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Life Insurance FAQ
What are the advantages of having a life insurance policy?
Monetary Death Benefits
Even if you're on your own for the first time, just getting married, starting a family, or simply enjoying retirement - life insurance can help provide monetary death benefits to those you designate as beneficiaries.
Cash Value Accumulation
But life insurance can serve for more than just "death protection." Some life insurance products combine death protection and savings. These products can be useful during your lifetime, not just after it. They can help you achieve your financial goals through cash value accumulation, which can help with college or retirement savings.
What are the most common types of pure life insurance?
Term life insurance
Term life insurance provides protection for a specified period of time.
If the death of the insured person occurs within the time limits of the policy, the death benefit will be paid to the beneficiary. No benefits are paid if the insured person is still alive at the end of the covered term. Term insurance does not generate cash values. For this reason:
- Term insurance is one of the simplest types of life insurance policies available today, and
- Is usually the least expensive means of protection.
Permanent Life Insurance
Unlike term insurance, permanent life insurance has no specified term, subject to policy conditions. A permanent life policy calls for premiums to be paid for as long as the insured lives.
- A permanent life policy accumulates cash value.
If the insured dies, the death benefit is payable (subject to policy terms). If the policy is surrendered before the insured dies, the cash value is payable (minus any outstanding loans). Loans may be made from the insurance company against the cash value of the policy at a rate guaranteed in the policy as security. The maximum loan rate guaranteed in the policy may be much lower than that available from a bank. Regardless of where the loan is secured, if the insured dies prior to the loan being repaid, the amount of the loan and any interest due must be repaid from the death-benefit amount.
What does renewable or convertible mean?
- A renewable term life policy permits the owner of the policy to automatically extend the policy length regardless of the health or occupation of the insured, with a possible increase in premiums at renewal.
- A convertible term life policy permits the owner to change the insurance (at an adjusted premium rate) into a whole life or other permanent life insurance policy regardless of the health or occupation of the insured.
What is Flexible premium or Universal Life Insurance?
A life insurance policy designed as a permanent policy, but different from traditional policies in that:
- It allows the policy owner to vary the amount and timing of premium payments (subject to satisfying policy premium minimums to maintain the policy), plus increase or decrease the death benefit (subject to underwriting for an increase).
- Cash values accumulate based on premium payments.
Monthly deductions are subtracted from this fund for expenses and cost of insurance. Interest is then added to this fund. In some cases the interest rates to be credited are declared by the company and vary from time to time. Under federal law, guidelines are defined for policies to maintain status as life insurance under the Internal Revenue Code. This law puts a cap on total payments to the contract and provides a minimum relationship of death benefit to cash value.
What does accumulate cash value mean?
Cash value generally accumulates at a currently competitive interest rate. There's also a guaranteed minimum interest rate. Under the current law, the growth of your cash value is income tax deferred.
Universal life policies allow you to borrow a portion of your cash value (within policy limits, subject to policy loan interest rate, and if sufficient cash value exists to maintain coverage) for any reason to help cover major expenses such as emergencies, a down payment for a new home, college costs, or retirement.
Why do I need life insurance?
There are many reasons for buying life insurance. If you're the primary wage earner in the family, life insurance is a good way to help provide your family with a stable financial future. If you aren't the primary wage earner in your family, it's important to have insurance to help cover the financial burden of childcare, funeral expenses, and other unforeseen costs.
While it's difficult to face our own mortality, planning for it can ease the burden our loved ones will face later. Purchasing life insurance can help make a difficult situation easier by providing death benefits for:
- unpaid medical bills
- income replacement for survivors
- final expenses like burial costs
- unplanned or emergency expenses
- your mortgage balance
- future education funds for your children
Remember, you can also use some life insurance products:
- to help you establish an estate plan
- as a component to your savings strategy
- for retirement income
- even to pay for estate taxes
What policy would work the best for my needs?
Every person has a different idea of what financial security means. If something should happen to you, how much money would your family need? You should consider:
- your current debt
- expenses your family can expect to pay after your death
- your family's future needs
A general rule of thumb to calculate your life insurance needs is to multiply your annual salary by seven.