Life Insurance

How to protect your family if you die...what everyone must know about life insurance

What you'll discover in this report:

  • How to make sure your family is really protected!
  • Cut through the confusing "insurance jargon" and know what a life insurance policy really says!
  • The different kinds of life insurance policies...what they're good for, when to use which one
  • Why smart consumers use life insurance...and the mistakes that other people make too often
  • ...and much more!

How to protect your family if you die...

Life insurance is a simple concept -- you buy a policy that pays out a Death Benefit to your named beneficiary or beneficiaries when you die -- but the decisions of what kind life insurance to purchase, how much of a death benefit and how much you pay are extremely complex.

* Note. There are more than 2,000 companies selling life insurance in this country. Some are very good, financially solid companies; others are not so sound. A company's financial strength is vitally important to you because, hopefully, no one is going to collect on your life insurance for a long time.

You want to make sure your life insurer will be around for the long haul. How do you do this? You can consult a seasoned insurance professional, which is probably your best bet, or you can look at how various independent organizations "rate" the life insurers you are considering. Ratings are like school grades, A+, A, A-, B+, etc. In general, it's wise to stick with companies that are rated A or better by most rating organizations.

Many Purposes for Life Insurance

Life insurance is far more than just a decision of how much to buy. Depending on your financial situation, life insurance can be used for a variety of purposes, such as:

  • estate planning
  • accumulating cash
  • transferring wealth
  • achieving estate tax liquidity.

Life insurance is like auto insurance in that you can buy a lot of it or not very much of it. Life insurance differs from auto insurance in that, depending on the type of policy you buy, you can pay a lot or a little for basically the same death benefit. Keep in mind, though, that the younger and healthier you are, the less you will pay for coverage.

* Tip. So how much life insurance do you need?  That depends...on a number of things.  For starters:  What do you want to have happen when you die?   Do you want your mortgage paid off, money set aside in a college fund, debts paid?  Or would you rather just provider a stream of income ($1000-2000/month for example) to help your loved ones after your death.  You do not have to necessarily REPLACE your entire income, but you may want to make sure they can still pay bills and take care of kids.   A professional, like CB Health Insurance, can help you determine exactly what you need based on your needs.

One common benchmark says your death benefit should be about eight to ten times your annual earnings, but there are a variety of factors to consider:

  • Other income sources.
  • The size of your family.
  • Whether your spouse works and his or her earning capacity now and in the future.
  • The number of people who are financially dependent on you and for how long.
  • The death benefits your family will receive from Social Security and any life insurance plan through your employer.
  • And any special needs such as mortgages, college education funds and estate planning.

Make Sure Death Benefit Is Adequate

What kind of life insurance should you buy? That also depends. But keep this very important principle in mind:

* Tip. Whatever type of policy you buy, make sure it provides enough of a death benefit to meet your family's needs if you aren't there. When you consider buying life insurance, calculate what your family must have in terms of a death benefit. Don't lose sight of this number.

What kinds of life insurance policies are there?

There are several, but keep in mind that the terms and costs of the policies vary widely among insurers.

There are two basic types:

  1. Term Life, which is good for only a certain period of time.

  2. Cash Value, which is "permanent" insurance that also includes a buildup of value in cash in addition to your death benefit. You can borrow against your cash value. You can even take out some of that cash value, but your death benefit will be reduced.

What exactly is "cash value?"

    One way to thing of the difference between TERM and CASH VALUE policies is like RENTING an apartment VS BUYING a house.  With an apartment, you don't own it and you don't receive any equity over time. If you stop paying the rent, you will most likely be kicked out of the apartment and no longer have a place to live.  (If you stop paying term insurance, you no longer have the death benefit and there is no cash value).   With a house, the mortgage payment may be much higher than renting, but you know that over time you will are gaining equity in the house - equity that can be borrowed against or used as collateral for a loan.  At some point in 20-30 years depending on your loan, you will own the house free and clear!  That is what a CASH VALUE life policy is!    Remember, if you borrow money from your house (home Equity loan or line of credit), it will take you longer to pay off the loan and own the house free and clear.  Same with the insurance.  The other MAJOR difference is that RENTS go up and up and up over time.  So does TERM insurance!  But your mortgage payment does not change!  (unless you borrow more money or refinance).

When young, healthy people buy life insurance, they have a very low mortality cost to their insurer (which is why life insurers are so willing to provide coverage to the young and healthy).

What You Need to Know about Term Life Insurance...

Term life policies provide coverage for specific periods of time, sometimes as little as one year, but more typically for 10 - 20 years. With a LEVEL TERM Policy for a year period, the premium will not change during this time.  However, at year 21, the premium will usually significantly increase (sometimes 2-5 times the 20 yr premium) and will continue to go up year after year.  If your health is good, you may want to drop to 'old term' and just buy a new one. However, if your health has changed significantly, you may want to ask if you can CONVERT the term to a Permanent, cash value policy with a FIXED annual premium. 

