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LIFE INSURANCE

OVERVIEW

WHAT ARE THE DIFFERENT TYPES?

WHO NEEDS IT?

WHAT TO KNOW WHEN BUYING LIFE INSURANCE

HOW MUCH DO I NEED?

RE-EVALUATE NEEDS DUE TO LIFE EVENTS

 

Overview

Life insurance is simply intended to cover the financial risk of death.  In general, anyone who wants to make sure that their family does not have to change its lifestyle after his or her death needs to have it.  Life insurance has several variables: duration of coverage, frequency and stability of payments, as well as payout method and amount of coverage.

You can use simple rules of thumb, but a real evaluation of your needs should take your whole financial picture into account.  Most advisors recommend an amount between 5 to 10 times your salary.

What Are The Different Types?

 Term

 As the name implies, term insurance provides protection for a specific period of time and generally pays a benefit only if you die during the "term." Term periods typically range from one year to 30 years, with 20 years being the most common term.

One of the biggest advantages of term insurance is its lower initial cost in comparison to permanent insurance. Why is it cheaper when initially purchased? Because with term insurance, you're generally just paying for the death benefit, the lump sum payment your beneficiaries will receive if you die during the term of the policy. With most permanent policies, your premiums help fund the death benefit and can accumulate cash value.

Term insurance is often a good choice for people in their family-formation years, especially if they're on a tight budget, because it allows them to buy high levels of coverage when the need for protection is often greatest. Term insurance is also a good option for covering needs that will disappear in time. For instance, if paying for college is a major financial concern but you're pretty sure that you won't need life insurance coverage after the kids graduate, then it might make sense to buy a term policy that'll get you through the college years.

But what happens if you buy a term policy only to realize at the end of the term that you still have a need for life insurance? Well, it's sort of  a good news, bad news story. The good news is that many policies will give you the option to renew your policy when you reach the end of the term. The bad news is that you'll probably face much higher costs since age is one of key factors used to determine life insurance premiums. To renew the policy, you also may have to present evidence of insurability (that's insurance jargon meaning, "take another medical exam and answer a new round of questions about your lifestyle, health status and family history"). If you're still a fine specimen with healthy living habits, you might re-qualify at a reasonable rate. But if your health has deteriorated, you may find that with continually increasing premiums it's too expensive to renew your policy or you may not even re-qualify.

So if you're considering a term policy, make sure you carefully consider how long you'll need the coverage. If you're pretty sure that your needs are temporary, then term insurance may be an excellent choice. But if you think there's a real possibility that you might need the coverage for a long time, then remember that if you want to renew your term policy after it expires or buy a new term policy at that time, your age, health status or other factors may make coverage very expensive.

To better understand term insurance, consider this analogy. When you purchase term insurance, it's sort of like renting a house. When you rent, you get the full and immediate use of the house and all that goes with it, but only for as long as you continue paying rent. As soon as your lease expires, you must leave. Even if you rented the house for 30 years, you have no "equity" or value that belongs to you.

One exception to this rule is what's called a return-of-premium term policy. With these policies, if you keep the policy in force for the entire term, say 20 years, the insurance company will refund the premium payments you made over that 20-year period. Of course, there is a price to be paid for this added benefit. The premiums for return-of-premium policies are considerably higher than premiums for standard term policies. The price difference can be 30%, 40% or more. Another factor to consider is that term insurance rates have dropped considerably over the past decade, mostly because people are living longer. If you own a standard term policy, there's really no harm done in dropping that policy in favor of a newer and cheaper term policy. But if you own a return-of-premium policy, dropping the policy before the full term has expired means that you will have paid a high price for your term insurance coverage and the premiums you paid won't be refunded.

When considering a term purchase, one thing to keep in mind is that not all term policies are the same. Some may include certain provisions as standard features, while others may require you to pay extra to add these features as "riders" to your policy. So if you're comparing term policies, remember that price is not the only factor to consider. Ask us about provisions such as accelerated death benefits, disability waiver of premium, and accidental death benefits.

