Buying Life Insurance: What Kind and How Much?

Finding the middle ground between being "insurance poor" and unprotected requires assessing real needs and choosing products that are affordable. This article introduces different types of insurance products and the role that they can play in a personal financial plan.


Think about which members of your household should be covered by life insurance. (It's typically a good idea to insure anyone who earns income.)
Find out whether you're eligible for group life insurance coverage at work. If you already have it, review the policy to understand exactly what benefits it provides.
Keep in mind that you may not need life insurance if you have no dependents and nobody else relies on you for financial support.

1)Buying Life Insurance: What Kind and How Much?
2)Types of Insurance
3)How Much Insurance Do I Need?
4)Other Types of Life Insurance

1) Buying Life Insurance
Conventional wisdom says that life insurance is sold, not purchased. In other words, some people are reluctant to discuss the importance of owning life insurance, and others are simply unaware of the need to have life insurance. Although many large companies provide life insurance as part of their benefits package, this coverage may be insufficient.
Who needs life insurance? If there are individuals who depend on you for financial support, or if you work at home providing your family with such services as child care, cooking, and cleaning, you need life insurance. Older couples also may need life insurance to protect a surviving spouse against the possibility of the couple's retirement savings being depleted by unexpected medical expenses. And individuals with substantial assets may need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations and to cover the final expenses.

2)Types of Insurance

Term insurance is the most basic, and generally least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. Also, the premiums increase at the end of each term and can become prohibitively expensive for older individuals. A level term policy locks in the annual premium for periods of up to 35 years.
Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is "pure" insurance without any investment options. Benefits are paid only if you die during the policy's term. After the term ends, your coverage expires unless you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent insurance without a medical exam.

Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy's cash value tax-free.

Universal Life Universal life (UL) insurance can provide a wide range of financial solutions, both during your lifetime, and for your heirs.Universal life insurance provides two key financial planning solutions: a savings component that permits tax-deferred investment growth, and life insurance that provides a tax-free death benefit (which includes your savings and your insured amount).Your financial advisor can recommend a number of universal life insurance strategies to meet your personal needs.

Protect your family's standard of living
Pass family assets to the next generation
Pass company assets to the next generation
Add to your retirement income
Maximize your savings

Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract.

Universal Variable Life insurance is the most aggressive type of policy. Like variable life, you control your investment in mutual funds. However, there are no guarantees on universal variable policies beyond the original face value death benefit. These policies are probably best suited to affluent buyers who can afford the risks involved.

Key Terms and Definitions

1)Face Value -- The original death benefit amount.
2)Convertibility -- Option to convert from one type of policy (term) to another (whole life), usually without a physical examination.
3)Cash Value -- The savings portion of a policy that can be borrowed against or cashed in.
4)Premiums -- Monthly, quarterly, or yearly payments required to maintain coverage.
5)Beneficiary -- The individual(s) or entity (e.g., trust) that is designated as benefit recipient.
6)Paid Up -- A policy requiring no further premium payments due to prepayment or earnings.

3)How Much Insurance Do I Need?
A popular approach to buying insurance is based on income replacement. In this approach, a formula of between ten and fifteen times your annual salary is often used to calculate how much coverage you need. Another approach is to purchase insurance based on your individual needs and preferences. The first step is to determine your unique income replacement needs.
Currently, a large portion of your income goes to taxes (insurance benefits are generally income tax free) and to support your own lifestyle. Start off by determining your net earnings after taxes. Then add up all your personal expenses such as food, clothing, magazine subscriptions, club memberships, transportation expenses, etc. The remainder represents annual income that your insurance will need to replace. You'll want a death benefit amount which, when invested, will provide income annually to cover this amount. Then, you should add to that the amounts needed to fund one-time expenses such as college tuition for your children or paying down mortgage or debt.
Income replacement for nonworking spouses is an important and often overlooked insurance need. Coverage should provide for your costs for day care, housekeeping, or nursing care. Add to this any net earnings from part-time employment.
Finally, estimate your own "final expenses" such as estate taxes, uninsured medical costs, and funeral costs.

4)Other Types of Life Insurance
Survivorship life insurance (also referred to as last-to-die or second-to-die) is a unique type of contract that insures the lives of two people. It pays a death benefit upon the death of the second insured. Therefore, it is typically less expensive than two individual policies. Survivorship life is often used for estate planning, where it may be possible to potentially leverage today's dollars -- via insurance premiums -- into a potentially significant death benefit that can be used to fund estate taxes, create wealth for future generations, or benefit a charity. These policies may be available if one insured is medically "uninsurable."
First-to-die life insurance insures the life of at least two people and pays a benefit upon the death of the first insured. This policy is useful for covering a mortgage or other large debt obligation where there is more than one debtor. In addition, it can be an ideal tool for funding a buy-sell agreement within a closely held business.

Life insurance is an important component of a sound financial plan. Buying insurance involves asking a variety of personal lifestyle and financial questions. If you are not already working with an insurance professional, you may want to consider the advice of a fee-for-service financial planner who can offer you an objective review of your insurance options. When you decide on what you want, there are many solid insurance companies to choose from. Consult an independent insurance professional like me for companies with the highest ratings from the four ratings.

