What is life insurance?
Life insurance is a contract between the policy owner and the insurer , where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular intervals or in lump sums.
Life based contracts tend to fall into two major categories:
- Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
- Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms are whole life, universal life and variable life policies.
Why buy Life insurance?
For individuals, expenses at death such as funeral, debts, Special Needs for a loved one, Mortgage Protection, Income Replacement, Education and Taxes can be paid or an individual may want to provide gifts to charities or leave a gift to a family member.
For a business, it's a matter of considering a key-person's worth to the business in case of loss of that person, business continuity to fund a buy/sell agreement or stock redemption plan to enable a partner or group to buy the business internest of a deceased partner, paying off company loans or simply providing an employee benefit.
What amount of coverage do I need?
Consider the cost of Final expenses, supplemental income, educational funding or retirement funding. This can be done by listing out the estimated costs of each item of concern. We can help you with your estimates.
What types of insurance are there?
- Term
- Permanent
- Whole Life
- Universal Life
- Variable Life
- Variable Universal Life
- Second-to-Die (Survivorship)
- Limited Pay
Term Back to list
Term life insurance or term assurance is the original form of life insurance and is considered to be pure insurance protection because it builds no cash value. This is in contrast to permanent life insurance such as whole life, universal life, and variable universal life.
Term life insurance provides coverage for a limited period of time (generally one to 20 years), the relevant term. After that period, the insured can either drop the policy or pay annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
Level premium term life insurance has premiums which remain level over a specified period of time. These plans have premiums that remain level for a period of 5, 10, 15, 20, 25, and 30 years. After the initial level period expires, the annual premium increases each year, subject to a guaranteed maximum.
Yearly renewable term life insurance has premiums that are initially low; however, the premiums increase substantially as the insured gets older. These plans have diminished in popularity due to the introduction of level premium term life insurance.
Permanent Back to list
Permanent life insurance is life insurance that remains in force (in-line) until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires OR policies lapse). The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
(The basic types of permanent insurance are whole life, universal life, Variable, Variable Universal and Second-to-die.)
Whole Life Coverage Back to list
Whole life insurance provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy.
Cash value can be accessed at any time through policy "loans". Since these loans decrease the death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit only. If the dividend option: Paid up additions is elected, dividend cash values will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary.
Universal Life Coverage Back to list
Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. A universal life policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy (credited) on the account at a rate specified by the company. This rate has a guaranteed minimum but usually is higher than that minimum. Mortality charges and administrative costs are charged against (reduce) the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.
Universal life policies guarantee, to some extent, the death proceeds, but not the cash function - thus the flexible premiums and interest returns. If interest rates are high, then the investment returns help reduce premiums. If interest rates are low, then the customer would have to pay additional premiums in order to keep the policy in force. When interest rates are above the minimum required, then the customer has the flexibility to pay less as investment returns cover the remainder to keep the policy in force.
Variable Life Coverage Back to list
Variable life is permanent insurance, which allows you to invest a portion of your premium in various subaccounts. The policy owner can choose among several subaccounts, each of which has its own investment strategy, and invests the money in stocks, bonds, money market, or other securities in order to build your policy's cash value. However, because the performance of these investments is not guaranteed, there is an element of risk.
Variable Universal Life Coverage Back to list
Variable Universal Life (often shortened to VUL) is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in volatile investments similar to mutual funds. The 'universal' component in the name is a bit of a misnomer that is used to refer to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy. Variable life insurance policies are valuable because they provide permanent protection and may accumulate cash values; however, these policies carry more risk than traditional whole life insurance policies. Individuals considering purchasing a variable life insurance policy should be experienced investors in equity investments.
Second-to-Die Life Insurance Back to list
A second-to-die life insurance policy insures the lives of two people, typically a husband and a wife. The death benefit is not paid to the beneficiary until the death of the second insured. These life insurance policies are generally available as either whole life insurance or universal life insurance policies, and premiums are often less expensive than buying two life insurance policies.
Second-to-die life insurance policies are effective tools often used by wealthy individuals in estate planning. They can be used to pay for estate taxes. By removing the proceeds of a life insurance policy through the use of gifting policies and third party ownership, a life insurance policy can be used to pay for estate taxes. Careful planning by your tax and legal counsel, coupled with a properly structured second-to-die life insurance policy, can help you preserve your net worth.
Limited-pay Back to list
Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.
Business Planning
Designing and implementing the right Business Planning Strategy can help to free up your worries so you can concentrate on running your business and pursuing your goals and dreams. Whether you are looking for insurance, retirement products or investments your decisions can be beneficial to those you depend on, like rewarding your employees and top executives with benefits and bonuses. And, part of what you'll need to manage is the unexpected — like maintaining business continuity during a disability of yourself or one of your employees, or upon the death of a business partner.
Considerations Include:
Executive Benefits
Executive bonus plans can help employers reward select employees, supplement existing benefits plans, stimulate better employee performance, provide a cost-effective benefit replacement for group term life insurance and minimize reporting requirements.
Under an Executive Bonus Plan (also known as a Section 162 Plan), the employer provides a bonus to select employees in the form of cash or in the form of premiums on life insurance or disability policies on the employees' lives. The executive receives the bonus as taxable income; and the employer is provided with a business tax deduction assuming the bonus qualifies as reasonable compensation to the executive.
Executive Bonus is different from key person insurance because it is employer-financed personal life or disability insurance intended to benefit the selected employees, where as key person insurance is intended to protect the business from losses resulting from the employee's death.
By providing a bonus to select employees, an employer is able to provide additional compensation to certain employees and deduct the premiums for a policy on the employee's life or disability insurance (provided it qualifies as reasonable compensation).
Key Person Insurance
As a business owner you cannot do it all. You rely on a few key employees who help make day-to-day operational decisions, who play a key role in obtaining credit with a financial institution or who oversee all sales activities. Losing one of these key employees could set you back.
Key person life insurance provides life insurance protection on the life of a key employee and is purchased to help reimburse the business owner from economic loss caused by the death of the employee.
Buy-Sell Agreements
Buy-Sell agreements and their funding are critical to a smooth transition of business ownership from one party to another. As a business owner, a buy-sell agreement provides a ready market for what is typically an asset without a public market. Without a buy-sell agreement, a deceased business owner's estate may be stuck with an illiquid business interest that may not be easily sold. A buy-sell agreement, properly funded with life insurance, is an ideal alternative to insure the business owner's illiquid business interest is converted to cash for the family.
Split Dollar Arrangements
Split dollar arrangements let a company provide significant life insurance and retirement benefits to key employees with funds that the company can eventually recover.
Businesses often use non-qualified retirement plans as special rewards for top executives. Split dollar arrangements are one example: they let business owners fund the purchase of life insurance on an executive using corporate dollars that can later be recovered. Split dollar arrangements are an excellent way to provide benefits to non-shareholder executives or even the business owner.