Life insurance is a cost effective means to provide cash for:
- Mortgage Protection: Benefits can be used to help pay off mortgages and other outstanding debts in the event of a premature death.
- Estate Preservation: Life insurance can provide funds to cover estate expenses and help avoid the need to sell assets and or borrow money to cover these expenses.
- Retirement Funding: Cash values can be accessed through policy loans or surrenders to supplement a retirement income. Loans will reduce the death benefit.
- Charitable Giving: Life insurance can enable you to make a major donation to your favorite charity upon death.
- Business Needs: Life insurance can be an attractive executive and employee benefit and a means to assure a business’s financial future.
- Higher Education: Benefits can help pay for college and advanced degrees.
There are numerous types of life insurance, but they can all be broken into two key categories – Term Life and Whole Life.
Commonly used for younger individuals and families, term life provides affordable pure insurance protection for a specified period of time. Rates are usually guaranteed over that period of time. If the insured should die while the policy is in force, the face amount is paid to the named beneficiary. At the end of the premium guarantee period, the insured can renew the coverage at a higher premium. Premiums are generally lower than whole life but do not accumulate cash value and insure an individual only for a specified amount of time, the term (i.e. five, ten, fifteen, twenty or thirty years). Term life insurance is ideal for people or businesses requiring temporary life insurance protection and wanting to maximize the death benefit for the lowest possible premium.
Whole life insurance protects the insured for their entire life, from the day purchased until death, as long as premiums are paid. Because Whole life will pay upon death regardless of age, these products are often used as an estate planning vehicle. Whole life policies have a level premium that is guaranteed never to increase.
Generally after the first year, the policy begins to accumulate cash value. The amount of cash value in the policy usually increases every year. Cash values build on a tax-deferred basis. This money can be used to help purchase a home, fund a child’s education, supplement retirement income, or for any other purpose. Policy owners may also choose to leave cash accumulation and dividends in the policy and allow them to grow. The policy’s cash value may be accessed through policy loss or withdrawals which will reduce the death benefit.
A whole life policy can earn dividends, which can fluctuate from year to year. Dividends are determined by the company’s board of directors each year and are not guaranteed. When a dividend is payable, you may choose to take it in cash, use it to purchase more insurance or to pay or reduce premiums. Purchasing a whole life policy on a young child not only helps protect against future illness that may make them uninsurable, but additionally the dividend may actually pay the premium at a relatively young age.
Upon death, the insurer will pay the whole life insurance owners beneficiaries the death benefit, usually the face amount of the policy plus any dividend. This money is generally received by the beneficiaries free from Federal income tax.