Life Insurance - Permanent and Term
Life insurance is a critical component of sound financial planning, and yet life insurance is one of the hardest financial products to understand. Some financial planners advocate permanent life insurance policies with cash value components. Others recommend you buy term life insurance for the cheaper premium and invest the differences.
The underlying life insurance costs are based on actuarial tables that project your life expectancy. High risk individuals, such as those who smoke, are overweight, or have a dangerous occupation or hobby (for example, flying), pay more. Permanent life insurance premiums are comprised of current cost of insurance fees as well as additional mandatory premium to build up what’s called your cash value or accumulation value.
When choosing the right type of life insurance for your unique personal situation, the focus of your attention shouldn’t be only on the difference in premiums between temporary and permanent life insurance. The type of life policy and the amount of life insurance you need depend on factors such as your income, how many dependents you have, your debts, your lifestyle, etc. The general guideline is between five and ten times your annual salary.
There are so many different kinds of life insurance, and so many companies that offer these policies. In order to keep objectivity, it’s recommended to use an independent financial professional who will research the various policies available to you and recommend the one that suits your needs. In general, all types of life policies fall into two categories: temporary and permanent.
Term Life Insurance: Term life offers temporary insurance coverage with no "cash value," which means you buy only the death benefit — no savings accumulate in the policy. Term policies are issued for a period of years, after which the insurance coverage can be renewed at significantly higher rate. The older you get the more expensive the premium becomes.
Permanent Life Insurance: In addition to death benefit, permanent life policies can build up a cash reserve. Some of these types of policies may be structured to offer some other features and forms of coverage (e.g., alternatives to disability and long-term care insurance). Premiums of permanent type of policies may remain the same or in the case of more flexible types of permanent life insurance, premiums can be decreased or increased throughout the insured’s life.
It’s also important to distinguish between fixed and variable life polices. In the case of variable life insurance, you assume the investment risks. When the investment funds perform poorly, less money is available to pay the premiums, meaning that you may have to pay more than you can afford to keep the policy in force. Poor fund performance also means that the cash and/or death benefit may decline.
Certain types of distributions from life insurance may be tax free. * In planning your estate be aware that life insurance policy can be structured to provide a tax-free lump sum payout to the beneficiary. *
Evaluating which type of life insurance to purchase can be difficult. There are several types — and it pays to understand the differences.
Please feel free to contact me to find out what type of life insurance is the appropriate for your unique personal situation.
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*It is not the intent of Dee Turkalj to provide tax advice. Gold Coast Securities, Inc, its affiliates and agents are not in the business of providing tax advice. Please contact your tax advisor with all questions regarding how anything discussed above may affect your tax situation.