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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?
What are the tax issues with life
insurance cash values, dividends, and death benefits?
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.
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
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. 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.
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.
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.
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.
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.
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.
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.
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. Policy owners 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 policy owner 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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