Another provision that is very important is something called convertibility. This valuable feature is usually available in the first few years of the policy, and allows you to convert your term policy to a permanent policy (e.g., whole life insurance) without submitting evidence of insurability. Being able to convert to a permanent policy is a great option to have in the event that circumstances in your life change such as failing health or maybe just the realization that coverage is needed for a longer period of time than you originally anticipated. That's why when purchasing a term policy; it's never a bad idea to find out what kind of permanent policies are offered by the company you are considering. Some companies may only have strong term insurance offerings, while others may have very competitive products in both categories.

One final piece of advice: Here are some important questions to ask yourself when considering the purchase of a term policy:

  • How long can I keep this policy?
  • If I want the option to renew the policy for a specific number of years or until a certain age, what are the terms of renewal?
  • When will my premiums increase? Annually? Or after a longer period of time, such as five, ten, or twenty years?
  • Can I convert to a permanent policy? If so, how many years will this option be available to me and will I need a medical exam if I want to convert?

 Permanent

 Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. So if you don't intend to keep the policy for the long term, this may be the wrong type of insurance for you.

Why would someone need coverage for an extended period of time? Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?

Another key characteristic of permanent insurance is a feature known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries.

Cash values, which accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children's education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you're using the policy's cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash surrender value.

If you need or want to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values are yours. Just know that if you surrender your policy in the early years, there may be little or no cash value.

With all types of permanent policies, the cash value of a policy is different from the policy's face amount. The face amount is the money that will be paid at death or policy maturity (most permanent policies typically "mature" around age 100). Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company's financial results or experience, which can be influenced by mortality rates, expenses, and investment earnings.

Types of Permanent Insurance

"Permanent insurance" is really a catchall phrase for a wide variety of life insurance products that contain the cash-value feature. Within this class of life insurance, there are a multitude of different products. Here we list the most common ones.

If you're the kind of person who likes premiums that will remain fixed and predictable over time, you may want to consider:

Whole life or ordinary life. This the most common type of permanent insurance. It provides you with the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values. And you'll have a level premium that is guaranteed to never increase for life.

Another valuable benefit of a participating whole life insurance policy is the opportunity to earn dividends. While your policy's guarantees provide you with a minimum death benefit and cash value, dividends give you the opportunity to receive an enhanced death benefit and cash value growth. Dividends are a way for the company to share part of its favorable results with policyholders. When you purchase a participating policy, it is expected that you will receive dividends after the second policy year - but they are not guaranteed. Dividends, if left in the policy, can provide an offset (and more) to the eroding effects of inflation on your coverage amount.

Variable life. This type of insurance is offered via a prospectus and provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate your premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds, combinations of both, or a fixed account that guarantees interest and principal. This type of insurance is for people who are willing to assume investment risk to try to achieve greater returns. With variable life you're shifting much of the investment risk from the insurance company to yourself. Good investment performance would provide the potential for higher cash values and ultimate death benefits. If the specified investments perform poorly, cash values and death benefits would drop accordingly.

While some people like the predictability of fixed premiums, others prefer adjustable premiums because they like having the option to make higher premium payments when they have extra cash on hand or lower ones when money is tight. If you find this kind of flexibility appealing, you may want to consider:

Universal life. This type of insurance is offered via a prospectus and allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under a traditional whole life policy. With universal life, you get the certainty of a guaranteed minimum amount of death benefit, as long as premiums are sufficient to sustain that death benefit. Any guarantee relies on the claims paying ability of the issuing insurance company. As such, do your homework and select a financially sound company. Most universal life policies will also provide a guaranteed rate of return on your cash values, with one important exception. It is possible that you will not accumulate any cash value if any, or all, of the following circumstances occur: administrative expenses increase, mortality assumptions are changed, the insurance company's investment portfolio underperforms, premium payments are insufficient.

