Did You Know?
of Gen Z
44% don't have life insurance
34% have a group life policy5
$129,800 average amount of
individual life insurance
38% don't have life insurance
39% have a group life policy5
$187,100 average amount of
individual life insurance
What Can Life Insurance Do For Your Family?
Life insurance can help:
Support your family's expenses
Pay off your mortgage
Cover education expenses for your children
Replace income for your dependents
Pay final expenses
Create an inheritance for your heirs
Pay federal and state estate taxes
Create a source of savings
Provide funds for charitable contributions
Introduction to Life Insurance
If you are planning to purchase a life insurance policy, you should first consider your needs and understand the different type of insurance products that are available. Many more consumers are using life as part of their financial planning goals. Consumers spend substantial sums of money each year on life insurance policies knowing very little about what it is that they are getting. This guide was developed to help consumers make educated decisions and to help them understand both the benefits and the risks involved in financial planning.
The purpose of this information guide is to help you understand what type of life insurance policies are available. If one type of policy does not fit your needs, then ask and find out about other available policies, many of which are described in this information guide. You can research more information on life insurance policies by checking with a licensed life insurance agent or a licensed life insurance company. You can also visit your public library for material or books on financial planning. Life insurance information is also available on the Internet.
What is life insurance?
Life insurance provides piece of mind knowing that your loved ones will be taken care of in the event that anything were to happen to you. Life insurance living benefits can be used while you are living to pay unforeseen medical expenses in the case you ever become critically, chronically or terminally ill. Life insurance can help you spend less time worrying about the future and more time enjoying the present.
Defining Your Needs
The purchase of life insurance is an important decision for both you and your family. There are many reasons why life insurance policies or annuity contracts are purchased, but these reasons should be based upon your financial planning needs. Factors such as your marital status, number of dependents and cost for their support, future education needs, current and anticipated family income, and your current assets and debt obligations all play a role in determining the amount of life insurance that is right for you.
Choosing the Amount of Life Insurance
Your need for life insurance will vary with your age and responsibilities. The amount of insurance you buy should depend on the standard of living you wish to assure for your dependents. You should consider the amount of assets and sources of continuing income available to your dependents when you pass away. Simply stated, you should choose an amount of life insurance that is determined necessary to meet the needs you are trying to satisfy. A balance needs to be achieved in this process. To be over-insured can negatively affect your budget and threaten your long range financial goals just as much as being under-insured can. While each person must individually assess their responsibilities, needs, and financial situation, it is important to be careful to choose an amount of life insurance that reflects your specific circumstances without under-insuring or over-insuring.
Steps To Determine How Much Life Insurance You Need:
Determine how much life insurance you need based on the factors mentioned above.
Decide how much money you can afford to pay.
Choose the type of life insurance policy that meets your coverage goals and current family budget. Fitting these two factors together will move you toward a successful overall financial plan.
Once you have completed these steps, you will be able to move ahead and contact several life insurance companies (through an agent or broker) to shop for the right type of policy for you. There are many reasons for purchasing life insurance, among which are the following:
Insurance to provide financial protection and security for surviving family members upon the death of the insured person.
Insurance to cover a particular need such as paying off a mortgage or other debt upon the insured's death.
Business insurance to compensate a company on the death of a key employee or to provide a surviving partner the resources to buy out the deceased partner's share of the business.
Insurance to provide funds to pay estate taxes or other final obligations necessary to settle a deceased person's estate.
Insurance to provide the funds necessary for the deceased person's burial expenses.
Types of Life Insurance.
Here are some of the different types of life insurance.
Which insurance is right for me?
Click on each type of insurance for a more detailed description.
Term Life Insurance:
provides life insurance for a specified period of time. This period could be as short as one year or provide coverage for a specific number of years such as 5, 10, 20 years or to a specified age. If you die during the term period, the company will pay the face value to your beneficiary. If you live beyond the term period you had selected, no benefit is payable. As a rule, term policies offer a death benefit with no savings element or cash value. If you have a limited amount to spend, and only need insurance for a specified period of time, you may be able to get more coverage by buying term insurance than by buying cash value insurance. Keep in mind that the cost of term insurance increases as you get older, which may make it more expensive than cash value insurance in the long run. Today's term policies usually have two sets of premiums: guaranteed maximum premiums and current premiums. Current premiums are usually much lower, but they can be changed by the insurance company. The insurance company cannot increase the current premium above the guaranteed maximum premiums shown in the policy. When you buy term insurance, you need to make a choice as to how long you want the protection. You may renew the policy without a physical examination for the period of years specified in the policy. Some term insurance can be converted to cash value insurance up to a specified age with no physical examination. Premiums for the converted insurance will most likely be higher than the premiums you would be paying for the term insurance. If you do not pay the premium for your term insurance, it will generally lapse without cash value, as compared to a permanent type of policy that has a cash value component.