* Tip. If your health does change, you probably won't be able to buy another term without watching your premium skyrocket. You should ask your insurer or agent what the premium will be if you continue to renew the policy.  NOTE:  For this reason, it is wise to have a combination of some term and some permanent insurance - the permanent policy that you can afford to keep until you die!

* Note. You should also ask whether you will lose the right to renew the policy when you reach a certain age; many carriers do offer conversion options which must be exercised BEFORE the end of the 'term'  ie 10 years, 20 years. Because this coverage is fairly cheap, it's often a good option for young families who need a lot of insurance protection but can't afford to do all the coverage with permanent insurance.  (NOTE:  If you are young and health, consider a small permanent policy based on your current health and age.  Many permanent policies have GUARANTEED premiums based on your age and health that will never go up - and you will never be younger than you are right now!)   

Here are a couple of term life policy options:

  1. Yearly Renewable Term Life -- This is coverage for a longer term, five, 10 or 20 years. The longer term also means that the costs to cover you are spread out so that you will avoid the potential for huge annual premium increases.
  2. Convertible Term Life -- This is yearly renewable with the option to convert to a permanent policy in the future. The coverage, which often has the lowest cost and highest death benefit options of term insurance, can be a good choice for younger people who can't afford permanent coverage but who need a large death benefit and the option to convert to a permanent policy down the road.

What you need to know about Cash Value Life Insurance...

Cash-value life policies have premiums that are higher at the beginning than they would be for the same amount of term insurance.

The part of the premium not used to cover the yearly cost for mortality and other expenses is invested by the company and builds up a cash value that you may use in a variety of ways. Here are some specific examples of cash-value life insurance:

  • Whole (or Ordinary) Life -- Like other cash-value policies, this is permanent coverage. The cost is literally stretched out over your entire life, or what the insurance company expects your entire life period to be. Life insurers have tables that tell them how long, on average, someone of your age and physical health will live.

    Say you want $500,000 in coverage. The insurance company's rates are based on how much they need to charge you in order to allow the company to recoup the eventual death benefit while you are alive. The premium and the death benefit don't change much in whole life policies. You pay so much a month for a given death benefit. However, dividends to policyholders can increase the coverage or decrease the premium.
  • Universal Life -- This is the flexible life insurance.  The product was built on the concept of "Buy Term and Invest the Difference", and allows the insured to decide on the 'difference" they choose to fund into the policy. While there are minimum and maximum amounts you can fund (Minimally you need to cover the COST of insurance including mortality charges and fees, and Maximally you cannot put in more than the Government Guidelines, referred to as MEC laws.  Going over this amount causes the policy to become a MEC (Modified Endowment Contract), which is like a retirement vehicle where the cash cannot be accessed without penalty before age 59 1/2, similar to a retirement IRA or 401k.)    FUN FACT:  Life insurance cash values grow TAX DEFERRED and can be withdrawn TAX FREE - in the form of a loan against the policy (like a home equity line of credit);   Saavy individuals caught onto this and began over-funding life insurance policies for tax benefits until the IRS caught wind and changed the rules.  Universal Life policies allow you the flexibility to change your premium and your death benefit up or down withing limits; although any increase in the coverage usually requires you to prove you are still in good health and could require another exam.
  • Variable Life -- This is a hybrid universal coverage in which the death benefit is dependent on the investment performance of the insurance company's assets. Universal Variable Life allows the insured to choose the investment subaccounts to invest the 'extra premiums' over and above the policy costs, all within the policy -- options include money market fund, bond fund or stock fund; however, the fund choices are offered by the insurance carrier and are unique to the policy.  One cannot choose ANY mutual fund-type account to 'put into' their life policy.

* Note. If your investments do well, your policy's cash value and death benefit will increase. If not, they'll go down, but most variable life policies won't let your death benefit drop below a certain level. However, it's possible a company will charge you for a guaranteed death benefit.

Which type of policy is best for you?

In general, if you have significant assets, it's better (and less risky) to have some sort of cash-value policy. But which one? It's more important to buy the coverage from an insurer that has the best chance of performing well in the future; an insurer that has low actual expenses and mortality costs. Such an insurer will be able to offer better terms, including higher death benefits, higher cash value and lower premiums.

* Tip. But, again, there are more than 2,000 companies selling life insurance in the United States. As a result, you have thousands and thousands of options. This makes it even more imperative that you have a trained insurance professional analyze your financial situation and determine what kind of policy, from which insurer, is best for you.