Variable Universal Life. This type of insurance is similar to universal life. It is a flexible premium, permanent life insurance policy that allows you to have premium dollars allocated to a variety of investment options, including a fixed account. The policy generally provides income tax-free death benefit, has a cash value that grows tax-deferred, and is accessible through policy loans and/or withdrawals. Note that loans and withdrawals will reduce the death benefit by the outstanding loan amount plus any interest. The policy allows for increase or decrease of the policy coverage and premium changes to the life insurance benefit option. Some companies also give you the option to guarantee the death benefit with the Guaranteed Minimum Death Benefit Rider. Overall, variable universal life can be a good option for people who want to combine life insurance with a higher potential for investment return at a higher risk, of course. For more complete information, be sure to always request the appropriate product and fund prospectuses as they contain information you need to consider such as the investment objectives, risks, and charges and expenses of the investment. 

Who needs it?

If someone depends on you financially, chances are you need life insurance.

Life insurance provides cash to your family after your death. This cash (known as the death benefit) replaces your income and can help your family meet many important financial needs like daily living expenses, mortgage payments and college savings. What's more, there is no federal income tax on life insurance benefits.

Most Americans need life insurance. To figure out if you need life insurance, you need to think through the worst-case scenario. If you died tomorrow, how would your loved ones fare financially?

Would they have the money to pay for your final expenses (e.g., funeral costs, medical bills, taxes, debts, lawyers fees, etc.)? Would they be able to meet ongoing living expenses like the rent or mortgage, food, clothing, transportation costs, healthcare, etc? What about long-range financial goals? Without your contribution to the household, would your surviving spouse be able to save enough money to put the kids through college or retire comfortably?

The truth is, it's always a struggle when you lose someone you love. But your emotional struggles don't need to be compounded by financial difficulties. Life insurance helps make sure that the people you care about will be provided for financially, even if you're not there to care for them yourself.

To help you understand how life insurance might apply to your particular situation, below we've outlined a number of different scenarios below. So whether you're young or old, married or single, have children or don't, take a moment to consider how life insurance might fit into your financial plans.

You're Married
Most families depend on two incomes to make ends meet. If you died suddenly, could your family maintain their standard of living on your spouse's income alone? Probably not: Life insurance makes sure that your plans for the future don't die when you do.

You're a Single Parent
As a single parent, you're the caregiver, breadwinner, cook, chauffeur, and so much more. Yet nearly four in ten single parents have no life insurance whatsoever, and many with coverage say they need more. With so much responsibility resting on your shoulders, you need to make doubly sure that you have enough life insurance to safeguard your children's financial future.

You're a Stay-At-Home Parent
Just because you don't earn a salary doesn't mean you don't make a financial contribution to your family. Childcare, transportation, cleaning, cooking and other household activities are all important tasks, the replacement value of which is often severely underestimated. Some surveys have estimated the value of these services at over $40,000 per year. Could your spouse afford to pay someone for these services? With life insurance, your family can afford to make the choice that best preserves their quality of life.

Your Kids Are Self-supporting and Your Mortgage is Paid Off
As the years go by, you may feel your need for life insurance has passed. But just because the kids are through college and the mortgage is paid off doesn't necessarily mean that Social Security and your savings will take care of whatever lies ahead. If you died today, your spouse will still be faced with daily living expenses. What if your spouse outlives you by 10, or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?

You're Retired
Did you know that depending on the size of your estate, your heirs could be hit with a large estate tax payment after you die (up to 48% of your estate depending on your state). The proceeds of a life insurance policy are payable immediately, allowing heirs to take care of estate taxes, funeral costs, and other debts without having to hastily liquidate other assets, often at a fraction of their true value. And life insurance proceeds are generally income tax free and can be arranged to avoid probate. Finally, if your insurance program is properly structured, the proceeds from your life insurance policy won't add to your estate tax liability.

You're a Small Business Owner
Besides taking care of your family, life insurance can also protect your business. What would happen to your business if you, one of your fellow owners, or perhaps a key employee, died tomorrow? Life insurance can help in a number of ways. For instance, a life insurance policy can be structured to fund a "buy-sell" agreement. This would ensure that the remaining business owners have the funds to buy the company interests of a deceased owner at a previously agreed upon price. That way, the owners get the business and the family gets the money. To protect a business in case of the death of a key employee, "key person insurance," payable to the company, provides the owners with the financial flexibility needed to either hire a replacement or work out an alternative arrangement.

