs.
Option #1: Term Life Insurance
Just as its name implies, term life insurance covers you for a specific period of time, or term, that you choose. Since it offers a death benefit but no cash value, term life insurance is an inexpensive way to protect your beneficiaries for a specified period of time.
Renewal term life insurance can be renewed at the end of the term, at the option of the policyholder and without evidence of insurability, for a limited number of successive terms. It can also be converted, or exchanged for a permanent insurance policy, without evidence of insurability down the road. It’s important to note that rates generally increase along with the insured’s age.
Level premium, decreasing coverage, no cash value: Used for financial obligations which reduce with time, e.g. mortgages or other amortized loans.
Annual Renewable Term:
Increasing premium, level coverage, no cash value: Used for financial obligations which remain constant for a short or intermediate period, e.g. income during a minor’s dependency.
Long Term Level Premium Term
Level premium, level coverage, no cash value: The annual premiums are fixed for a period of time, typically 5. 10, 15, or 20 years. Used for financial obligations which remain constant for a short or intermediate period, e.g. income during a minor’s dependency.
Option #2: Whole Life Insurance
Permanent life insurance is any form of life insurance other than term. Examples are whole life, universal life and variable life. These policies combine term life insurance with a long-term, tax-sheltered savings plan.
Whole life is the most basic type of permanent life insurance. It provides coverage that lasts a lifetime and also builds up a cash value that you can borrow against, withdraw or use to pay future premiums.
An insurance policy with a cash value is ideal for those who have a lifetime need for insurance protection, prefer stable premiums over the life of the policy, want a policy that allows them to build tax-deferred values, and value the high degree of coverage the policy affords. While rates for a whole life insurance policy remain stable over the life of the policy, premiums are initially more costly than for term insurance.
Level premium, level coverage, cash values: Cash value typically increases based on insurance company’s general asset account portfolio performance. Used for long-term obligations, e.g. surviving spouse lifetime income needs, estate liquidity, death taxes, funding retirement needs, etc.
Single Premium Whole Life
Entire premium is paid at purchase, cash values, level coverage: Provides protection as well as serving as an asset accumulation vehicle.
What is Universal Life Insurance?
Level or adjustable premium and coverage, cash values: Cash values may increase, based on the performance of certain assets held in the company’s general account. Used for long-term obligations or sinking-fund needs: estate growth, estate liquidity, death taxes, funding retirement needs, etc.
Indexed Universal Life
Level or adjustable premium and coverage, cash values: Cash values may increase, based on the performance of an underlying stock or bond “index.” The death benefit may increase or decrease (but not below a guaranteed minimum) depending on investment performance. Used for long-term obligations or sinking fund needs, estate growth, estate liquidity, paying death taxes, funding retirement needs, etc.
Variable Life and Variable Universal Life
Level or adjustable premium, level coverage, cash values: Used for long-term obligations, by those individuals who are more active investors, for estate growth and tax liquidity. The death benefit may increase or decrease depending on investment performance. The policy owner directs cash values to a choice of investment accounts (bond, stock, money market, etc.). However, cash values are not guaranteed.
Note: Withdrawals and loans may be available form permanent policies. Withdrawals and policy loans may reduce the death benefit and will reduce the cash value of the policy. There are different income tax consequences if they are modified endowment contracts.
Life insurance is a unique asset that can be used to help solve some of life’s perplexing financial problems.
Death Benefit Uses for Life Insurance
- Create an estate: Where time or other circumstances have kept the estate owner from accumulating sufficient assets to care for his or her loved ones, life insurance can create an instant estate.
- Pay death taxes and other estate settlement costs: These costs can vary from a low of three to four percent to over 40 percent of the estate. Federal Estate Taxes are due nine months after death.
- Fund a business transfer: Business owners often agree to buy a deceased owner’s share from his or her estate after death. Life insurance provides the ready cash to finance the transaction.
- Pay off a home mortgage: Many people would like to pass the family residence to their spouse or children free of any mortgage. Often a decreasing term policy is used, which decreases in face amount as the mortgage balance is paid down.
- Protect a business from the loss of a key employee: Key employees are difficult to attract and retain. Their untimely death may cause a severe financial strain on the business.
- Replace a charitable gift: Gifts of appreciated assets to a charitable remainder trust can provide income and estate tax benefits. Life insurance can be used to replace the value of the donated assets. Proceeds from life insurance policies can also be paid directly to a charity.
- Pay off loans: Personal or business loans can be paid off with life insurance proceeds.
- Equalize inheritances: When the family business passes to children who are active in it, life insurance can give an equal amount to the other children.
- Accelerated death benefits: Federal tax law allows a “terminally ill” individual to receive death benefits of a life insurance policy on his or her life income tax free. Such “living benefits”, received prior to death, can allow a person to pay medical bills or other expenses and maintain his or her dignity by not dying destitute. If certain conditions are met, a “chronically ill” person may also receive accelerated death benefits free of federal income tax.(1)Existing life insurance policies should be reviewed to verify that policy provisions allow for payment of such “accelerated death” benefits.
How Much Insurance Do I Need?
To find the right amount of coverage, it’s important to weigh your dependents’ current lifestyle and spending needs against their future sources of income and assets. We can help you figure out how much your family will need to replace this lost income over this length of time should something happen to you. A person should have life insurance that approaches six to eight times their annual gross income. Under current laws, there is generally no federal income tax on death benefits paid to a named beneficiary.
Calculation the value of a human life to a family is difficult. Consider these projected total earnings up to age 65 assuming a 5% annual increase including inflation.
Download “How Much Life Insurance” Worksheet, to find out the amount of life insurance you need.
Call GDI Insurance Agency, Inc. today at 209-634-2929 to learn more.
Life Insurance is Affordable
Of course, there are forms of life insurance that get pricier with the additional features you add on to it, and the price goes up if you’re a smoker or dealing with health problems. Find example life insurance pricing here.
GDI Insurance Agency, Inc. Your Trusted Insurance Broker
We specialize in providing Life Insurance solutions so you can get back to the business of living, knowing one of your family is protected. Contact us at 1-209-634-2929 for your quote today!
1- The discussion here concerns federal income tax law; state or local tax law may vary.