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Will your life insurance be there when
you need it?
Term life insurance, the most common
form of life insurance, expires after a
set period of time. If you die during
the term of coverage, your beneficiary
receives a death benefit. If you die
after the term expires, your beneficiary
receives nothing.
You can buy another term life insurance
policy when existing coverage expires,
but the older you are, the more
expensive the premium becomes. After a
certain age, often 70, term insurance is
unavailable, because the risk that the
insured will die and a death benefit
must be paid is so great.
Another option is permanent life
insurance, which remains in effect as
long as you pay premiums and do not
cancel the policy.
Permanent Life vs. Term Life
Permanent life, also known as cash-value
life insurance, costs more initially
than term life, but being permanent is
not its only advantage. Other
advantages include:
·
Tax-deferred growth from interest or
earnings on the policy’s underlying
investments (under current tax laws).
·
The ability to make cash withdrawals.
Depending on the type of policy and the
amount withdrawn, the withdrawals may be
tax-free*.
·
The ability to borrow against the cash
value. Loans and interest on the loans
that are not paid back will reduce the
cash-value and the death benefit.
·
Cash-value life insurance is used for
estate planning, for business
succession, to fund retirement and for
many other uses.
The younger you are when you
purchase permanent life, the greater the
amount of your premium that goes toward
building cash value.
You may receive all or part of the cash
value if you cancel your coverage by
surrendering your policy. If you
purchase a cash-value policy, be certain
to review information about fees and
surrender charges with your insurance
agent.
Consider Your Goals
The type of insurance which is best for
you depends on your reasons for buying
insurance and your personal
circumstances.
If you want a simple, relatively
inexpensive policy to cover you only
until your children grow up and are
living on their own or any other
temporary need, term life may be
sufficient. If, however, you want
permanent coverage and tax advantages,
or have a special need, such as
transferring wealth to your heirs,
cash-value life insurance is preferable.
Should you determine that permanent life
best suits your needs, you have several
types of policies from which to choose:
Whole life.
Premiums for a fixed death benefit are
guaranteed, but the owner has no control
over how funds are invested. The insurer
generally invests the policy’s cash
value in long-term, conservative
investments. Depending on the policy the
insured may also receive dividends, but
they are not guaranteed.
Universal life.
Like whole
life, the owner has no control over how
funds are invested. Funds are held in
fixed-rate accounts. Interest is
credited based on cash values, but rates
are regularly subject to change.
Interest typically is close to market
rates, so returns may be attractive when
rates are rising. The owner can increase
or lower premiums each year, as long as
there is sufficient value to cover
insurance charges, fees and expenses.
Variable life.
The cash value of
variable life
insurance is invested in the owner’s
choice of separate accounts. The owner
can invest in stock and bond
sub-accounts that have the potential to
provide higher returns than fixed-rate
accounts. Annual expenses and charges
may apply.
Variable universal life.
Variable universal life combines
features of universal life insurance
with variable life insurance. As with
variable life, the owner can make
investment choices from various
sub-accounts within the policy. The
accounts usually provide a wide range of
investment selections. Policy owners
can choose investments based on their
financial goals and tolerance for risk.
Policy owners usually can transfer funds
between sub-accounts at little or no
charge several times a year.
If you choose a variable or variable
universal policy, you will be given a
prospectus and can review the
performance results of the sub-accounts.
Seek Professional Help.
Before making a decision, discuss your
financial goals with your insurance
agent or other adviser. Be certain to
review the prospectus or ask about all
charges and expenses involved, including
potential surrender charges. Your agent
will understand the types of life
insurance available and should be able
to recommend the best fit based on your
needs and your budget.
(William D. Smith can be
reached at the Mid Atlantic Agency in
Raleigh.) |