You're Single
Most single people don't need life insurance because no one depends on them financially. But there are exceptions. For instance, some single people provide financial support for aging parents or siblings. Others may be carrying significant debt that they wouldn't want to pass on to family members who survive them. If you're in these types of situations, you should own life insurance because you wouldn't want your loved ones to be burdened financially in the event of your premature death.

 What To Know When Buying Life Insurance

 Key considerations

To help you make the right insurance decisions for you and your family, read through these 10 important questions and answers. They'll help you make an informed decision when it comes time to make a life insurance purchase.

1.       How much life insurance do I need? Determining how much life insurance you need requires a careful examination of your current and future financial obligations (i.e., a combination of (a) what would it cost to help your surviving family members meet immediate and ongoing needs like funeral costs, taxes, food, clothing, utilities, mortgage payments, etc. and (b) future obligations like college and retirement funding) and the resources that your surviving family members could draw upon to meet those obligations (i.e., your spouse's income, savings and investments, other income producing assets, and any life insurance you might already own). The difference between the two (your financial obligations minus the resources your family has to meet those obligations) is the approximate amount of additional life insurance you need. If this sounds confusing, don't worry. You're not alone. That's why most people turn to a life insurance professional when they want to figure out how much insurance they need. But if you don't feel you're ready to speak with an agent or want a preliminary sense of your needs before meeting with an agent, visit our Life Insurance Needs calculator. It'll walk you through the various questions you need to ask yourself and provide you with a rough estimate of how much insurance you need to protect your family.

2.       What type of policy should I buy, term or permanent? It's impossible to say which is better because the kind of coverage that's right for you depends on your unique circumstances and financial goals. But generally speaking, term offers the greatest coverage for the lowest initial premium and is a great solution for people with temporary needs. Permanent insurance may make more sense if you anticipate a need for lifelong protection and like the option of accumulating tax-deferred cash values.

3.       What are the various kinds of permanent insurance? There are four main types. Whole life insurance is the most traditional form of "permanent" insurance. With it, the face amount (the death benefit) and the premium (the amount you pay for protection each year) are fixed at the time you buy your policy and stay the same even as you age. You also get a guaranteed rate of return on your cash values. Of course, any guarantee relies on the claims paying ability of the issuing insurance company. By contrast, the cash value in universal life is linked to interest rates, and the cash value of variable life and variable universal life is linked the performance of the underlying investment options you choose to invest in and fluctuate with market conditions. These two types of insurance products are offered via a prospectus, as such, you should always request a copy of a current prospectus, as it contains information you need such as the investment objectives, risks, and charges and expenses of the investment. The cash value of universal and variable policies is not guaranteed, although some policies set a minimum death benefit. With universal policies (universal life and variable universal life) you can reduce or increase the amount of the death benefit and vary the amount or timing of premium payments, subject to certain limitations

4.       What are accelerated death benefits and how do they work? Many policies contain a provision that allows a terminally ill person to collect a portion of his or her policy's death benefit, typically 50% to 75%, while that person is still alive. The money can be used to get one's family finances in order, pay for uncovered medical expenses, or simply do certain things for your family or friends while you still can. It's important to note that the amount you take out while still living will be subtracted from the death benefit payments to your beneficiaries along with an interest charge to account for early payment of benefits.

5.       By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition? Medical tests provide accurate and current information about an applicant's health, thus enabling insurers to charge premiums that reflect the level of risk an applicant represents. Because some health conditions are easily managed through proper medication, therapy or lifestyle changes, medical information makes it possible for insurers to cover applicants with certain health conditions. More serious or incurable conditions present a very significant risk that some insurers simply may not want to assume.

