Why should I read this?
If you want to make provisions for the welfare of your loved ones after your death but find the subject of life insurance confusing or intimidating, read on. It's easier to understand than you think, and the rewards can be substantial.
What is life insurance?
Life insurance is a financial resource for your loved ones in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary(ies) with a certain amount of money upon your death. In return, you make periodic payments, known as premiums. The amount of the premiums generally depends on factors such as your age, gender, occupation, medical history and whether you intend to build up cash value in your policy. Some policies may require a medical exam.
Certain types of life insurance may also provide benefits for you and your family while you're still living. Such policies accumulate cash value on a tax-deferred basis that can be used for future needs such as supplementing your retirement income or helping provide for a child's education.
Do I need life insurance?
The ability to earn an income can be considered your family's most valuable asset because your income allows you to obtain other assets, particularly the necessities of life and, of course, the creature comforts. However, as we know, the ability to earn an income is not guaranteed. Yet, the need for income may continue for those who were financially dependent upon you. Consequently, your need for life insurance and the amount will depend upon your personal and financial circumstances. If any of the following statements apply to you, you probably do need to consider life insurance:
What are some other reasons you may want to consider life insurance?
In addition to the comfort of knowing that you have provided for your loved ones after your death, there are several other reasons you may want to consider life insurance, including:
How can I choose the policy that's right for me?
Life insurance is a Long Term commitment. Before buying any policy, ask yourself these very important questions:
What are my options?
There are four basic types of life insurance to meet your individual needs.
How can I conserve costs?
Here are some ways you can save money when purchasing the life insurance that's right for you.
You may be able to obtain coverage up to a certain level without providing evidence of good health, a key advantage. Additionally, group insurance plans often provide for continued coverage during periods of disability. Many plans are administered through payroll deduction, a very convenient way to pay for coverage. And finally, many plans allow you to continue your coverage even after you leave employment by continuing payment of premiums or converting coverage to an individual policy.
What if I already have life insurance coverage?
Even if you have life insurance, keep in mind that life changes and, as it changes, so do your needs for protection. Your life insurance needs should be reviewed every few years. Any of the changes listed below should prompt you to sit down with your insurance agent to make sure your plan is still appropriate.
Can I trade or replace my policy?
You can trade or replace your policy, but it's not something to be considered lightly, regardless of whether you are thinking of switching policies within the same company or switching from one company to another. New policies typically have high costs the first few years and there is normally a new "contestability period" during which the insurer can cancel the policy and refuse to pay death benefits if an application was misleading. If you want to increase your total life insurance, it is probably better to keep your old policy and simply add a new one, or increase your specified face amount under the same life insurance policy. For example, suppose your objective is to have $100,000 of life insurance and you currently have $50,000. It maybe better to keep the existing $50,000 policy and buy a second $50,000 policy to reach your goal of $100,000. Your existing policy premiums will generally be less than those for the new policy, because you bought it when you were younger and you won't lose any existing cash value. Be sure to ask your agent, financial advisor or insurance company about the best alternative for your specific situation.
How can I tell how much life insurance I need?
Usually a good rule of thumb is 15 to 20 times your annual income, if you have dependent children. It is recommended that you have a professional evaluate your current situation to determine how much coverage you should have.
What is the difference between “term” and “whole life” insurance?
Term life provides death benefit only for a low cost in the early years. It gets very expensive as time goes on. Only 2% of term policies ever pay a death benefit because most people drop them when the cost goes up. It is excellent for short-term coverage.
Whole life provides lifetime coverage. The premiums are more expensive in the early years, but you get level cost, a cash value buildup in a tax friendly environment, low cost loans, and lifetime coverage.
This can be an excellent Long Term solution.
What is the best way to compare alternative policies?
You need to look at how long you will need the coverage, what your financial situation is now, and what the outlook for you and your family is in the future. You can compare surrender cost indexes on policies to give you an indication of the net cost of insurance. Meeting with an advisor will also help you evaluate which plan is best for you.
I heard that disability insurance is sometimes more important that life insurance. Is this true?
It depends. Disability insurance is very important, and you should get as much as you can. If you were suddenly unable to work and your income disappeared, then the effect on you and your family could be very detrimental, financially and otherwise. In addition, you need life insurance if people are dependent on your income for their survival. As you get closer to retirement and you have accumulated substantial assets, life insurance becomes more important for estate planning reasons. The bottom line is that most people need the maximum amount of both types of coverage.
I have life insurance at work and have other policies, why should I review my life insurance?
You should review your insurance coverage every few years. Perhaps your income has increased or decreased. You may have more responsibilities such as new children, new marriage, a spouse may not be working any more, larger debt obligations.
