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Life Insurance: Back to the Basics

Life Insurance: Back to the Basics

May 02, 2022
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As you consider the wide range of life insurance coverage available, you may wonder what type really fits your needs now, and what will suit your needs in the future. A good, first step is to ask yourself why you are buying insurance, and how it will fill your personal and family financial independence requirements. Do you want insurance to cover a new home or mortgage? A college education? A business investment? Your retirement? Your final expenses? Once you have the answers, you can look at the basic types of coverage, whole life, universal life, and term.

Whole Life Insurance—Cash Value for Your Dollar

Whole life insurance not only helps prepare you for financial hardship in the case of a death, but also provides a “living” savings and investment vehicle for the policyholder. As cash value insurance that links insurance protection with savings, premium dollars paid contribute to the combined program. Premium payments first pay the cost of pure insurance coverage, including expenses and mortality factors of the insurance company; the company then invests “leftover” dollars to build the policy’s guaranteed cash value.

In addition to the guaranteed cash value buildup in the policy, policyholders are provided with regular dividend payments, the result of lower expenses, lower mortality rates, and higher investment results than were predicted when premiums were set.

Another whole life insurance feature is predictability of expense: Premium payments at inception of the policy will not change and will continue until the policy endows (when the cash value of the policy equals the face amount of the policy). Or, an “accelerated” payment plan may be chosen, which permits payment of premiums later in life out of withdrawals from the dividend balance rather than out-of-pocket.

A guarantee of insurability comes with any whole life insurance policy. Once the individual to be insured provides initial evidence of insurability—and as long as premium payment responsibilities are met—the insured is guaranteed coverage for life in accordance with the terms of the policy. Evidence of insurability will never be necessary again, as long as the original policy remains in force.

The final feature to consider is the value of whole life insurance as a “creditor,” if necessary. Funds may be borrowed against the cash value of the policy at any time, but outstanding loan balances will be deducted from the death benefit in the event of the death of the insured.

There are numerous variations on whole life insurance as it was originally conceived. In keeping with the changing investment philosophy of policyholders, universal whole life was created. This policy provides all of the above benefits of whole life, and adds the possibility for the policyholder to change both the amount of premium payments and insurance coverage as individual needs change. The policyholder does accept the investment risk associated with the investment portfolio choices available, which can include growth, income, money market, equity income, and diversified mutual funds. Either conservative or aggressive return options are thereby available for policyholders.

Term Insurance—Pure Protection for Your Dollar

As the name implies, term insurance provides pure insurance protection for a specific period—or “term”—of time. It does not generally offer any guarantee of premium, death benefit stability, or right of renewal. It does provide some of the lowest cost protection available, and it is this cost factor that is its most beneficial feature for some.

There are one-year policies offering a right of renewal at a slightly higher premium paid each year to reflect the higher age of the insured. There are also decreasing term plans available to cover mortgages and loans. This means the face amount of the policy decreases as the mortgage or loan obligation decreases, thus moderating premium payments. Conversion to a whole life policy without a medical examination is generally permitted with most term policies.

Your Personal Life Insurance Needs

Contact your financial and/or insurance professional who can work with you to determine the short-term or long-term nature of your needs, as well as how the life insurance coverage available can help fulfill them. He or she can analyze your current cash position and help you find the life insurance coverage that may be appropriate and affordable for you.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

This article was prepared by Liberty Publishing, Inc.

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