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Back in the day, insurance companies found most people would back away from an insurance policy that talked about death, but now many people are more opt to consider life insurance to protect their family and their assets.


Before buying life insurance, you need to do a little thinking and a lot of research. There are a few questions you need to answer and some decisions you need to make.

Choosing the type of life insurance policy you need can get a little personal. By that I mean the choice is dependent on each family's unique needs. There are three basic types of life insurance policies. It is important to first take the time to learn about the three different types of life insurance polices and then decide which policy will suit your needs best. The three different types of life insurance policies are:

·         Universal Life Insurance

·         Whole Life Insurance

·         Term Life Insurance

Universal Life Insurance

Universal Life Insurance is a flexible-premium, adjustable benefit life insurance policy that accumulates account value. The flexibility of this policy allows you to change the amount of insurance as your needs for insurance change. Some changes require underwriting approval.   As with all life insurance, the main purpose for buying a Universal Life insurance policy is the death protection provided to your loved ones at your death.


Benefits of Universal Life


·         Flexibility -- You decide how much life insurance you need -- and subject to certain requirements and limitations, you can adjust the death benefit and premium payments to fit your changing needs.

·         Security -- You help protect your loved ones against possible financial hardship in the event of the insured's death.

·         Tax-Free death benefit -- Under current tax laws governing individual life insurance, life insurance proceeds are generally income tax free to the beneficiary.

·         Tax-Deferred account value growth -- Your policy's Account Value earns interest at the company's current interest rate -- federal income tax deferred. The current interest rate is guaranteed to be at least 4% a year.


Whole life insurance


Whole life insurance is Permanent life insurance coverage for as long as you live and continue to make timely premium payments.  It has level premiums and the accumulation of cash values, whole life insurance is a good choice for long-range goals. The guaranteed cash values can provide money later on to help with temporary needs or emergencies.


Features of Whole Life Insurance


·         Premiums generally are level and payable for life: Since premiums are level, the younger you are when you purchase a whole life policy, the less expensive the annual premiums will be.  Most insurance companies offer whole life policies that provide shorter premium payment periods, such as 15 years or a one-time payment.

·         Dividends: Whole life insurance policies can earn dividends. Dividends result when our actual life insurance costs turn out to be less than we assumed in setting our premiums. When this happens, insurance companies may return a portion of your life insurance premium to you as a dividend. Dividends are not guaranteed, since we don't know our actual costs in advance.

·         Guaranteed Cash Values: Unlike term life insurance, which does not accumulate any cash values, some of the money you pay into your whole life policy accumulates as guaranteed cash values. If you choose to surrender the policy, these guaranteed cash values would be available to you. Or, as long as the policy is in force, you may borrow against them as a policy loan at the current policy loan interest rate.

The amount of your guaranteed cash value depends on the kind of whole life policy you have, its size and how long you have had it. The growth in cash values is tax deferred under current federal income tax law. Borrowed amounts reduce the death benefit and cash surrender value.


Term life insurance


Term life insurance provides death protection for a stated time period, or term.  Term life insurance is perhaps the simplest form of life insurance. It was developed to provide temporary life insurance protection on a limited budget. Since term insurance can be purchased in large amounts for a relatively small initial premium, it is well suited for short-range goals such as life insurance coverage to pay off a loan, or providing extra life insurance protection during the child-raising years.


Features of Term Life Insurance

·         Initial affordability


·         Adjustable premiums:  Term life insurance policies have adjustable premiums. This means that insurance companies may raise or lower premiums at some point specified in the policy based on projected changes of investment earnings, mortality experience, persistency, and expenses. However, premiums may never be raised above the maximum premiums stated in the policy.


·         Renew ability:  Term policies allow the policyholder to continue coverage past the original coverage period of the policy. Each time the policy is renewed the premium increases to the amount for the then attained age of the insured. This right is usually offered for a specific period, which varies depending on the type of policy.


·         Conversion: Policies are convertible to age.

The basic difference between term and whole life insurance is this: A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years. Whole life insurance, on the other hand, combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against. The three most common types of whole life insurance are traditional whole life policies, universal and variable. With both whole life and term, you can lock in the same monthly payment over the life of the policy.

How much life insurance will you need? Once you decide what type of life insurance policy you need, you will want to get an idea of how much you would like your death benefit to be. This is the amount that your dependents will receive if you die.

This depends on the ages of your family, your lifestyle, your debts, how long you need to provide financing, and how much taxable money you might leave to your heirs. Take a look at the ages of you and your spouse and your life expectancies and then consider your health when making your decision. You also need to consider whether or not your spouse will be able to provide income after recovering from your death.

