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 How
much life insurance should you own?
What
about buying life insurance for a spouse or children?
Should
I buy term insurance or cash value life insurance?
How
does mortgage protection term insurance differ from other
types of term life insurance?
Can
an existing life insurance policy be used to provide for the repayment of an
outstanding mortgage loan?
Credit
life insurance is frequently recommended in conjunction with
taking out an installment loan when buying expensive appliances
or a new car, or for debt consolidation. Is credit life insurance
a good buy?
What
are the tax issues with life insurance cash values, dividends, and death benefits?
What
is participating whole life insurance?
How
is universal life insurance different from traditional whole life insurance?
Which
type of cash value life insurance policy, universal life (UL)
or participating whole life (WL), is a "better buy" financially?
What
is variable life (VL) insurance, and how is it different from universal life (UL)
and participating whole life (WL)?
How much life insurance should you own?
Rough rules of thumb suggest an amount equal to 6 to 8 times your annual earnings.
However, there are other things to consider when determining how much life insurance
you need. Important factors include: income sources (and amounts) other than
salary/earnings; whether or not you're married and, if so, your spouse's earning
capacity; the number of people who are financially dependent on you; the amount
of death benefits payable from Social Security and from an employer-sponsored
life insurance plan, whether any special life insurance needs exist (e.g., mortgage
repayment, education fund, estate planning need), etc. Talk to an insurance
adviser for a precise calculation of how much life insurance you need.
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What about buying life insurance for a spouse or children?
Generally, that should not be done in lieu of buying appropriate amounts of
life insurance on the family breadwinner(s). It is extremely important that
you protect the earning capacity of the primary breadwinner, if possible, with
the right amount of life insurance before considering life insurance on children
or spouse. In a dual-income household, it is important to protect the earning
capacity of both spouses. Life insurance for a non-wage earning spouse is often
recommended for help in paying for household services lost if that spouse dies.
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Should I buy term insurance or cash value life
insurance?
Term life insurance pays out in the event of death. Cash value, which is more
costly, has a cash amount you can withdraw before death. Which one is for you
will depend on your circumstances. First answer an insurance question - how
much life insurance should you buy? Then look at the financial aspect - what
type of policy should you buy? The amount of life insurance you need may be
so large that the only way you can afford it is by buying term insurance, which
carries a lower premium than cash value policies. If your ability (and willingness)
to pay life insurance premiums is such that you can afford the desired amount
of life insurance under either type of policy, you can consider the financial
decision - which type of policy to buy. Important factors affecting the financial
decision include your income tax bracket, whether the need for life insurance
is short-term or long-term (20 years or longer is long-term), and the rate of
return on alternative investments. If you view life insurance as an investment,
you'll want to study rates of returns. If it's protection, then your purchase
is a matter of what you can afford and want to spend.
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How does mortgage protection term insurance differ
from other types of term life insurance?
The face amount under mortgage protection term insurance decreases over time,
consistent with the projected annual decreases in the outstanding balance of
a mortgage loan. Mortgage protection policies generally cover a range of mortgage
repayment periods, e.g., 15, 20, 25 or 30 years. Although the death benefit
decreases, the premium is usually level in amount. Further, the premium payment
period often is shorter than the maximum period of insurance coverage--for example,
a 20-year mortgage protection policy might require that premiums be paid over
the first 17 years.
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Can an existing life insurance policy be used to provide
for the repayment of an outstanding mortgage loan?
Yes. Lenders don't usually require that you buy a new mortgage protection term
insurance policy. An existing policy, either term or cash-value life insurance,
can be used for many purposes, including paying off an outstanding mortgage
loan balance in the event of your death.
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Credit life insurance is frequently recommended
in conjunction with taking out an installment loan when buying expensive appliances
or a new car, or for debt consolidation. Is credit life insurance a good buy?
Credit life insurance is frequently more expensive than traditional term life
insurance. Further, if you already own a sufficient amount of life insurance
to cover your financial needs, including debt repayment, buying credit life
insurance is normally not advisable due to its relatively high cost.
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What are the tax issues with life insurance cash values,
dividends, and death benefits?
The "interest build-up" portion of the annual increase in the policy's cash
value is not taxed. Dividends generally are considered to be a "return of premium"
and are not taxable. Although life insurance death proceeds will not typically
be subject to income taxation, they may be subject to federal estate taxation.
If you own part or all of the policy when you die, those can be included in
your gross estate for federal estate tax purposes. State inheritance taxes and
federal gift taxes may also apply to life insurance policies/proceeds under
specific circumstances. Contact your tax adviser regarding questions about possible
income, estate and gift tax consequences surrounding any life insurance you
own or are contemplating buying.
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What is participating whole life insurance?
Participating (par) whole life insurance has been marketed for many years in
the U.S. The participating feature means you can receive dividends if the underlying
investments perform successfully. The investments are generally long-term, fixed-rate
contracts, so experience doesn't vary tremendously. Substantial amounts of participating
whole life insurance are still sold today, principally by the large mutual companies.
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How is universal life insurance different from traditional
whole life insurance?
Both traditional whole life (WL) and universal life (UL) products are examples
of cash-value life insurance. But there are several important differences between
them. One relates to product transparency. In UL policies, it's easy to look
at the internal operations of the policy and to examine the relationships among
various policy elements (premiums, cash values, interest credits, mortality
charges, and expenses) and how they interact with each other. Another difference
is that unlike whole life policies, universal life policy returns were freed
from long-term, fixed-rate contracts and replaced with policies whose returns
were tied to short-term interest rates and periodically adjusted. After the
initial payment, universal life allows you to pay premiums anytime, in virtually
any amount, subject to certain minimums and maximums. You can also reduce or
increase the amount of the death benefit more easily than under a traditional
whole life policy.
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Which type of cash value life insurance policy, universal
life (UL) or participating whole life (WL), is a "better buy" financially?
There's no simple answer to this. The best performing product (from a financial
perspective), whether UL, WL or some other type of cash value life insurance,
will likely be the one that reveals the most favorable interest earnings, actual
expenses and mortality costs. Insurers earning the highest investment income,
and who also incur the lowest expenses and the lowest mortality costs, are in
the best position to offer life insurance at the lowest cost. This is true whether
the cash value product being offered is UL or WL. You and your adviser should
carefully examine the financial aspects of each product under consideration.
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What is variable life (VL) insurance, and how is
it different from universal life (UL) and participating whole life
(WL)?
Variable life insurance is a type of fixed-premium whole life insurance policy
where changes in the policy's cash values and death benefits are directly related
to the investment performance of its underlying assets. Policyowners typically
can choose among several investment options for the assets backing the policy's
cash values. The various investment options offered in the contract generally
possess different risk/return relationships and frequently include a money market
fund, a bond fund, and one or more common stock funds. The policy prescribes
that the death benefit will not fall below a minimum amount (usually the initial
face amount) even if the invested assets depreciate in value by a substantial
amount. Because the policyowner assumes all of the investment risk, there is
no similar "floor" to protect the cash values. Variable universal life (VUL)
insurance has recently become a more popular product than VL. VUL combines features
of both UL and VL and, in essence, is the flexible premium version of VL
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