LIFE INSURANCE
Understanding Life Insurance:
Life insurance is designed to protect ones family from the financial tragedy that can result from the premature death of a bread winner. Each situation is unique as to the type and amount of insurance that is appropriate. The cost method arrives at the proper face amount by adding up the costs of the objectives the policy owner has should he / she die prematurely. For example: Cost to pay off the mortgage plus cost to send the children to college plus cost to retrain the surviving spouse to become the breadwinner etc. etc. The income replacement method is an alternative method: The breadwinner makes 100K per year – multiply by the number of working years to be covered (you can factor in inflation as well) would equal the face amount to be purchased to cover a premature death.
Term Life Insurance:
Term life insurance is designed to cover a financial loss due to premature death that exists for a defined period of time. For example if a policyholder has 20 years left on the mortgage a policy can be purchased for a 20 year period of time to cover the term of the mortgage. Term insurance is relatively inexpensive as compared to whole life insurance as the probability of the policy holder dying during the term is reduced.
Whole Life Insurance:
Whole life insurance is designed to cover an individual for his / her entire life. If the premiums are paid the policy is guaranteed to be in effect until the policy holder does indeed die – so the face amount will inevitably be paid to the beneficiaries. If the policy holder is fortunate enough to live to 100 years of age the policy will ‘mature’ and he / she will collect the proceeds at age 100. Whole life insurance is relatively more expensive then term insurance since the face amount is guaranteed to be paid to the beneficiaries. An interesting added feature of whole life insurance is the savings and investment aspect of these policies. Since the premiums paid are higher than the cost of the underlying insurance in the early years of the policy cash accumulates in the policy. If the insurance company is adept at investing this cash interest on the cash also accrues to the policy holder. If the cash balance grows large enough and the rate of interest is high enough the policy can become self-funding at some point reliving the policy holder from having to pay the premiums. It is very important to purchase this kind of policy from a highly rated company since it has a much higher chance of good performance over time.
Taxes & Life Insurance:
Proceeds paid to the beneficiary due to premature death of the insured pass to the beneficiary tax free. Interest paid on the cash balance within a life insurance contract accrues tax deferred until such time that you ‘cash out’ or surrender, in whole or part, the policy. Life insurance can be a powerful tax planning & estate planning tool as a result of the tax preference status enjoyed by these contracts. ‘Help to Retire’ works with our clients, in conjunction with attorneys and tax professionals, to develop strategies designed to minimize estate taxes.
A Strategy:
For large temporary insurance needs buy term insurance - Paying off the mortgage, sending children to school, etc. In addition buy a whole life contract with a minimum face amount that you can maximize the cash value feature. Be certain that the policy contains features that allow you to increase the face amount over time should you so desire. Also be certain that the company you purchase this policy from is highly rated with an excellent track record of outstanding cash accretion. If done early enough in life the cash built up and the interest paid out from the whole life contract can be large enough to actually pay for the costs incurred from purchase of both the term insurance and the whole life contract when you reach retirement age!
Another excellent strategy is to purchase a significant whole life policy for very young children. If a good company with a proven track record of dividends is selected the ‘payback period’ (the time period that the cash value in the policy equals or exceeds the amount of premium paid) can be 12 to 14 years. The policy can be gifted to the child as a graduation present or a wedding present.
There are many estate planning, and tax planning uses for life insurance. Each individual’s situation is unique. Please sign up for a complimentary review of your situation to discuss these strategies.
Each Person has a unique set of circumstances:
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