Life Insurance

Life insurance is a component of financial planning. People purchase life insurance to replace income that would be lost with the death of a provider. The cash provided by life insurance also can help ensure that dependents are not left with debt after the death of a loved one.

An important feature of life insurance is that generally no income tax is payable on proceeds paid to beneficiaries.

The death benefit of a life policy owned by a C-corporation may be included in the calculation of the alternative minimum tax.

Determining the Benefit Amount
Before buying life insurance, you should sit down and figure out your family's financial needs to survive if a loved one should die.

Even if you have no dependents now, you may later so that’s something to consider. Buying when you are young and healthy will allow you to lock in low cost coverage, including guaranteed insurability.

Here are some things to consider when deciding how much insurance to purchase:

Some financial planners recommend that you buy life insurance that is equal to five to seven times your family’s annual gross income. However, you should evaluate your own situation to see if that makes sense.

Naming a Beneficiary
Think carefully about naming beneficiaries. Always name a secondary or “contingent” in case you outlive your first beneficiary. Make sure you are clear in wording beneficiary designations. If you name a child specifically, it may exclude children born after the policy’s issue. Also, make sure to stay up to date on changing beneficiaries if your circumstances change (for example, if a named child passes away).

Types Of Plans
The most common types of life insurance available are term and permanent.

• Term insurance provides protection for a specified period term – typically a year, or for level periods such as 5, 10, 15, 20 and even 25 or 30 years. 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
• Permanent insurance provides lifelong protection, where the policy is for the life of the insured. The payout comes at the end of the policy and the policy accrues cash value.

Permanent life insurance originally was offered as a fixed premium fixed return product known as whole life insurance (also known as cash surrender life insurance). This offered consumers guaranteed cash value accumulation and a consistent premium.

Later, a more flexible policy was created in the form of universal life insurance. Universal life insurance allows consumers flexibility as to when premiums are to be paid and the amount that they would cost. Universal life policies also allow consumers to permanently withdraw cash from the policy without the interest associated with the loan provisions in whole life policies. Universal life policies retain the fixed investment performance of whole life policies.

Variable life insurance follows the mold of whole or universal life, but it shifts the investment risk to the consumer along with the potential for greater returns. Variable universal life insurance combines this with the flexibility in premium structure of universal life.

Riders
Addition riders may be available and can help you customize your policy. Riders are the additional benefits that can be bought and added to a basic insurance policy. These options allow you to increase your insurance coverage or limit the coverage set by the policy.

1. Accidental death benefit - provides for an additional benefit in case of death as a result of an accident. This rider varies by state and requires an extra premium.
2. Accelerated death benefits - allow you to receive the proceeds of your life insurance policy before you die. Such circumstances where this is allowable are things like a terminal or catastrophic illness and long-term care needs including confinement to a nursing home. This rider varies by state and requires an extra premium.
3. Guaranteed Insurability Rider (a.k.a Renewal Provision) - allows you to purchase additional insurance coverage along with your base policy in the stated period without the need for further medical underwriting. This rider is most beneficial when there has been a significant change in your life circumstances, such the birth of a child, marriage or an increase in your income.
4. Waiver of premium - the future premiums are waived if the insured becomes permanently disabled or loses his or her income as a result of injury or illness prior to a specified age.
5. Child rider - provides insurance for children, usually from $1,000 to $20,000 of death benefit. This rider varies by state and requires an extra premium.

Policy Replacement
Replacement policies only make sense in certain situations, so make sure you research it thoroughly and it’s right for your circumstances.

Consider the following:

• If your health status has changed over the years, you may no longer be insurable at preferred or standard rates.
• Even if both policies pay "dividends," it may be years before the new policy's dividends equal those of your present one.
• If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original one. There may also be a period where a surrender charge is applicable on the first policy.
• You should ask for a detailed listing of cost breakdowns of both policies, including premiums, cash surrender value and death benefits. Compare these as well as the features offered by both policies.
• The policy’s effective date could be from the date the company issues the policy so you have to check with your insurer before you cancel the old policy to make sure there is no gap.
  
  

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