6.       What should I consider in naming life insurance beneficiaries?
(a) Always name a "contingent," or secondary, beneficiary, just in case you outlive your first beneficiary.
(b) Select a specific beneficiary, rather than having the proceeds of your life insurance paid to your estate. One of the great advantages of life insurance is that it can be paid to your family immediately. If it is payable to your estate, however, it will have to go through probate with the rest of your assets.
(c) Be very specific in wording beneficiary designations. Saying "wife of the insured" could result in an ex-spouse getting the proceeds. Naming specific children may exclude those born later. If your child dies before you, do you want the proceeds to go to that child's children? Changing the beneficiary designation is easy, but you have to remember to do it. Due to the various issues involved, an agent can be an excellent source of information to help you properly set up your beneficiary designation.

7.       Does it make sense to replace a policy? Think twice before you do, because in many situations it may not be to your advantage. Before dropping any in-force policy, consider:
(a) If your health status has changed over the years, you may no longer be insurable at standard rates.
(b) Your present policy may have a lower premium rate than is required on a new policy of the same type (if, for no other reason, that you have grown older).
(c) If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original one.
(d) You will be subject to a new contestability period.

You should ask insurance agents for a detailed listing of cost breakdowns of both policies, including premiums, cash surrender value, and death benefits. Compare these as well as the features offered by both policies.

If you decide to surrender or reduce the value of the policy you now own and replace it with other insurance, be sure that:
(a) the agent making the proposal puts it in writing;
(b) you pass any required medical examination; and
(c) your new policy is in force before you cancel the old one.

8.       What happens if I fail to make the required premium payments? If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. If you own a term policy and fail to pay your premium within the grace period, your insurance company will typically terminate the policy. If you own a permanent policy and fail to pay your premium within the grace period, your insurance company, with your authorization, can draw from your policy's cash value to keep the policy in force. In some flexible-premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values and a shortened coverage period.

9.       Should I just buy basic life insurance coverage or is it worth considering the "bells and whistles? that some policies offer? Whether you should consider adding a rider to a policy you're considering really depends on your specific needs, objectives and budget. Here are a few riders that you at least should take a close look at and consider. A disability waiver of premium rider stipulates that if you become totally disabled for a specified period of time, you don't have to pay premiums for the duration of the disability. Why might you want to consider such a provision? Disabling illnesses and injuries are much more common than you probably realize. If you become disabled and your income declines or disappears for a period of time, a disability waiver of premium can ensure that your life insurance policy will remain in force. An accidental death benefit is another common rider. It will pay an additional benefit in the case of a death resulting from an accident. Many companies offer accelerated death benefits, also known as living benefits. This type of rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care, or confinement to a nursing home. Ask your agent for information about these and other policy riders.

How Much Do I Need?

 The answer isn't really how much life insurance you need, it's how much money your family will need after you're gone. Ask yourself:

  • How much money will my family need after my death to meet immediate expenses, like funeral expenses and debts?
  • How much money will my family need to maintain their standard of living over the long run?

Life insurance proceeds can help pay immediate expenses including uncovered medical costs, funeral expenses, final estate settlement costs, taxes and other lump-sum obligations such as outstanding debts and mortgage balances. They can also help your family cover future financial obligations like everyday living expenses, money for college or your spouse's retirement, and so much more.

But how do you know if you need $100,000, $500,000, $1 million or more? The most common way to determine your life insurance needs is by conducting what's called a Capital Needs Analysis.

Here's how it works. Start by evaluating your family's needs. Gather all of your personal financial information and estimate what your each of your family members would need to meet current and future financial obligations. Then tally up all of the resources that your surviving family members could draw upon to support themselves. The difference between their needs and the resources in place to meet those needs is your need for additional life insurance (see diagram below).

 Life Events

If you're like most people, you probably don't take the time to routinely evaluate your life insurance needs. Why might that be a mistake? Well, your life insurance needs change as circumstances in your life change. That's why it's a good idea to re-examine your life insurance needs at least every few years and certainly when big changes, or life events, occur.

