Inadequate insurance protection undermines the financial foundation for everything you do-from building your career to raising your family.
Two Purpose of Life Insurance:
1. Life insurance as protection.
This primary purpose of life insurance is to provide for dependants at the death of a primary wage earner paying for everyday needs, the home mortgage, or education of family members.
2. Life insurance as cash values.
Because of its tax-deferred accumulation properties, more people are using cash value life insurance as a tax-advantaged way to build up cash reserves while earning competitive rates.
Protect Your Most Valuable Asset
If you provide an income for yourself or your family, the value of your own life is your most important asset. It is encouraging that in the United States, almost 80% of households own life insurance today. However, the average size of an individual policy purchased in 1999 was just $87,000*. While that sounds like an adequate amount, often it is not. Consider an individual earning $50,000 a year who owns that policy. If the family is totally dependent in this income, the insurance would last for less than two years.
*Source: 2000 Life Insurance Fact Book
How Much Life Insurance Do you Need?
Not everyone needs the same amount of insurance. Family situations, goals, needs, debt and income are often used to estimate life insurance needs. This chart can help clarify insurance needs:
Living Style Income Factor
Low mortgage or rent payments, no children living at home, low level of debt, single, may have elderly parents to take care for. 1x to 3x annual salary
Low mortgage or rent payments, no children living at home, low level of debt, single, surviving spouse will work. 3x to 5x annual salary
Moderate mortgage payment, medium level of debt, good amount of savings, surviving spouse will work.
5x to 7x annual salary
Young children, new home, mortgage payment is significant expense, surviving spouse wants choice of not working.
7x to 9x annual salary
Take a Closer Look at the Types of Life Insurance Available
- Cash Value
Term insurance pays only a death benefit. Its characteristics include:
- Low initial cost
- Meets specific short-term needs
- Has no cash values
- Is in force for a specified time period
- Policy proceeds pass to beneficiary income tax-free (Note: they may be subject to estate taxes)
Annual renewable term. The death benefit remains level. Premiums increase annually or at certain age brackets.
Level term. The death benefit and premiums remain level for a specific time, usually 5,10,15,20, or 30 years, or to age 65.
Decreasing term. The death benefit decreases each year, even though premiums remain level. This type of policy is frequently used to cover a mortgage or other loan with a decreasing balance.
Cash Value InsuranceThese policies provide cash values in the policy in addition to the death benefit. In a traditional whole life policy, cash values coming from the premiums you pay in early policy years will more than cover the actual cost of insurance that is needed. In later policy years, these cash values have increased, so the premium you pay can remain level. If for any reason you elect not to continue your coverage, you always have access to the cash value. You can also access the cash value for emergencies and other needs, or it can be used as a supplemental retirement income. Participating cash value insurance policies may be dividends.
Cash value insurance characteristics include:
- A death benefit
- Protection for life or as long as needed (or until policy’s stated maturity date or age)
- Cash accumulation that grows on a tax-deferred basis
- Competitive interest on cash values
- The option to borrow against cash values
- A provision that all policy proceeds pass to named beneficiaries income tax-free (Note: they may be subject to estate taxes)
Whole Life. Sometimes called “ordinary” or “straight” life, it has a guaranteed death benefit, cash values, level premiums, and it may pay dividends.**
Universal Life. In 1977, this type of policy was created with greater flexibility as its goal. Both premium payments and death benefits can vary. Premiums, less any sales charges, are credited with interest on a monthly basis. The cost of insurance, together with all other policy fees, are deducted on a monthly basis from the policy cash value. You can increase or decrease the premiums within limits, and even skip payments without losing coverage, so long as the cash values are adequate to cover insurance costs.
Variable Life. * This is a form of whole life with scheduled premiums due in which you tell the insurance company how to invest your policy cash values. You do this by selecting from the investment choices the company offers.
Variable Universal Life.* Like universal life, you can choose how and when to pay premiums so long as adequate cash values exist. You also direct the investment of the policy’s cash value.
*Variable Life and Variable Universal Life are sold by prospectus. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. A prospectus is available from an Investment Executive. Please read the prospectus carefully before investing.
**These guarantees are backed by the claims-paying ability of the issuing company.
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