Life Insurance

Life Insurance

Why Do You Need It?

Life insurance has a variety of uses.  Some of the reasons why people have life insurance are:

Income replacement: It protects your family’s standard of living by providing funds to replace the income you used to bring in.  Besides the normal living expenses, there now may be additional expenses like childcare, cooking, cleaning, and lawn care.

Pay off debts: It can enable your family to have enough money to pay off the mortgage, car loans, student loans, and credit cards.  Relieving debt obligations can provide some comfort to your spouse and family.

Provide retirement income: Life insurance proceeds can be used to fund retirement goals.  Since the proceeds provide necessary funds, instead of spending down retirement accounts, you can keep them intake to grow for the future.  You can also set a certain lump sum aside as a way of pre-funding retirement goals.

Fund other goals:  You probably have more financial goals than just retirement.  Life insurance can also help fund college expenses, new cars, and future family vacations.

Create an estate:  You may want to leave an estate to your family or friends.  However, if you are young or haven’t accumulated enough assets yet, the proceeds from a life insurance policy can create a larger estate.

Philanthropy:  You may have a favorite charity or cause you’d like to contribute to, but you don’t feel you have enough income or assets to give regularly.  You may want to create a legacy and be remembered for your generosity.  Life insurance can help you meet both these goals.

Settle an estate:  If your estate is large, your family may have to pay estate taxes.  Life insurance proceeds provide liquidity to pay taxes and final expenses without having to sell assets to come up with funds.

Business purposes:  As a business owner you may use life insurance to protect your family’s interests, provide liquidity to continue operations, or to buy out your ownership in the business if your family is not interested in running it.  You may also use it as a benefit offered to employees and key personnel.

Types of Life Insurance

Term: This is the simplest and least expensive form of life insurance.  It is considered pure insurance because there is no investment component.  It covers you only for a certain term such as 10 years, 20 years, etc.  If you die before that time, your beneficiary receives the value of the policy.  Premium rates usually stay the same for the length of the policy.

Whole Life: This policy can provide a specific amount of coverage for your entire life, not just a certain number of years.  The premiums remain level, but they are usually quite a bit higher than term.  A portion of the premium is invested by the insurance company and starts to build a tax-deferred cash value account.  The rate of return is often low.  Companies give you the option to receive dividends from your policy or to apply them to reduce premium payments.  This cash value is available for withdrawals during your lifetime.

Variable Life: This type of life insurance can also provide life-long coverage.  Premiums remain the same over the life of the policy and it also accumulates tax-deferred cash value.  The main difference between variable life and whole life is that variable has more flexibility on the investment side.  Companies typically offer mutual fund investments which may grow faster than the low fixed rates of whole life.  The trade-off is that there is no guarantee to the amount of cash value over your lifetime.

Universal Life: Universal life can also provide permanent insurance coverage, and is more flexible than whole life and variable life.  Like variable life, it allows you to accumulate cash value on a tax-deferred basis which can be withdrawn.  One difference between the two is that universal life does not allow you to participate in the stock market.  Instead, it provides market interest rates on your cash value.  Another difference is that premiums are not fixed.  Beyond a minimum premium, you can decide how much to invest in the policy.

Universal Variable Life: This is the most flexible type of insurance.  Like the other permanent insurance, it can provide coverage for your entire life, it accumulates cash value on a tax-deferred basis, and you are able to withdraw the cash value.  It provides the premium flexibility of universal life and the able to investment in the stock market like variable life.