Life Insurance
What Is Life Insurance?
Life insurance is a contract to pay a predetermined sum of money upon the death
of an insured person to the named beneficiary of a contract. It is the only
way that people can fund the obligations they have incurred during their lifetimes
in the event that they die before they have the opportunity to accumulate enough
wealth to provide for those obligations.
The proceeds of a life insurance contract can provide income to support a family,
money to purchase stock in the event of the death of a shareholder, dollars needed
to pay estate taxes, payment of debt, tax deferred accumulation of dollars, and
funded employee benefit plans. There is no other investment vehicle that can
provide exactly the amount of money needed, at exactly the moment needed, at so
small a cost as Life Insurance.
Term Insurance is life insurance protection offered during a limited
number of years during which payments are made. The policy terminates without
any residual value to the owner if the insured survives the stated period.
Term insurance may or may not be renewable (at either a fixed price known ahead of
time or a variable price quoted at the time of renewal (if renewal is available)
depending upon the terms of the policy chosen. Policies that offer renewal
terms are more expensive than those that don't offer a renewal feature. Term
insurance is less expensive then other forms of life insurance that offer inside
policy cash build up, guaranteed renewal or those that don't expire if payments
continue to be made. Policies that don't offer automatic renewal should be a
concern to the consumer as, after policy expiration, they may no longer qualify for
life insurance (or qualify at higher rates) due to changes in the condition of their
health.
Variable Life Insurance. Unlike other forms of life insurance, a
variable life insurance contract allows the owner to invest periodic payments that
may vary in size into mutual fund-like accounts; therefore, the variable
account benefit may increase in value in rising stock markets and decline in value
in declining stock markets, according to the investment results of the company's
separate account (usually invested primarily in common stock). The amount of
death benefit payable would, under variable life policies that have been proposed,
never be less than the initial death benefit payable under the policy.
Survivorship Life Insurance. The Economic Recovery Tax Act of 1981
allowed postponement of estate taxes - through the Unlimited Marital Deduction until
after the death of the last of either husband or wife. While this provides
couples with increased flexibility during their lifetime, in many cases, it places a
substantial tax burden on their estate and its beneficiaries. This delay in
payment causes a financial problem that survivorship life is designed to answer.
Unlike traditional life insurance, which provides protection on the life of a
single insured, survivorship life covers two lives with proceeds payable at the
second death. As such, it is perfectly suited to deal with the problem
discussed above.
Some Advantages Survivorship Life offers over Individual Coverage include:
- Lower premiums - more cost effective than two policies.
- Medical underwriting standards are eased due to second death payouts.
- Lower "economic benefit" reportable for income taxes in Split Dollar Plans
(often 10 times lower).
Survivorship Life Ownership Arrangements. Third party ownership
(adult children or an Irrevocable Life Insurance Trust) is generally most desirable
for persons with potential estate tax problems. The policy may sometimes be
transferred out of the estate after the first insured dies. If the survivor
lives 3 years after the gift, the full-face amount should be out of his or her
estate.
Other Uses For Survivorship Life include:
- Key Person Insurance - where the employer can self-insure or absorb the loss
of one key individual but not two.
- Business Buyout - where a child wishes to purchase the family business from
aging parents. Child working in the business owns policy on parents.
- Charitable Gift Replacement - Provides heirs with replacement cash when assets
are used to fund Charitable Remainder Trust.
Life Insurance Basics. Policies from mutual companies have
consistently earned greater returns than their counterparts who purchased policies
from stock companies. Occasionally, we will offer products from a stock
insurance company if it fits the client's situation.
Why Ordinary and Variable Life Insurance? In the insurance industry
there are three basic types of cash value policies:
Variable Universal Insurance
- Dollars are invested directly into variable accounts that operate similar
to mutual funds
- Earns a rate of return totally dependent upon the return of those variable
accounts
Ordinary Life
- Issued by a mutual insurance company
- Pays dividends based on company earnings
Fixed Interest Rate Universal Life
- Primarily sold by stock insurance companies
- Declares a fixed rate of return monthly or annually which is passed along
to the insured
- Occasionally, we will recommend interest sensitive Universal Life if it
fits that client's situation.
Analogy to Investment Portfolios. As a Financial Advisor, you
generally make a decision as to which type of investment portfolio to recommend to
your clients. Choosing among insurance products is similar to choosing among
one of three different investment poitfolios:
Equity Portfolio
- Invests in some form of domestic growth or international stocks
Diversified Portfolio
- Consists primarily of long term bonds with stocks and real estate to
hedge inflation
Intermediate-Term Bond Portfolio
- 100% Bonds
- 5 - 10 year average maturity
Consider:
- "Which portfolio would have the greatest rate of return over a period of 10
years or longer?" (Equity Portfolio)
- "Which portfolio would have the safest, most stable long term growth?"
(Diversified Portfolio)
Other Management Topics:
Accounting |
Business Consulting |
Business Valuation |
Charitable Giving |
Estate Planning
Financial Planning |
Investment Management |
Insurance/Risk Management
Tax Planning & Preparation |
Technology |
Links |
Find Us |
Contact Us |
Home