Just about any life event you can imagine will have an impact on your life insurance needs. An obvious example is having a child. As you bring a new person into the world, you also bring a major financial responsibility into your life. If something happens to you, where's the money going to come from to help provide the kind of upbringing you want your child to have?

This section will explore the major life events that might trigger the need to re-evaluate your life insurance coverage.  Once you have a general sense of your needs, you should consider meeting with a qualified life insurance professional who can conduct a more thorough analysis of your needs and help tailor a plan that meets your specific financial objectives.

Having a child

Getting married

Buying a home

Taking on debt

Changing jobs

Supporting aging parents

Changes in your business

Changes in marital status

Planning for retirement

Planning for college

 Having a child

 

It's time to start thinking about whether to wallpaper the extra bedroom in pink or blue - your child is on the way. With your growing family, you're probably doing all you can to save and invest for the future. But is that enough?

You have big plans for your kids and want to see them realize their hopes and dreams. It's hard enough to make that happen with you in the picture. But what if you or your spouse - or both of you - were suddenly out of the picture? From diapers to diplomas, would there be enough income to pay for day care, a college education, and everything in between?

Your children are your greatest responsibility, and life insurance can help them to grow up in a stable environment, one in which they are physically safe and financially secure, if something were to happen to you.

 Getting married

 Driving away from the reception in a blue convertible with balloons flapping in the wind, you're headed for a bright future. Together, you both dream of a nice home, a good education for the kids and a comfortable retirement.

Enjoy these early carefree days, but make sure you talk to an insurance professional sometime soon, now that you're financially dependent on one another. As a married couple, you share a life together, but you also share each other's financial obligations.

What if one of you were to die tomorrow? Would the surviving spouse have enough money to pay for your final expenses, eliminate debts such as credit-card balances and car loans, and buy some time to be able to adjust to a new way of life? Life insurance can help ensure that these financial goals will be met in the tragic event that one of you was to die prematurely.

 Buying a home

 When you finish signing that huge check, your realtor hands you the keys to the cutest little Victorian three-bedroom you've ever seen. Mortgage payments are a little daunting. Now, it's time to make sure you've thought ahead.

What if the worst were to happen? Could your spouse manage the mortgage payments without you? What about monthly maintenance, utilities and unforeseen repairs not to mention property taxes? How long would your spouse have before your dream house is back up for sale?

If tragedy were to strike, turning over the keys to the family home to the bank is probably the last thing you'd want to have happen to your loved ones. Having adequate life insurance coverage can help keep the family you love in the home they love.

Taking on debt

These days, living with debt seems to be as American as baseball and apple pie. We rely on credit to help pay for lots of important things like a reliable car, home improvements, education expenses, vacations, etc. We also pile up sizable credit card bills to pay for everyday living expenses such as groceries, gas, clothing, entertainment, etc. The truth is, living with debt is a way of life for many of us. But that's not necessarily a bad thing, as long as you have a plan for managing your debt.

First, make sure you're living within your means. You should never assume a debt load that you can't keep up with. Second, if you've got lots of different creditors and some of them are charging you high-interest rates, it might make sense to consolidate at least some of your debt at a more favorable rate. And finally, you should carefully consider how your family would manage the payments if something were to happen to you. If you were suddenly out of the picture, you wouldn't want to leave your family to drown in a sea of debt. You should have at least enough life insurance to pay off all your outstanding debt and provide a financial cushion to help your loved ones begin a new life without you.

Changing jobs

Congratulations on your new position or your big raise. You may not realize it, but when your income rises, your spending tends to rise too. If something were to happen to you, you'd probably want your family to be able to maintain their new and improved lifestyle. That's why it makes a lot of sense to re-assess your life insurance coverage whenever your income rises.

If you determine that you need additional coverage, the first thing you'll want to do is find out if your life insurance benefit through work (assuming, of course, that you have such a benefit) has increased along with your compensation. Many group plans will tie life insurance benefits to your annual income. So if you get a $5,000 raise and your company's life insurance plan will pay two times your income if you die, then your death benefit will increase by $10,000.

