Life insurance can be confusing. I hope these frequently asked questions and answers will give you a better understanding.
Why is it important to have life insurance?
When is the best time to get life insurance?
How are rates impacted as you age?
What’s the difference between term and cash value (whole life insurance)?
What is the benefit of cash value in a permanent life insurance policy?
Can my policy supplement my retirement income?
Are there tax benefits to permanent life insurance?
What is the cost range?
How can I know the life insurance will pay out after I’m gone?
Why is it important to have life insurance?
Life happens! Life insurance proceeds can provide peace of mind and security for your loved ones when the unexpected happens. Here are some of the ways you can benefit from life insurance:
- Buys time – help pay for funeral and other final expenses and relieve loved ones of this added burden during a time of grief
- Provides a fresh start – help loved ones start with a clean slate by paying off debt
- Generates income – Can help reduce lost income so family members can continue to pay for for life’s necessities
- Offers flexibility – Can give a surviving spouse or partner the opportunity to take time off from work or switch to a job that provides more scheduling flexibility
- Creates opportunity – Can provide funding to start a business or pay for schooling
- Funds the future – Can offer a way to fund college or a secure retirement
- Leaves a legacy – can provide the legacy of long term financial security
Usually any time that life changes – job changes, getting married, starting a family, buying a home. And, of course, it’s an important part of your estate planning in order to leave a legacy for your loved ones.
Life insurance rates are based on mortality tables which are made up of several factors, age being the most prevalent as well as health risks and tobacco usage. Essentially, the longer you wait to obtain the policy, the higher your age which increases the premium. Health changes can also place you in a lower underwriting class which results in higher rates.
As the name indicates, Term life insurance provides coverage for a specified period of time with no cash value during the term of the policy. Permanent life insurance, on the other hand, will remain in force for the insured’s life. A good analogy is Term life is like renting a home and Permanent life is like owning a home. When you rent, you aren’t building any equity, but when own you have an asset with value.
Term life insurance is a very cost effective product for protecting family finances. The drawback is when the term of the coverage ends, you and your family may be in a situation that still needs coverage. By the time you need the new policy, it could easily be more expensive. And, the premiums you paid for the first Term policy do not provide you with any cash value at the end.
The cash value in permanent life insurance is, in fact, a living benefit. You can access the cash value at any time through a policy loan. You can use the cash value for an emergency, college funding, to supplement retirement income, as a business cash reserve, etc. It’s important to understand that loans accrue interest and reduce the available cash value and future death benefit. When you die, the death benefit generally passes to your beneficiaries free of federal income tax.
Yes, if structured properly, you may borrow against the cash value of your permanent life insurance policy to supplement your retirement income. Just remember that policy loans do accrue interest and reduce the death benefit cash value.
One of the best features of permanent life insurance is that the cash value growth is tax deferred income, the death benefit is generally tax from federal taxes and, with proper planning, you can access your cash value (living benefit) through policy loans at the time you need with no tax consequences.
Each individual will have their own cost based on their policy face amount, their age and underwriting class. An qualified insurance agent can give you a detailed quote after asking some simple questions about your situation.
Life insurance is a collateral contract, an arrangement between the issuer (insurance company) and the insured. The insured agrees to make premium payments, and the issuer agrees to provide a death benefit upon death and good standing of the policy. The crucial part is selecting a financially strong company with a good history, claim paying ability and a good agent who understands your needs.