Breaking Down Term Life Insurance
Term life insurance policies provide a stated benefit upon the death of the policy owner, provided that the death occurs within a specific time period. However, the policy does not provide any returns beyond the death benefit (the amount of insurance purchased); the policy has no additional cash value, unlike permanent life insurance policies, which have a savings component, increasing the value of the policy and its eventual payout. Because of this, term life insurance is also known as "pure life insurance": Its only purpose is to insure individuals against the loss of life, and all premiums paid are used to cover the cost of insurance protection.
How Premiums Work
Term life insurance premiums are set based on the age, sex and health of the policyholder, as determined by a medical exam; also included factors such as driving record, medications, smoker or non-smoker status, occupation and family history.
The younger a person is when he takes out a term life policy, the cheaper his premiums. The reason is obvious: A person is statistically less likely to die between the ages of 25 and 35 than between the ages of 50 and 60. For younger ages, term coverage is inexpensive and the premium can be guaranteed not to change for up to 30 years. Once the guaranteed period ends, the policy still remains in force, but changes to a one-year renewable term. The premium is then based on your attained age and increases every year.
Whole Life Insurance: (also known as straight life, ordinary life, and traditional permanent insurance)
is designed to provide coverage for your entire lifetime unlike term insurance which provides protection for a specified time period. To keep the premium level, the premium at the younger ages exceed the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance. Under some policies, premiums are required to be paid for a set number of years. Under other policies, premiums are paid throughout the policyholder's lifetime.
Breaking Down Whole Life Insurance
Whole life insurance provides policyholders with the ability to accumulate wealth as regular premium payments cover insurance costs. These payments also contribute to equity growth in a savings account. Dividends, or interest, can build up in this account, tax-deferred. As indicated by its name, whole life insurance protects an individual for his entire life. This is the most basic type of whole life insurance, also known as straight life, traditional or permanent whole life insurance.
Universal Life Insurance:
Unlike term and whole life insurance, universal life provides an additional level of flexibility. It allows policy owners to modify the amount and frequency of premium payments as long as there is sufficient cash value in the policy to cover monthly deductions.
When the insured dies, a guaranteed amount of money, or death benefit, is left to the named beneficiaries. In addition to the death benefit, universal life insurance also contains a cash value. The cash value grows tax-deferred until funds are withdrawn.
Breaking Down Universal Life Insurance
Universal life insurance was created under the umbrella of permanent life insurance options to provide more flexibility than whole life insurance. Premiums within a universal life insurance policy are broken down by the insurance company into two categories: the cost of insurance and a saving component known as the cash value. The cost of insurance must be covered so the policy remains in force, but premiums may be shifted over time based on the policyholder's needs. Premiums paid over the minimum cost of insurance accumulate within the cash value portion of the policy, and funds can be used to pay premiums. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums. As long as the minimum cost of insurance is covered, either through paid premiums or cash value, the policy is guaranteed for as long as the initial contract dictates.
Cash Value within Universal Life
Although whole life insurance and universal life insurance both fall into the category of permanent coverage, the differences between the two lie in how the cash value accumulates. Under a universal life insurance policy, the insurance company issuing the policy establishes an interest rate minimum, stated within each individual contract. Should the insurance company's portfolio outperform the minimum interest rate, excess earnings may be applied to the cash value of a policy. The potential to earn more than the minimum crediting interest rate differentiates universal life insurance from whole life.
As cash value accumulates over time, policyholders can access a portion of the balance without affecting the guaranteed death benefit. Life insurance policy loans allow policyholders to borrow against accumulated cash value within a universal life policy without any tax implications. However, any policy loan not repaid may reduce the total death benefit issued to beneficiaries. Cash value may also be accessed as a withdrawal, but the policyholder may incur a tax liability in doing so.
Variable Life Insurance (VUL):
(VUL) is a form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount.
Breaking Down Variable Universal Life Insurance - VUL
The investment feature usually includes sub-accounts, which function very similarly to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.
While variable universal life insurance offers increased flexibility and growth potential over a traditional cash-value whole life insurance policy, investors should be sure to compare this type of policy against a "buy term and invest the rest" strategy. They should pay particular attention to the management fees of the variable investment options, as well as to whether an individual even needs life insurance coverage beyond a specific point in the future.
How Variable Universal Life Insurance Works
Like universal life insurance, variable universal life insurance combines a separate savings component with a separate death benefit component, allowing for greater flexibility in managing the policy. Premium payments are paid into the savings component, which, for variable universal life insurance, consist of separately managed accounts also referred to as sub-accounts. Each year, the life insurer takes what it needs to cover mortality and administrative costs. The rest remains in the separate accounts.
The separate accounts are structured similar to a family of mutual funds, with an array of stock and bond accounts along with a money market option. Policyholders are allowed to transfer between the accounts up to a certain number of times per year, typically four. In addition to the mortality and administration fees paid by the policyholder each year, the separate accounts deduct management fees that can range from 0.05% to 2%.
The cash value inside a variable universal life policy is allowed to grow tax deferred. Policyholders can access their cash value by taking a withdrawal or by borrowing funds. However, if the cash value falls below a certain level, additional premium payments must be made to prevent the policy from lapsing.