Term insurance is basic, inexpensive coverage with premiums that increase over time and have no cash value.
Consider a term policy that is renewable and convertible to whole life should your needs change.
Whole life provides level coverage with level premiums. A portion of those premiums goes into tax-deferred savings.
Check rates on whole life policies and compare them to other investment opportunities.
Variable life offers control over your investments.
Premiums on variable policies are fixed, but face value and the value of your investments can fluctuate.
Universal life offers more investment options, but is highly sensitive to interest rate changes. Universal variable life is highly flexible, but offers no guarantees beyond the original face value.
Insurance needs are based on income replacement and personal preferences.

Determine exactly how much money your survivors would need from life insurance in order to maintain long-term financial security.
Decide whether you prefer term life insurance or a policy that also includes a savings feature.
Buy from a advisor, who talk about all these advantage and disadvantage and chose a best deal for u , and read the policy before making a purchase. Don't assume you'll be getting benefits that aren't clearly spelled out.You will have 10 days to return your policy with no cost.

Life Insurance - Lifetime Plans

What types of permanent life insurance are available?

There are several different types of permanent insurance some of which policies are similar.

Whole Life, also called ordinary life. This traditional permanent life insurance will cover the insured for his/her entire (whole) life. The premium payments generally remain the same for the life of the insured.

Variable Life. This permanent life insurance policy offers a fixed premium payment schedule (like whole life), while it accumulates a cash value account offering other non-guaranteed accounts which invest in securities, with the associated risk of the stock market (portfolio performance can fluctuate either positively of negatively).

Universal Life (UL). This plan offers more flexibility than traditional whole life insurance. Universal life insurance allows the policy owner increased flexibility to pay premiums on a flexible basis, versus a fixed schedule. However, a certain level of premiums must be paid into the policy to cover the costs associated with the insurance coverage. Failing to do so may cause the insurance policy to lapse. Flexible tax-deferred interest rates on the policy's cash value (some have guaranteed interest rates) add to the appeal of a Universal Life policy.

Indexed Universal Life Insurance. This coverage provides a death benefit, with tax-deferred growth on your cash value account which is indexed to one or more stock market indices. Many allow for a guaranteed minimum interest rate to protect the policy owner against the odds of a market downturn.

Variable Universal Life (VUL). Blending the premium payment flexibility benefits of universal life insurance with an invested portfolio with the upside market potential of variable life, many VUL policies feature tax-deferred earnings. Allowed policy withdrawals and loans from the policy cash value (which will reduce the cash value and death benefit) are subject to interest charges. Like variable life insurance, VUL policies re designed to invest primarily in securities with the upside potential to grow the policy's cash value with the associated market risk of losing money. Purchasing the right life insurance in your financial plan is an important decision.

Financial Foundation

Constructing Your Plan

You’ve set your goals, made your budget, and started a strategy. Now it’s time to formalize your financial plan. Each goal may require a different financial vehicle to help you to achieve it. The vehicles may vary greatly depending upon whether the goal is long or short term. Money for short term needs should be kept in low risk, highly liquid accounts. To help understand the basics of various investments, these are some of the concepts with which you should become familiar:
1. The Time Value of Money
2. Rule of 72
3. Controlling Risk
4. Tax Considerations
5. Putting It All Together

The Time Value of Money

That is one way of looking at the Rule of 72 and understanding the power of compounding and the importance of following a regular plan of saving and investing. Here is another example with the effects of different rates of return on a fixed sum of money.


The key is always DIVERSIFICATION

A balanced financial plan always includes many facets. Building your financial home is no different than building a regular house. Start with the foundation. Ensure you have adequate emergency funds (enough to cover at least three months of bill payments & it can be a line of credit ). Have a strong debt reduction plan in place and ensure you have ample protection for your family and your assets (life, home, auto, & health insurance). Pay yourself first, if possible through a payroll deduction or allotment program. Your savings/ investments can take many forms. The basics normally include some type of fixed interest rate program and investment in equities through a good mutual fund. A mutual fund offers the advantages of diversification, professional management, liquidity, and choice of objectives and some can be started for as little as $25/ month. The biggest killer of financial futures is PROCRASTINATION. Don’t put off activating your financial plan. Once you start it, BE PERSISTENT. A wonderful example of the advantages persistency is Dollar Cost Averaging.


A Balanced Program
You’ve learned about safety, liquidity, and growth, but the wild card that can drastically effect your financial future is TAXES. You must understand the fact that there are three ways that most retirement accounts will be treated for tax purposes: TAX-DEDUCTIBLE, TAX-DEFERRED, or TAX-FREE. If an account is tax-deductible, it will normally be tax-deferred, but it will NEVER be tax-free. On the other hand, an account may be tax-free and tax-deferred, but will NEVER be tax-deductible. You can’t ever receive all three in the same program. Understand the rules and build your plan accordingly to give you the maximum benefit. Know the difference between structures such as traditional & Roth IRA’s. Take advantage of 401k plans with matching funds. Understand annuities, variable programs, and the difference between tax deductions & tax credits.

As always DIVERSIFICATION is the key, however, in this case we refer to TAX DIVERSIFICATION. Your emergency funds will always be in a taxable liquid account. Your retirement funds should not only be diversified between fixed income and equities, but also between qualified accounts (tax deductible and tax deferred, but fully taxable when withdrawn) and accounts which offer tax-free withdrawal at retirememt

Plans offering tax-free access are TFSA, and some forms of life insurance.

A Balanced Financial Plan

Don't ignore any of the classic financial planning steps:


Take advantage of 401k plans with matching funds.programs. Ensure you have an up to date will and as your situation warrants investigate the use of revocable and irrevocable trusts. In summary, here are the key areas of any good financial plan: