|
How
much life insurance should an individual own?
What
about purchasing life insurance on a spouse and on children?
Should
term insuranceor cash value life insurance be purchased?
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?
Credit
life insurance is frequently recommended in conjunction with the taking
out of an installment loan when purchasing expensive appliances or a new
car, or for debt consolidation. Is credit life insurance a good buy?
What
is the tax treatment of life insurance cash values, dividends, and death
benefits?
What
is participating whole life insurance?
I
have heard a lot about universal life insurance. How is this type of 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 an individual own?
Rough "rules of thumb" suggest an amount of life insurance equal to 6
to 8 times annual earnings. However, many factors should be taken into
account in determining a more precise estimate of the amount of life insurance
needed. Important factors include income sources (and amounts) other than
salary/earnings, whether or not the individual is married and, if so,
what is the spouse's earning capacity, the number of individuals who are
financially dependent on the insured, 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. It is recommended that a person's
insurance adviser be contacted for a precise calculation of how much life
insurance is needed.
What
about purchasing life insurance on a spouse and on children?
In
certain circumstances, it may be advisable to purchase life insurance
on children; generally, however, such purchases should not be made in
lieu of purchasing appropriate amounts of life insurance on the family
breadwinner(s). It is of utmost importance that the income earning capacity
of the primary breadwinner be fully protected, if possible, through the
purchase of the required amount of life insurance before contemplating
the purchase of life insurance on children or on a non-wage earning spouse.
In a dual-earning household, it is important to protect the income earning
capacity of both spouses. Life insurance on a non-wage earning spouse
is often recommended for the purpose of paying for household services
lost at this individual's death.
Should
term insurance or cash value life insurance be purchased?
Although a difficult question--one whose answer will vary depending on
circumstances--several principles should be followed in addressing this
issue. It must first be recognized that in any life insurance purchasing
decision, there are at least two basic questions that must be answered:
(a) "How much life insurance should I buy?" and (b) "What type of life
insurance policy should I buy?" The question contained in (a) involves
an "insurance" decision and the question contained in (b) requires a "financial"
decision. The "insurance" question should always be resolved first. For
example, the amount of life insurance that you need may be so large that
the only way in which this needed amount of insurance can be afforded
is through the purchase of term insurance with its lower premium. 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, it is then appropriate to consider the "financial" decision--which
type of policy to buy. Important factors affecting the "financial" decision
include your income tax bracket, whether the need for life insurance is
short-term or long-term (e.g., 20 years or longer), and the rate of return
on alternative investments possessing similar risk.
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 are generally available
to cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30
years. Although the face amount decreases over time, 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 level 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; the purchase of a new mortgage protection term insurance policy is
usually not required by the lender. 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 the insured's
death.
Credit
life insurance is frequently recommended in conjunction with the taking
out of an installment loan when purchasing 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, the
purchase of credit life insurance is normally not advisable due to its
relatively high cost.
What
is the tax treatment of 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 currently to the policyowner. Dividends generally
are considered to be a "return of premium" and are not taxable to the
policyowner. Although in the typical case, life insurance death proceeds
will not be subject to income taxation, these proceeds may be subject
to federal estate taxation. If the insured has any elements of ownership
in the policy at the time of his/her death, the proceeds are includible
in the insured's 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. You should contact your tax adviser regarding
questions concerning the possible income, estate and gift tax consequences
surrounding any life insurance that you currently own or are contemplating
purchasing.
What
is participating whole life insurance?
Participating
(par) whole life insurance has been marketed for many years in the U.S.
The participating feature allows for the payment of dividends to policyowners
when actual experience justifies such payment. Substantial amounts of
participating whole life insurance is still sold today, principally by
the large mutuals.
I
have heard a lot about universal life insurance. How is this type of 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. However, there are several important differences
between these two products. While WL policies contemplate the payment
of fixed, level premiums and provide for level death benefits, UL policies
offer adjustable death benefits and flexible premiums that can be varied
according to changing circumstances. This is a rather simplistic comparison,
however, since policyowner dividends under participating WL insurance
contracts can be used to offset a portion of the premium payment otherwise
required; in addition, dividends can be used to increase the policy's
death benefit. Because of these and other possible uses of policyowner
dividends, an argument can be made that participating WL insurance possesses
some (but not all) of the same flexibility/adjustability that is possessed
by UL policies. Another important difference between WL and UL relates
to product transparency. In UL policies, it is easy for policyowners 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.
Which
type of cash value life insurance policy, universal life (UL) or participating
whole life (WL) , is a "better buy" financially?
There
is no simple answer to this question. 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 offered by the insurer that enjoys
the best future experience as it relates to 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 life insurance product being
offered is UL or WL. Thus, it will be necessary for prospective insureds
and their advisers to carefully examine the financial aspects of each
product under consideration, irrespective of whether the product is UL
or WL.
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 an underlying pool of
assets. Policyowners typically can choose among several investment options
as to where the assets backing the policy's cash values will be invested.
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. Although the policy's
death benefit is directly related to the actual performance of the invested
assets, 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 policyowner
assumes all of the investment risk, there is no similar "floor" below
which cash values may fall. In recent years variable universal life (VUL)
insurance has 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.
|
