Life Insurance

Who Needs Life Insurance? 

Life insurance is an essential part of the financial planning process. This is especially true if dependents rely on you financially. The main reason people buy life insurance is to replace the income that would be lost with the death of a wage earner. The life insurance proceeds can also help ensure that your dependents are not burdened with significant debt upon an insured person’s death. These proceeds could mean your dependents won’t have to sell assets to pay outstanding bills or taxes. An important feature of life insurance is that death benefits are not subject to federal income taxes, and, if set up properly, it can be estate tax free when desired.

How Much Life Insurance Do I Need? 

The amount of life insurance an individual insured may require can vary tremendously. Generally, the more people who depend on your income while you are alive, the more life insurance you should own. This holds true for individuals, families and business people. In general, many financial planners estimate that you should be insured for 5-7 times your annual income.

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, our consultants recommend 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 has several tax 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 advantage. 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.

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 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 considerably more expensive, our consultants recommend 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 (5, 10, 15 or 20 years) 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.

The National Association of Insurance Commissioners has adopted a piece of legislation (Measure XXX) that will probably affect insurance companies in 1996 or possibly 1997. The result of this measure will be markedly higher level term life insurance prices for consumers. Because of this, our consultants recommend that buyers of term life insurance lock in their insurance rates by buying level term before the measure takes effect in your state. If your health is good, you should consider buying a level term policy for as long as you will need life insurance.