The amount of coverage and the type of coverage may need to be changed or modified. You may be at the tail end of a 10 or 20-year term life insurance policy and the rates are ready to increase substantially.
How do I determine the amount of life insurance that is needed for my spouse and me?
The first thing to determine is the amount of your outstanding monthly obligations, then you need to determine your future obligations such as college cost and taxes on retirement plans. In addition you need to look at inflation, your cost of living today will increase by 2 to 10 percent per year due to inflation. If you are spending $50,000 per year to live in 2005 dollars you will need more money to live 10, 20, 30 or 40 years from now. Typically people need 10 to 20 times their income in life insurance and other liquid assets. Most people are substantially underinsured based on their income and their consumption. It is good to run a human life value calculation to see what you are worth to your family in the event of your death.
What insurance issues should I be concerned with during divorce proceedings?
There are several issues. First of all, just as with any other property, you need to determine who will be the owner of your various insurance policies. Secondly, if both spouses and child(ren) are covered under a group health plan, how will both spouses and child(ren) be covered after the divorce? Thirdly, consider what will happen to the income from the support order or alimony if the provider should die.
Why is ownership of the insurance policies important?
The owner controls the policy and has the right to name the beneficiaries. For instance, your spouse may be the current owner of a life insurance policy that has you named as the beneficiary. This means that your spouse could change the beneficiary at any time, contrary to what you might desire or need.
What will happen to the income from the support order or alimony if the provider should die?
You should ask your attorney whether the divorce settlement will include a provision for life insurance on the provider, to protect the support order or alimony. If not, you might consider purchasing such a policy yourself.
How much life insurance is needed to protect the support order or alimony
We have provided a life insurance calculator to assist you in this regard.
How much does life insurance cost?
We have provided a life insurance quote engine to assist you in this regard.
What health considerations are important in buying life insurance?
Your personal and family health history are big factors in determining the rate class under which you can purchase life insurance. Many sites only quote the rates for the healthiest people, but this can be misleading. Follow this link to obtain life insurance quotes that consider your underwriting profile.
If I need to purchase life insurance, which companies have the cheapest rates?
See this independent survey of competitive term life insurance companies by accessing our life insurance quote engine.
How do I use Life Insurance as a College Funding Source?
A life insurance policy is a good resource to make current college tuition costs more affordable. Anyone with children is already well aware of the high cost of college tuition and may have even started saving up for the thousands you'll spend. A life insurance policy can be used as an additional college savings resource as well as a guarantee that, in the event of a premature death of you or your spouse, your child will have access to sufficient funds to finance a college education.
Using cash value feature as a tool for college savings. The savings component of a cash-value insurance policy can be used to put aside money to cover the cost of tuition. This savings feature allows a portion of your premiums to be invested.
Depending upon the type of policy, either you or the insurance company creates and maintains your personal portfolio. If the bills for tuition become too burdensome, you can take out a loan up to the amount of accumulated savings.
The insurance company charges you a lower interest on the loan than any other financial institution will. If you take this route, the death benefit of your insurance policy will be reduced by the amount you have taken out on loan. If you choose to pay off the loan, the original amount of your death benefit will be re-established.
The advantage to using your savings from a life insurance policy instead of from another source is that no taxes are applicable to these loans as long as you make your premium payments. Furthermore, the interest you earn from your life insurance policy's investments is non-taxable as income. Because your earnings are never reduced by taxes, your policy's portfolio increases more rapidly than if it were invested without the aid of a life insurance policy. In essence, your money grows tax-deferred and can be used tax-free!!
Remember, a permanent life insurance policy with a cash-value is needed if saving for college is part of the reason why you would choose to get insured. Give us a call and we can discuss your protection and investment options, and present you with a quote on what the associated costs would be.
What are my options of paying for my children’s college education?
Your child could help pay for college by getting a job, but students must already juggle studies and other college activities. Even a part-time job might detract from their primary focus – getting an education.
You can also plan to pay college expenses out of your future income as long as you realize that doing so might require substantial cutbacks in other areas of your family budget.
Some might suggest that you approach college tuition as you would buying a home – borrow the money to pay for college and simply repay the debt with higher earnings after graduation. Though many parents see advantages in having children contribute to their education expenses, a college education can be as costly as buying a home.
How many parents want their children to start out with such substantial debt?
Scholarships and grants are the ideal financial aid. They don’t have to be paid back. But only 40% of all financial aid comes from scholarships and grants, while nearly 60% is loans.
Saving now is the best way to ensure that you have options later. After all, you would like your child to select a college that offers the best education and not necessarily the best financial aid.
You probably also want the comfort of knowing that you won’t be dependent on outside sources like loans or scholarships to meet college expenses.
