Client Solutions: Personal Life Insurance Information
Why do you need life insurance?
Life insurance helps you and your family deal with the financial impact of life's unexpected events. A life insurance policy ensures that when you die, your family members will have the financial resources they need to meet their expenses. Many people also purchase life insurance to accumulate equity for future needs, including retirement income, college funding, or funds for future emergencies or opportunities.
Life insurance provides an important layer of financial protection for ANY family member, including children. In addition to replacing the lost income of a wage earner, life insurance helps assure that expenses such as child care and household maintenance will continue to be covered. Acquiring life insurance when your children are young can help lower your premium while your insurability is at the highest level.
What types of life insurance are available?
There are two basic kinds of life insurance, term and permanent. Other variations also exist, with "universal life" representing a popular option.
Term Insurance delivers what its name implies: protection for a specific term of one or more years. Since protection is only provided for a specific time period, this insurance is best considered "temporary protection."
Under term insurance, death benefits are typically paid only if you die during the "term period" written into the policy. Term insurance typically can be easily renewed, and a medical examination may or not be required. Premiums, however, will be higher each time you renew because you are older. Term insurance offers the key advantage of giving you the greatest amount of coverage per premium dollar. Most policies are "convertible," which means these policies can be "traded" for permanent life insurance protection. (Of course, premiums for the permanent policy will be higher than those you were paying for the term policy.)
Permanent life insurance provides protection for as long as you live. Premium costs are typically averaged over your lifetime, so the premium does not increase as you get older. The premiums are higher than what you would pay for an equivalent amount of term insurance, but permanent insurance can be considered "more economical" when compared to the higher premium rates associated with term insurance that is repeatedly renewed.
"Whole Life" is the most basic type of permanent insurance. These policies develop cash values on a tax-deferred basis, and these values can be used for a variety of purposes, including:
- Collateral for loans — Securing a loan with the cash value of your policy can be useful for funding short-term obligations. Note: if you die before the loan is repaid, the amount owed and interest is deducted from the life insurance proceeds.
- Payment of premium — You may authorize the insurance company to borrow from your cash value to pay the premium due.
- Funding a reduced level of protection — If you wish to stop making premium payments, the cash value of your policy can be used to continue a reduced level of protection.
In the event you wish to cancel your policy, the accumulated value of your insurance is always available to you. In the event of a disbursement, you will pay taxes on the cash value only if it exceeds the amount of premiums paid into the policy.
Universal life insurance offers features found in both term and permanent insurance. Universal life provides life insurance protection, but it also accumulates cash that can be credited with interest earnings. (The amount earned will of course depend on prevailing interest rates.)
Under a universal life policy, the premiums you pay are added to the cash accumulation portion of your policy. A monthly deduction from your account value can provide for life insurance protection and other benefits and riders, and administrative fees can also be deducted from the cash accumulation.
Universal life is known as a flexible premium policy that allows you to vary the timing and amount of your premium payments every year, or even skip a premium payment. Your insurance will continue as long as there is enough money in the cash accumulation to pay for all charges and fees. You can obtain cash from your universal life policy by borrowing or withdrawing from the account value.