LIFE INSURANCE - AN IMPORTANT FINANCIAL STRATEGY

Buying life insurance can be confusing. One of my jobs is to educate you on your options, helping simplify that decision for you.

First, there are many reasons people purchase life insurance: 
  • Family and Income Protection - providing financial support for surviving family members
  • Estate Planning - offsetting potential estate tax liabilities with life insurance proceeds
  • Cash Value Accumulation - supplementing long-term savings with tax advantaged funds
Second, there are many different varieties of life insurance available. One of the first questions we need to ask is, are your life insurance needs temporary or permanent?
 
A simple way to understand the differences between these two types of life insurance is by comparing them to something familiar to all of us – finding a place to live. Once you find the right home, you need to choose how to pay for it.
 
Buying Permanent Life Insurance is like owning a home, while buying Term insurance is like renting one. There are advantages and disadvantages to both.
 
Like owning property, owning Permanent Life Insurance is usually an appropriate way for people to help meet long-term needs. Premiums are fixed and it builds value. Plus, this cash value accumulates on a tax-deferred basis.
 
Generally speaking, there are three types of Permanent Life Insurance policies: Whole Life, Universal Life and Variable Universal LifeWhole Life requires a higher payment, but has the most guarantees. The latter two products require less premium, but generally contain more of uncertainty.
 
Let’s focus first on Term Insurance. 
 
Generally the least expensive and least complicated type of life insurance, Term provides insurance protection at a low cost for a specified period of time, typically as short as one year, and as long as 30 years. If you die within the term period, a death benefit is paid to your beneficiary. If you are still living at the end of the term, protection ceases unless the policy is renewed. There is no "accumulation" element, or cash value with Term Insurance.
 
Term Life Insurance can be a useful financial planning vehicle for:
  • People with a temporary need for life insurance protection.
  • Those who are budget conscious.
  • People with specific business needs (e.g., business owners who want to cover the life of a key employee who has a set number of years until retirement).
The advantages of Term Life Insurance include:
  • It provides insurance protection for a low cost (at least initially).
  • If your needs change, most policies allow you to convert your term policy for a permanent life insurance policy without having to take a medical exam or provide other information about your health.
  • Term Insurance is a good way to supplement other coverage when you have added financial responsibilities for a given period of time (e.g., mortgage, college expenses).
  • Death benefits are generally received free from income tax.
The disadvantages are:
  • Premiums generally increase with age and they could become unaffordable later in life.
  • There is no cash value element, so you miss the tax-deferred cash value of permanent life insurance policies
  • Once the term period expires, the insurance coverage ceases and the policy has no further value
Permanent Life Insurance is distinguished from Term Insurance in several ways.
 
While Term insurance provides protection only for a specific period of time, Permanent Insurance can provide protection for your entire lifetime.
 
In addition, Permanent Life Insurance policies can build cash value – money that you can borrow against and, in some instances, withdraw to help meet future goals, such as paying for a child's college education.
 
Permanent Life Insurance policies enjoy favorable tax treatment under current rules. Cash value growth is generally on a tax-deferred basis, meaning that you pay no taxes on any earnings in the policy so long as certain conditions are met. If managed properly, money can be taken out of the policy without having to pay taxes, although withdrawals and loans will reduce the death benefit. And if the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payment may need to be resumed.
 
Permanent Life Insurance is most suitable for people who:
  • Know their need for life insurance is long term.
  • Want to accumulate cash value to provide funds for education, retirement or other future goals. 
  • Want to take advantage of the tax-favored treatment of cash value life insurance policies.
 The disadvantages of Permanent Life Insurance include:
  • Permanent Insurance is generally more expensive than term insurance.
  • Unlike Term insurance, Permanent Insurance offers no conversion option — the ability to exchange it for another type of plan later. Make sure the policy you buy is the one you really want.
  • Loans, withdrawals, and any unpaid loan interest generally reduce the death benefit and can result in a policy lapse which could leave beneficiaries inadequately protected.
Confused yet? If so, you’re like most people. It’s a lot of information, I know. So, call me. I’ll help you assess the amount of life insurance necessary, and determine the most appropriate product to meet your goals. I can be reached at (973) 227-8800, x 7563.
 
I look forward to helping you.