Indexed Universal Life Insurance (IULs):
A permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns.
Indexed Universal Life insurance gives the policy holder the opportunity to allocate cash value amounts to either a fixed account or an equity index account. Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100.
How Does It Work?
When a premium is paid, a portion pays for annual renewable term insurance based on the life of the insured. Any fees are paid, and the rest is added to the cash value. The total amount of cash value is credited with interest based on increases in an equity index (but it is NOT directly invested in the stock market). Some policies allow the policyholder to select multiple indexes. IULs usually offer a guaranteed minimum fixed interest rate and a choice of indexes. Policyholders can decide the percentage allocated to the fixed and indexed accounts.
The value of the selected index is recorded at the beginning of the month and compared to the value at the end of the month. If the index increases during the month, the interest is added to the cash value. The index gains are credited back to the policy either on a monthly or annual basis.
For example, if the index gained 6% from the beginning of June to the end of June, the 6% is multiplied by the cash value. The resulting interest is added to the cash value. Some policies calculate the index gains as the sum of the changes for the period. Other policies take an average of the daily gains for a month. If the index goes down instead of up, no interest is credited to the cash account.
The gains from the index are credited to the policy based on a percentage rate, referred to as the "participation rate". The rate is set by the insurance company. It can be anywhere from 25% to more than 100%.
For example, if the gain is 6%, the participation rate is 50% and the current cash value total is $10,000, $300 is added to the cash value [(6% x 50%) x $10,000 = $300]. IUL policies typically credit the index interest to cash accumulations either once a year or once every five years.
Pros About an UIL Policy?
Low Price: The policyholder bears the risk, so the premiums are low.
Cash Value Accumulation: Amounts credited to the cash value grow tax deferred. The cash value can pay the insurance premiums, allowing the policyholder to reduce or stop making out-of-pocket premiums payments.
Flexibility: The policyholder controls the amount risked in indexed accounts vs. a fixed account; the death benefit amounts can be adjusted as needed. Most IUL policies offer a host of optional riders, from death benefit guarantees to no-lapse guarantees.
Death Benefit: This benefit is permanent.
Less Risky: The policy is not directly invested in the stock market, thus reducing risk.
Cons About a UIL Policy?
Caps on Accumulation Percentages: Insurance companies sometimes set a maximum participation rate that is less than 100%.
Better for Larger Face Amounts: Smaller face values don't offer much advantage over regular universal life policies.
Based on an Equity Index: If the index goes down, no interest is credited to the cash value. (Some policies offer a low guaranteed rate over a longer period). Investment vehicles use market indexes as a benchmark for performance. Their goal is normally to outperform the index. With the IUL, the goal is to profit from upward movements in the index.
While not for everyone, indexed universal life insurance policies are a viable option for people looking for the security of a fixed universal life policy and the interest-earning potential of a variable policy
Accidental Death Insurance (AD&D):
Accidental death insurance provides a death benefit, which is the amount paid to your beneficiaries if you are killed in a covered accident. This benefit is payable regardless of your other insurance coverage. Accidental death insurance also provides a benefit in the case of a covered accident that leaves you without vision, hearing or a limb.
There is no medical exam or evaluation required to purchase accidental death insurance. You may purchase accidental death insurance on its own or with another type of insurance policy.
Accidental death can be a stand-alone insurance policy.
Used as a stand-alone policy, accidental death insurance can provide you with a substantial amount of coverage at competitive rates.
Accidental death coverage can also be added to an existing life insurance policy.
Accidental death coverage is also available as a rider to your current life insurance coverage. This rider can be an extremely cost-effective way to obtain additional protection on top of the life insurance coverage that you already have in place. The accidental death rider will pay your survivors an additional sum on top of the death benefit from your base policy if death occurs due to a covered accident.
Because there is no medical exam or evaluation required, your acceptance for the accidental death rider is guaranteed.
Final Expense Life Insurance:
Final expense life insurance can help protect loved ones from having to pay for costs associated with death such as caskets and embalming.
In 2014, the average funeral exceeded $8,500. In most cases, a basic funeral service will include a memorial, death certificates for the deceased, and housing the remains. In addition to those costs, there are also charges involved for goods and services, such as transportation, preparation and embalming, use of the funeral home, a casket and headstone, a burial plot, gravesite, the burial service or alternatively, cremation. There may also be additional costs, such as flowers and the printing of memorial cards.
Social Security only pays a lump final expenses sum of $255 for those who qualify.
This is for informational purposes only.
The actual terms of an insurance policy and related law prevail over the information provided here.
In the case of a dispute, the insurance policy is controlling and a court of law will rely on the policy as it is written to resolve the dispute.
The policy is the only document that describes what the insurance company will pay.
The information contained here does not create rights or obligations on the part of the insured, the insurer, the agent, the broker, or the state.
This information is not intended to be a substitute for the actual insurance policy.