If you feel that's not enough, many employers will give you the option to increase your coverage, often through a payroll deduction. Determining whether to take advantage of this option usually depends on your age and health status. How so? With most group plans, employees are offered the same premium as others in their general age bracket (e.g., 25-34 year olds), regardless of their health status or actual age. So if you're healthy or near the lower end of your age bracket, this one-size-fits-all premium may be higher than what you would find if you shopped around on your own. On the other hand, if you're an older employee or perhaps suffer from a chronic health condition, increasing your coverage through work might be a great option because you might not be able to find a policy on the open market that's as affordable as what your employer is offering.

Supporting aging parents

When you were growing up, your parents made lots of sacrifices for you. They did all they could to provide for your basic needs, and then some. And they probably did so without ever thinking that they'd need to rely on your financial support later in life. But that's not always the way things work out.

Today, many people find themselves having to support their aging parents financially and otherwise. If you're one of them, you need to think about what would happen to them if something happened to you. Would your parents be able to afford quality healthcare and a decent place to live? Would they have to turn to friends or other family members for financial support?

By figuring your parents financial needs into your life insurance plans, you can take the guesswork out of what would happen to your parents if something were to happen to you.

Changes in your business

One of the keys to running a successful small business is being able to adapt to change. Maybe you need to buy an expensive new piece of equipment to keep pace with a competitor. Or perhaps you have to hire a new person with a specialized skill set in order to expand into a new area. Whatever the case may be, anytime you make big changes in your business is an ideal time to find out if it also makes sense to make changes to your life insurance plans.

To get a sense if it's a good time to reevaluate your life insurance coverage, ask yourself the following questions:

  • Has your business taken on more debt recently?
  • Has your business become more dependent on a key employee or several key employees?
  • Has the value of your business changed lately?

Life insurance can help address all of these scenarios. For instance, you could buy an individual life insurance policy to cover a new loan that you may have taken out for the business. If an employee or groups of employees have become crucial to the ongoing success of your business, you can buy "key person insurance." Then, if one of these employees dies, you'll have the financial wherewithal to either hire a replacement or work out an alternative arrangement. If you have business partners and the value of your business changes significantly, it might be time to revisit your buy-sell agreement (assuming you have one). This is an agreement between owners to buy out a deceased owner's share of the business in the event of the co-owners retirement, disability or death.

You've worked far too hard to leave the future of your business to chance. Make sure you have an insurance plan that will protect your family, your employees and the business

Changes in marital status

If you're on your own now, whether through death or divorce, you need to carefully re-examine your entire financial situation, including your life insurance needs. In fact, you almost have to start from scratch because going from two spouses in a household to one will affect just about every financial calculation you can imagine.

With regard to life insurance, the first thing you'll want to do is determine whether you still have a need for coverage. Remember, one of the main reasons you purchased life insurance in the first place was to provide financial security for your immediate family. If your spouse has died and you either have no children or your children are grown and financially independent, you may no longer need life insurance.

But what if your spouse has died and you now have to raise young children on your own. Then instead of dropping your life insurance, you actually might need to increase your coverage. Think about it. As a single parent, you're the primary caregiver, breadwinner, go-to person and so much more. Your children are probably entirely dependent on you. By having adequate life insurance coverage, you can help ensure that your children will have the kind of lifestyle and opportunities you'd always dreamed they'd have.

Another important consideration is beneficiary designations. Most people will list their spouse as their primary beneficiary. So if your spouse has died, you should immediately change the beneficiary designation. Otherwise, a surrogate court judge might be the one to decide how to distribute your life insurance proceeds among your children or other family members.

