The most important use of life insurance has been to ensure sufficient capital in the estate to allow the deceased's dependents to maintain the standard of living they enjoyed while the deceased was alive. Other uses of Life Insurance are to provide capital for both Personal needs as in mortgage (*see mortgage insurance) and/or corporate needs (*retirement compensation, Buy/Sell, Key Person Coverage). Life insurance is well suited to these applications, as it provides a tax-free lump sum payment upon the death of the insured.
An insurance advisor will prepare a "financial needs analysis" to determine the amount of insurance required on the death of the individual. This involves an analysis of:
(1) sources of income that will continue to be available on the death of the life insured;
(2) capital assets that can be liquidated to provide income;
(3) tax and other liabilities that will arise on death; and
(4) the income needs of the dependents/corporation/partners.
Should there be a shortfall between the income / capital available on death and the needs of the dependents, insurance can be used to create additional capital. We use various techniques, programs and insurance carriers to ensure the best solutions are achieved.
PERMANENT LIFE INSURANCE
Permanent life insurance has several variations: whole life, universal life, variable life.
All are designed to provide insurance protection for your entire lifetime, as long as you keep the policy in force.
Basic features of permanent policies
Level premiums: Most permanent policies have premiums that remain level over the lifetime of the policy, even though the risk of death increases with age. To achieve this, the premiums charged in the initial years are higher than the risk you represent then and are invested to form policy reserves that subsidize the premiums paid in later years when you are older and the risk is higher.
Cash values: These reserves accumulate as a cash value, or cash surrender value. The cash value is available to you if you want to borrow against your policy or to cancel (surrender) it. (Usually, the cash value is not added to the face amount of the policy, which is paid out on your death.)
Non-forfeiture options: These are choices available to a policy holder if he or she discontinues premium payments on a policy. They allow the policyholder to keep the policy in force or to take a cash settlement.
Participating policies and policy “dividends”: A participating policy shares in the financial experience of the insurance company, and policy “dividends” are declared annually and paid to policyholders.
Premiums are based on conservative estimates of future expenses, death claims and interest or other investment earnings. When experience is more favorable than these estimates, a surplus is created, which allows the company to credit participating policyholders with dividends. Because dividends are based on future experience, such as costs and earnings, they are not guaranteed.
Variations of permanent insurance
Although every permanent insurance policy is designed to provide you with coverage for your entire life, the guarantees vary in different policies. This, in turn, affects the premium you pay.
Whole life: This is the traditional policy that fully guarantees the level of premiums you pay, the death benefit and the growing cash values within the policy.
Interest-rate sensitive policies: Unlike whole life policies, which use very long term interest rate assumptions, these policies use current interest rates, which can be adjusted periodically if interest rate levels change. This offers the policyholder the potential of getting more coverage for less premium, but it involves sharing some of the risk with the insurer. Premiums could be increased if interest rates decrease. On the other hand, premiums could be decreased if the reverse holds true.
The most popular and flexible of the interest-rate sensitive policies is universal life. It consists of two parts: life insurance and an investment account. You decide what to do with each part of the policy, and you can increase or decrease your premiums and your death benefit, within certain limitations. Earnings on the investment account may or may not be guaranteed, depending on the type of investment chosen.
This is valuable to you because your circumstances change, and economic conditions change. For example, as a parent in a growing family, you may want more insurance coverage; as your family grows and becomes more independent, your focus may shift to investment as well as life insurance.
Universal Life can be a way to accumulate wealth on a tax-sheltered basis*. If you like involvement and control over your finances, if you want life insurance that you can tailor to your changing needs over time, Universal Life may be best for you. One very attractive feature is the accumulation of investment returns that can be paid out to your beneficiary on a tax-sheltered basis at a later date.
Variable life: Here, the premiums usually are guaranteed, but the cash values vary according to the performance of an investment fund or other index. The death benefits may be guaranteed or may vary with the fund’s performance, subject to a minimum guarantee.
TERM LIFE INSURANCE
Term policies provide insurance coverage for a specified period (e.g., a fixed number of years, or to a set age) and then expire. A death benefit is paid only if you die during the term of the policy.
Term policies are commonly available for terms of one, five, 10 or 20 years, or to age 60 or age 65. The premiums usually remain level during the specified term but increase if that term is renewed (e.g., premiums would increase every five years on a five-year renewable term policy). They will also expire at a specific age that varies by company.
Most term policies are non-participating and do not include cash values or other non-forfeiture values. Hence, premium costs are lower than for permanent policies — at least when you’re younger.
TERM TO 100
Often categorized as a permanent plan, term to 100 policies provide life insurance coverage through to age 100.
Usually they don’t pay dividends or include cash values, though some may provide other non-forfeiture values. Accordingly, premiums are lower than for traditional whole life policies.
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