When you finally decide that you do need to purchase life insurance, proceed with caution. Be sure you understand exactly what you are purchasing, how it works, how it pays at death and so on. There are many types of life insurance and what works for one person might not be right for another. Do your homework. Discuss your decisions with your family. If you are an older person with grown children who stand to inherit your taxable retirement funds, you might ask the children to take out life insurance policy on you. This way, when you die, he/she will receive the money from the policy and it won’t be placed into your estate.

Bottom line is a life insurance policy that is set up correctly could be one of your best retirement planning decisions. It could mean the difference between your heirs getting all of your retirement distributions or the government getting a sizable chunk of your hard earned money

The Two Approaches to Setting Life Insurance Policy Amounts are:


  1. Estimate how much life insurance you should buy: the needs approach or the replacement-income approach.

  2. Use the needs approach, you calculate the amount of life insurance necessary to cover your family’s financial needs if you die.

  3. Use the replacement-income approach; you calculate the amount of life insurance you need to equal the income your family will lose. Let’s look briefly at each approach.


The next question that’s probably rolling around in your mind is how much do you need? To answer this question you use can use these approaches.


The Needs Approach,


Add up the amounts that represent all the needs your family will have after your death, including funeral and burial costs, uninsured medical expenses, and estate taxes.


However, your family depends on you to pay for other needs, such as your child’s college tuition, business or personal debts, and food and housing expenses over time. The needs approach is somewhat limiting.


The task of identifying and tallying family needs is difficult, and separating the true needs of your family from what you want for them is often impossible.


Replacing Income Approach 


Using the replacement-income approach for estimating life insurance requirements, you calculate the life insurance proceeds that would replace your earnings over a specified number of years after your death.


Life insurance companies sometimes approximate your replacement income at four or five times your annual income.


A more precise estimation considers the actual amount your family members need annually, the number of years for which they will need this amount, and the interest rate your family will earn on the life insurance proceeds, as well as inflation over the years during which your family draws on the life insurance proceeds.


Note: Do remember as you quantify the income you want to replace that Social Security provides generous survivors benefits if you’ve qualified.


Calculating Replacement-Income Amounts with Excel


If you’ve got access to a computer running Microsoft Excel, the popular spreadsheet program, you can use your computer to calculate the amount of insurance you need to replace a specified number of years of income.


Suppose, for example, that you want to buy enough life insurance to replace the income from a $50,000-a-year job for 15 years.


If you figure your family will earn 5% on the life insurance proceeds should the worst case scenario occur, you enter the following formula into a cell in an Excel workbook to calculate the replacement income life insurance amount:




Excel returns the formula result 518,982.90 indicating that you would need roughly $520,000 of life insurance, invested at 5%, to payout $50,000 a year for 15 years.


Two Calculation Tips


  1. If you want to factor in inflation because you’re trying to replace income over a long period of time, you should use a real rate of return rather a regular, or nominal, rate of return.  To calculate a real rate of return, subtract the inflation rate from the interest rate in the formula. For example, if you expect 2% inflation, you could replace the formula shown earlier with this formula: =-PV(5%-2%,15,50000)

  2. You probably want to round up your number. For example, if the formula provided earlier returns the value 518982.90, you might want to round up this value to $600,000. Or $750,000.


When looking for a life insurance company, of course a low premium is important. But it is also important to learn about the financial strength of the insurance companies you are interested in. By choosing a company that has strong financial strength, you should have no worries that the company will be able to pay your life insurance claim when needed. Learn about different insurance company's financial strengths


When you have chosen a list of life insurance companies to contact, have all personal information available about whoever is getting the life insurance policy. Names, social security numbers, addresses, phone numbers, and places of work will be helpful to have on hand. Also, be aware that if you are getting life insurance from anywhere else but your employer, you will probably have to take a medical exam. Different life insurance companies test for different things during the medical exam and charge different premium rates for smokers. So, if you are a smoker you will want to search around for a life insurance company that has the best rates for smokers.


Now that you have your policy, take the time to learn about it. If you have questions about your life insurance policy, don't hesitate to contact the insurance agent who sold you the life insurance policy. It is much easier to know answers to your questions before you have to make a claim.

Remember, the first and primary reason for any life insurance purchase is to provide protection for your family, permanent insurance policies, such as whole life, universal life, or term life, offer other features that many people find attractive. Specifically, permanent policies provide a cash accumulation value that grows over time and can be borrowed against.  The best way to find the right life insurance policy for your needs is with the help of a qualified insurance agent.

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