Burkhart Insurance Agency, Inc. - Life Insurance Basics

THE ADVANTAGES OF HAVING LIFE INSURANCE

Life insurance has many advantages besides helping to provide financial security for your heirs. You can also tap into the benefits of permanent life insurance while you are still alive.

GUARANTEED FINANCIAL RESOURCES: Life insurance provides immediate cash at death which can be used by your beneficiaries to pay final expenses, estate taxes, and administrative fees. The financial resources provided by life insurance can prevent the need to sell your home, business property, or appreciated assets to cover these costs. The sale of any of these assets in some cases may impose financial hardship on your survivors. Insurance, therefore, provides a measure of financial security.

TAX-FAVORED SAVINGS ALTERNATIVE: Life insurance also provides a way for younger families to accumulate wealth. Permanent forms of insurance — whole life, universal life, and variable universal life — can provide you with savings opportunities. The cash value of these types of insurance grows tax deferred. They can make excellent alternatives to other commonly used savings vehicles.

FINANCIAL GOAL ACHIEVEMENT: Life insurance can also be used to satisfy financial goals that would normally not be achieved by other investment vehicles. Life insurance proceeds can be used to repay outstanding mortgages as well as create a college education fund for your children. Using life insurance to help achieve these goals can enhance and ensure the surviving spouse’s standard of living in the event of premature death.

FLEXIBILITY: Whether you need term or permanent protection, fixed or variable returns, fixed or adjustable premiums, or individual or joint coverage, there is a policy available that can fulfill your specific objectives.

THE LIVING BENEFITS: Life insurance provides benefits that you can enjoy during your life. You can borrow from or withdraw your policy’s cash value to achieve your financial goals or to enhance your liquid reserves. If you have accumulated sufficient cash value, it may also be used to provide you with a retirement income. Your cash value can even be used as collateral to obtain credit.

SUMMARY: Life insurance can be an important element in your risk management program. Through the benefits it provides, life insurance can provide a foundation of financial security for you and your family.

YOUR LIFE INSURANCE POLICY OPTIONS

YEARLY RENEWABLE TERM (YRT)

Term life insurance provides protection for an initial low premium with the rates generally increasing each subsequent year. It pays a benefit only if you die during the term of the insuring agreement. Most term insurance policies can be renewed annually until you reach the end of a specific period (say until age 95). However, after a period of years, most policies require evidence of insurability to be furnished in order to qualify for the lowest available rates.

If you need life insurance for shorter time periods (4 years and less), you should purchase Yearly Renewable Term (YRT). Examining every type of life insurance plan available on the market, YRT usually provides the least expensive life insurance for the first few years. But when buying term life insurance, buyers should not always buy the policy with the lowest first year premium. These policies frequently raise their rates more rapidly in later years and can end up costing more, over time, than companies with higher first year premiums. Term life buyers, or prospective buyers, should consult an agent to create an insurance program exactly right for you. In this conversation, discuss how long you want to keep the insurance policy, and what your current and future cash flow might be.

LEVEL TERM LIFE INSURANCE

Level term insurance offers term life insurance with premiums that remain level for a certain number of years. Commonly, level term is offered with guaranteed level premiums of 5, 10, 15, and 20 years: Most level term policies are more expensive than YRT policies in the first few years. However, if you are planning to keep your life insurance for 5, 10, 15, or 20 years, level term will end up being far less expensive than a single Yearly Renewable Term (YRT) policy.

Level term policies are usually renewable after the initial term (5, 10, 15 or 20 years). This means you can renew the coverage at the end of the term if you are willing to pay more premiums. Keep in mind that at the end of your initial term the premiums will have gone up significantly. Some level term policies are not automatically renewable at the end of their term. These policies should generally be avoided.

Unless it is vastly more expensive, consider purchasing a level term policy with a conversion option. This option will allow you to convert to cash value life insurance without evidence of insurability (no medical exam or questions need be completed). This option becomes very important if you decide to keep your life insurance beyond the initial term of the policy, and your health has deteriorated.

After the initial term, a level term policy will often become a YRT policy, with premiums that rise annually. Alternatively, some level term policies will continue, but at a higher level premium for some period of years. For example, a 10-year level term policy might have a rate increase in the eleventh year. The rate increase might result in another premium that is level for ten years. When a level term policy reaches the end of its initial term, the policy should be repriced. If a re-entry premium is offered and you are still in good health, this may be your best option. At the same time, you should look at what else is available on the marketplace. Before changing any life insurance policy, an insured person should consider the pros and cons of replacement.

CASH VALUE (PERMANENT) LIFE INSURANCE

Cash value life insurance generally has higher premiums than pure term insurance. This is because a portion of the premium is used to pay mortality costs such as term insurance premiums, and a portion goes into a "savings account" for your benefit. That savings component is usually called "cash value" and can be used for supplemental retirement income, a source of emergency funding, to pay down a mortgage, etc. Unlike term insurance, with cash value insurance the death benefit is guaranteed to always be there as long as you pay the necessary premiums. Because of front-end expenses, it is usually advisable that cash value insurance be purchased by those who plan to hold the insurance for long periods of time (at least 10 years).

Cash value life insurance does have some advantages. The growth of cash values in a life insurance plan receive preferential tax treatment, since interest or growth is not subject to current income taxes. Cash withdrawals from a cash value life insurance contract are also accorded tax advantages. Moreover, some cash value life insurance contracts offer investment choices by allowing the customer to select how the money is invested among 10 or 15 "separate accounts". These separate accounts might include stock funds, money market funds, global growth funds, etc. Life insurance that provides these separate accounts is called Variable Life.

CASH VALUE LIFE SUMMARY

Cash value life insurance is more expensive than term life insurance. If you are going to have insurance protection and accumulate cash value, it will cost more. You might compute your insurance needs and find out that you need $500,000 of life insurance. However, you may not be able to afford this much cash value life insurance. What you may want to do in this situation is buy as much cash value life insurance as you can afford and buy term life to fulfill the remaining need.

When buying cash value life insurance, one needs to weigh many factors. Have you made the maximum contribution to your tax qualified retirement plan (IRA, 401(k), etc.)? If you haven't, you should explore that option more fully, before you purchase cash value life insurance. If you are paying 20% interest on unpaid credit card balances, you should pay the credit cards off before making an investment in cash value life insurance. If the above situations do not pertain to you, and you want to accumulate some savings, cash value life insurance can make a lot of sense. That is why the majority of Fortune 500 companies use cash value life insurance to supplement their Executive's Retirement Programs. As indicated above, there are many types of cash value life insurance plans, and consumers should purchase the type that best matches their financial objectives.

UNIVERSAL LIFE

Universal life is a combination of a term life insurance policy and a savings account that is earning interest. Every month, the insurance company adds any premiums that you pay to your existing account's balance, and credits interest on that money. That same month the company subtracts expenses and the cost of insurance (COI). The COI is very similar to Yearly Renewable Term premiums. Universal life premiums are very flexible and can be changed frequently at the insured person's election.