Many strategies and investment vehicles are available to help you maximize your college savings. Selecting a suitable strategy and the best combination of investment vehicles is critical. For each option, you face the task of evaluating key characteristics including:
The decisions you make now can have a significant impact on how much money is available for tuition payments in the future. In this tutorial, we focus on the most common components of a sound college savings plan – a plan that can give you and your future college student a high degree of financial security and the confidence that you can afford the college of choice.
If my child chooses not go to college will I lose the money I invested in a 529 Plan?
One option you would have is to change the beneficiary to another member of the family. That could be the current beneficiary’s brother or sister. It could also be the beneficiary’s cousin, although the cousin alternative will disappear at the end of 2010 unless Congress extends current treatment (which we expect to happen). You could even move the beneficiary up or down the family tree, naming the beneficiary’s child, parent, or even yourself as replacement beneficiary.
Another option you have is to take the money back out of the 529 plan for yourself. However, you probably won’t want to do this unless you have a real need for the funds. Any earnings growth in the account will be taxable to you at your ordinary income rate plus a 10-percent penalty rate. The fact that the account beneficiary can be changed as many times as you want means that any excess funds in your 529 plan can remain there to be passed down from generation to generation (check to see if your 529 plan has a restriction on how long the account can stay open—many do not).
Add a what if my child doesn’t go to college if funding with Life Insurance
Why would I need Long Term Care Insurance?
You could need Long Term Care Insurance if you were to suffer an illness, need major surgery, get in a severe car accident, slip and fall, and break a hip, or encounter a disability or simply grow old and fragile, you may require long term care.
Wouldn't my health insurance pay for my long term care?
No. Health insurance pays for medical treatment that is making you “better”. Once there is no sign of improvement from the care being delivered, it is consider long term care, and your health insurance no longer pays for that.
Who Needs Long Term Care Insurance?
Long Term care goes beyond medical care and nursing care to include all the assistance you could need if a chronic illness or disability leaves you unable to care for yourself for an extended period of time. If you can afford Long Term Care Insurance, you should consider it.
What is Long Term Care Insurance?
It is a transfer of risk, which you can use at any age, and it pays for care anywhere.
How much does Long Term Care cost?
Nationally - the average cost per year in a nursing home is $61,000. In some regions, it can cost twice that. Home care is also expensive. A home health aide visiting just three times a week for eight hours – to help with bathing, dressing, and other activities of daily living – can cost $20,000 per year. These costs are expected to increase at least 5 percent each year.
Can I afford Long Term Care Insurance?
A good rule of thumb is to purchase a policy if it costs no more than 7 percent of your gross income. The other question to ask yourself, is “Can you afford not to have the insurance and spend the $60,000-$100,000 per year if and when you need care?”
Will Long Term Care Insurance allow me to have care at home ?
Long Term Care Insurance pays for care in your home or at any level of care facility. (See LTC Definitions – Types of Facilities).
What are activities of daily living?
ADL's are used to determine whether a person needs Long Term Care and is eligible to receive benefits from a Long Term care insurance policy. ADLs are bathing, eating, dressing, toileting, transferring, and continence. (See LTC Definitions – Benefit Triggers). Most policies require that a person be unable to perform two of the six ADLs to qualify for Long Term care insurance benefits.
Is Alzheimer's disease covered by Long Term care insurance?
Most policies today cover Alzheimer's disease. Check your policy before purchasing.
What are the tax implications of having Long Term Care Insurance?
Recent changes in the law allow the premiums and benefits of Long Term care insurance, as well as consumers' out of pockets expenses for Long Term care, to be tax deductible under certain circumstances. Employers may count their contributions to employee Long Term care insurance planes as a business expense.
How can I keep my premium costs down?
Premiums are based on your age and the coverage you receive. The younger you are when you purchase Long Term Care Insurance, the lower your premiums will be. More limited coverage, such as a lower daily benefit, a longer elimination period, or a shorter benefit period, will also result in lower premiums.
How do I know the coverage I buy today will still be sufficient in 15 years?
Inflation protection is a critical option that increases coverage by five percent annually on either a simple or compounded basis, or allows the purchase of increased coverage based on the Consumer Price Index. For those buying Long Term Care Insurance at a younger age, this feature is essential for full protection against rapidly rising costs.
What is a Life Insurance policy with a Long Term Care Insurance rider?
This policy is purchased to satisfy to purposes insurance protection in the event of an illness or injury (Long Term Care Insurance) and a death benefit in the event of your death. If at any point you cannot perform 2 ADL's the LTC rider would begin paying your benefit. In the event of your death, your beneficiaries would receive a predetermined death benefit when you die.