is a key component for protecting your family and your overall financial wellbeing. Proceeds from your life policy will help you meet important financial obligations and preserve assets after a loss of life by:
- Replacing lost income
- Reducing or eliminating debt
- Paying for funeral expenses and medical bills
- Providing funds for college
- Providing funds in case of a critical illness
- Providing funds to deal with your estate like selling your home etc.
- And much more
Some life insurance policies can also help with retirement and business planning and even provide liquidity for estates.
The face amount of your policy is the value of the policy to be paid out in the event the policy holder dies. The death benefit is the amount actually paid out at the time of death. The death benefit is the purchased face amount minus any funds paid out in advance of the policy owner’s death. (More on this later.)
The person, company, or trust that will receive the death benefit is known as the primary beneficiary and is selected by the policy owner. Policies may have more than one beneficiary. A minimum of one primary beneficiary is required, but a contingent beneficiary can be selected. Should a primary beneficiary die before the policy holder and no other beneficiaries are named, money from the policy will go to the estate. If this occurs it can create an unwelcome taxable event for your loved ones. In most cases, a beneficiary can be changed at any time.
is a form of temporary life insurance that provides death benefits for a specified period of time. Generally these plans do not accrue any cash value, and premiums are lower than permanent insurance initially, but will increase once the term ends. The benefits of term insurance is that it is simple, affordable plans in most cases can cover temporary or short term needs. Term insurance may be underwritten on a simplified, express issue or with full medical underwriting depending on carrier or specific plan. Term insurance is available in set periods typically ranging from 10 to 30 years.
The death benefit may not be increased while the policy is in force and the policy cannot be cancelled by the carrier as long as premiums are paid. There are several types of term life insurance including:
· Level term which has stable premiums over the initial term period
· Annually Renewable term plans renew each year and premiums increase each year
· Decreasing term has level premiums but the death benefit decreases over time
Term life insurance may also come with a rider that allows it to be converted to a permanent insurance policy at some point during the term. There are also riders that will allow you to access up to 90% of the face value of the policy if you are diagnosed with a critical illness or disability.
Permanent life insurance policies
on the other hand, can provide death benefit protection for your lifetime. These plans may accumulate cash value on a tax deferred basis, but have higher initial premiums than term products. However, premiums for permanent life plans remain more stable over the long-term life of the plan. These plans are designed to meet long-term or permanent goals and in most cases require full medical underwriting. For permanent life policies, a portion of the premium goes toward an investment to build cash value which is payable to the insured in the case of death or survival.
The policyholder may withdraw money from the cash value account so long as the withdrawal does not exceed the amount accrued. Permanent life coverage remains in effect as long as the policy is not surrendered or lapsed.
Penalties may apply for surrendering or lapsing the policy in its early years. Permanent life insurance policies have different plan designs just like term insurance. Whole life insurance provides a guaranteed death benefit and cash value. These plans require fixed premiums over the life of the policy. The policyholder may withdraw or borrow against the cash value, but the death benefits is reduced by any outstanding policy loans.
Universal life insurance
is also a type of permanent policy. These plans have greater premium flexibility than whole life plans. After the initial premium period, the client can decide when to pay premiums and how much to pay. This is subject to certain minimums and maximums. Any cash value accrued will earn a guaranteed interest rate with a universal life policy.