Individuals >> Life Insurance

Life insurance helps to ensure that your family and loved ones are protected against financial difficulties in the event of a premature death. Combined with investments, retirement and estate planning, life insurance is a fundamental part of a sound financial plan. With the help of an insurance professional you can develop a complete plan that will protect you and your family.

Life insurance is the foundation of a sound financial plan. It provides financial security for your family by protecting your financial resources, such as your present and future income, against the uncertainties of life. More specifically, life insurance provides cash to your family after your death. This cash (the death benefit) replaces the income you would have provided and can meet many important financial needs: It can help pay the mortgage, run the household, send your kids to college, and ensure that your dependents are not burdened with debt. The proceeds from a life insurance policy could mean that your family won't have to sell assets to pay outstanding bills or taxes. What's more, there is no federal income tax on life insurance benefits.

Most people with dependents need life insurance. While there's no substitute for evaluating your specific situation, one rule of thumb is to buy life insurance equivalent to five to ten times your annual gross income. To determine how much, if any, life insurance you need, start by gathering all your personal financial information and estimating what your family will need after you're gone. Include ongoing expenses (such as day care, tuition, or retirement) and immediate expenses at the time of death (like medical bills, burial costs, and estate taxes). Your family also may need funds to help them readjust: perhaps to finance a move, or pay expenses while job hunting. The best way to evaluate your specific needs is to contact a life insurance professional.

Choosing a life insurance product is an important decision, but it can be complicated. As with any major purchase, it is important that you understand your family's needs and the options open to you.

There are two basic options when it comes to Life Insurance: Term insurance versus Permanent Insurance.

Term insurance

Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of the term, which can be from one to 30 years. The premium rates increase at each renewal date. Many policies require that you present evidence of insurability at renewal to qualify for the lowest rates.

The following points can help to determine if Term Insurance meets your needs.

• Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.
• It's good for covering needs that will disappear in time, such as mortgages or car loans.
• Premiums increase as you grow older
• Coverage may terminate at the end of the term or become too expensive to continue.
• The policy generally doesn't offer cash value or paid-up insurance.

Permanent insurance

Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, this may be the wrong type of insurance for you.

Permanent policies are known by a variety of names: whole, ordinary, universal, adjustable, and variable life. Most have a feature known as cash value or cash-surrender value. This feature, not found in most term insurance policies, provides you with some options:

• You can cancel or surrender the policy in total or in part and receive the cash value as a lump sum. If you surrender your policy in the early years, there may be little or no cash value.
• If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime.
• You usually can borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.

With all types of permanent policies, the cash value of a policy is different from the policy's face amount. The face amount is the money that will be paid at death or policy maturity. Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company's financial results or experience, which can be influenced by mortality rates, expenses, and investment earnings.

There are several types of permanent insurance:

1. Whole life or ordinary life is the most common type of permanent insurance. The premiums generally remain constant over the life of the policy and must be paid periodically in the amount indicated in the policy.
2. Adjustable life insurance premiums are recalculated at set time periods, typically every five, or even ten, years, to reflect current interest rates. While five years is the most common readjustment period, some policies may be based on three or even ten years.
3. Universal life allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, the insurance company usually requires you to furnish satisfactory evidence of your continued good health.)
4. Variable life provides death benefits and cash values that vary with the performance of a portfolio of investments. You can allocate your premiums among a variety of investments offering different degrees of risk and reward: stocks, bonds, combinations of both, or accounts that guarantee interest and principal. You will receive a prospectus in conjunction with the sale of this product.

The cash value of a variable life policy is not guaranteed and the policyholder bears that risk. However, by choosing among the available fund options, you can allocate assets to meet your objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. If the specified investments perform poorly, cash values and death benefits will drop.

Some policies guarantee that death benefits cannot fall below a minimum level. There are both universal-life and whole-life versions of variable life.