If you have children, deciding whether to list them as beneficiaries will depend, in part, on their age. If they're minors (under age 18), you should probably establish grantor trusts for each of your children and name the trusts as the beneficiaries. If you go this route, you'll also need to appoint a trustee (It's also a good idea to appoint a successor trustee, in case something happens to your first trustee). When you die, the trustee will be responsible for distributing funds to your children in accordance with your wishes. When the children are minors, trustees are often granted the discretion to make distributions as needed, within certain parameters. Once they're older, wills will often specify that distributions be made to the children in lump sums when they attain certain ages (For instance, you could arrange for your children receive equal payouts when they reach ages 20, 25 and 30). Alternatively, you could name adult children as the beneficiaries of your policy. But just know that if you do that and, say, your son or daughter gets divorced or is divorced when you die, the proceeds may be subject to equitable distribution. And would you really want half the proceeds to go to someone who's no longer in the family. Trusts can help prevent that from happening.

The various scenarios described above all assumed that your spouse is deceased. But what if you've just divorced and have young children. Then things can get more complicated because your ex-spouse may be the one to care for and provide for your children if you die while they're still minors. Again, this is where trusts can be a good option. They can help ensure that the money is used to support your children needs.

A final word of advice; These are very important and complex decisions, and may require the assistance of not just an insurance professional, but an attorney and an accountant as well. So if you're suddenly in the unfamiliar position of having to make financial decisions on your own, don't try a do-it-yourself approach. The stakes are way too high, especially if there are young children involved.

 

Planning for college

 With college costs continuing to skyrocket, you need to plan earlier and more carefully than ever to achieve your college-savings goals. Meeting this challenge requires a disciplined approach to saving and investing. But having a smart investment strategy is just one part of a sound college-funding plan. You also need a smart risk management strategy to ensure that your college savings goals will be achieved, even if you're not able to complete them due to illness, accident or death.

Saving and Investing for College. Federal- and state-sponsored college-savings programs are increasing in popularity because they let you save and withdraw tax-free. Education IRAs, now called Coverdell Education Savings Accounts, let you contribute $2,000 annually per child, but phase out contributions at higher income levels. Section 529 plans, a more flexible option, permit much larger contributions (over $200,000 per beneficiary in most states), and generally have no income restrictions.

Permanent life insurance is another option to consider because it, too, allows you to save and withdraw tax-free, while also providing the protection you should be building into your college savings plan (see below). Withdrawals, and loans, which are also subject to interest charges, can lower the ultimate death benefit. Because of the insurance component, your costs may be somewhat higher than with, say, a Section 529 plan.

Protecting Your College-Savings Plan. Protection products form the foundation of a sound college-funding program, ensuring that your college-savings plan won't die or become disabled if you do. Life insurance can complete a college-savings program that hasn't matured, while disability insurance can help make sure that you can continue to set aside money for college, even if you're unable to work for a period of time.

Remember, a college-funding plan without insurance is just a savings and investment program that can die or become disabled when you do.

Planning for retirement

 Mention "retirement planning" and most people think about their 401(k)s, IRAs or mutual funds. Keep saving, invest those savings wisely, get to age 65 and voila! You're set for retirement.

Maybe. But what if things don't work out exactly the way you planned? What if you die prematurely or become disabled? What will happen to those people in your life, especially your spouse, who may be depending on your retirement savings to help support them well into old age? A retirement plan without insurance is just a savings and investment program that dies or becomes disabled when you do.

Below are three ways life insurance can help you meet important retirement planning objectives:

Prevent your retirement plans from dying when you do. If you die before retirement, your survivors would miss out on both your salary for living expenses and the money you were setting aside for the future. People who die prematurely haven't had as much time to put together an investment program that can really pay off. If you have sufficient life insurance, it can help pay your family's expenses and may still be there for your spouse's retirement.

Supplement your retirement income. Suppose your circumstances change and you no longer have anyone who would need the proceeds of a death benefit. With a permanent life insurance contract, you have the flexibility to surrender the policy and supplement your retirement income with the funds that have accumulated in the policy's cash value account.

Preserve your estate assets for your survivors. If you've accumulated a large estate, life insurance can help foot the estate tax bill from Uncle Sam, preserving assets for your heirs. Or, if your estate is more modest, life insurance can provide a legacy for your children and grandchildren even if you use up most of your assets during your retirement years.

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