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Life Insurance

Life insurance can provide an excellent opportunity for you to meet many of your goals while still protecting the financial stability of your loved ones. All life insurance policies have some things in common-you make payments, called premiums, to the insurance company. When you die, the insurance company pays a death benefit to your beneficiaries. Often, this death benefit is received income tax-free.

Permanent life insurance, however, can also provide a living benefit. When you pay your premium, part of it goes into a cash reserve and accumulates tax-deferred. You can generally access this cash reserve at any time, for any purpose. It can be used for things like education expenses, retirement income, and many other needs. It also remains in force during the insured's entire lifetime, provided premiums are paid as specified in the policy.

Permanent Insurance

Permanent life insurance comes in different forms to meet a variety of needs.

  • Whole Life Insurance usually has premiums that remain fixed for the life of the policy. Whole life insurance also builds a savings element since part of the premium is used to accumulate a guaranteed cash value. Dividends, which are not guaranteed, may also increase policy cash value.
  • Universal Life Insurance is a variation of permanent life insurance that offers flexible premiums and the choice of either a level or increasing death benefit. As in Whole Life, cash value builds within the policy. While there are guarantees built into the policy, the cash value is based on the performance of the company and on how much premium is paid.
  • Variable Whole Life Insurance is a form of permanent life insurance under which the death benefit and the cash value of the policy fluctuate according to the investment performance of the variable investment options selected by the policy owner. With variable life insurance, you get to decide where to invest your money among the multiple investment accounts. Many variable life insurance policies guarantee that the death benefit will not fall below a specified minimum if the required premiums are paid, but a minimum cash value is not usually guaranteed.
  • Variable Universal Life Insurance is a form of variable life insurance that combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance. It is important to note that in both variable whole life and variable universal life, the insured bears the investment risk within the policy.

Living Benefits

When you hear people talking about the "living benefits" of life insurance, they are often referring to one's ability to access the cash value. Frequently the "living benefits" of the death benefit go unnoticed. Let's take a look at some:

  • Spend down your assets - A common concern for many people during their retirement years is conserving their assets and passing them along to their spouse or children. Owning permanent life insurance, however, allows you to have more flexibility and freedom with your spending habits. You can increase your retirement income and reduce the fear of dying without leaving behind sufficient assets simply by having a death benefit that will replace the assets that you spent. 
  • Give assets to charity - Charitable giving has many tangible and intangible benefits, from income tax savings to feelings of philanthropy. An often-overlooked benefit is the potential to increase your income through a charitable giving program. If you have assets, like stocks or real estate, that have appreciated substantially, you risk paying taxes on those capital gains if you need to sell them to begin drawing an income. A charitable remainder trust, along with permanent life insurance, can provide the opportunity to increase your income, avoid capital gains taxes, provide a significant benefit for the charity of your choice, and pass along substantial assets to your heirs.
  • Maximize your pension benefits - Those of us who will receive a monthly pension from our employers will have to make a very important, and often irrevocable, decision before retiring - which option will you choose for a monthly income amount. Those options determine how much your spouse would receive if you were to die. Often people choose to accept a lower monthly amount in order to continue providing a benefit to a surviving spouse. By owning a permanent life insurance policy, you may have the flexibility to choose a higher monthly retirement income because the insurance will provide needed benefits to your survivors.


The primary purpose of a life insurance policy is to provide an amount of money to a beneficiary when s/he needs it most - at the death of the insured person. The ability to name a beneficiary, in fact, is one of the most important responsibilities that the policy owner assumes.

For many people, the decision is an easy one. Often, for young working couples, the logical choice is one's spouse or partner. Many parents, however, might be tempted to name their children as beneficiaries. This could be a drastic mistake, especially if the children are minors.

 In the eyes of an insurance company and of a court, a minor does not possess the legal capacity to accept life insurance proceeds and provide a valid receipt for them. In many cases, a guardian will need to be appointed to manage the funds until the child reaches the age of majority (18 or 21), at which point the funds will be released. This process can be costly and time consuming.

Consider the following example. After he graduated college, Jim took a job with a large bank as a teller. He has been with the bank for 20 years and, when he initially enrolled in his employer's group life insurance program, he was single and had no children. His logical choice for beneficiary then was his mother, with whom he lived and helped support. Today he is married, has three children, and his mother has since passed away. Jim, however, has not yet changed the beneficiary designation on his group life insurance policy. What would happen if he died today?

One thing is certain - by not keeping his beneficiary designation up-to-date, he has made settling his estate and filing a claim much more cumbersome for his family. Here are a few instances when you might consider changing the beneficiary designations on your life insurance policies:

  • When you get married 
  • When you get divorced
  • When you have/adopt children
  • When a spouse or loved one dies

Employer-Sponsored Insurance

The Advantages 
Most employers, even the smallest ones, offer their employees some form of life insurance benefit. For some companies, the benefit is a flat amount ($50,000, for example); for others, the benefit is a factor of the employee's salary (like 2 times annual salary). In either instance, if your employer offers you a life insurance policy through the company, you'll most often find that this insurance is a type called Group Term Insurance (Group Term). Group Term gets its name from the fact that coverage needs to be offered to a "group" of employees (often a minimum of 10). It offers a number of advantages to the employee, but also has a number of disadvantages.

For many people, a big factor in purchasing life insurance is the cost of the annual premium. If you did a very quick comparison of Group Term and many other types of life insurance, especially individual whole life insurance, it might appear that the Group Term is much less expensive. For a young employee, the initial yearly cost of Group Term might be pennies on the dollar when compared to whole life insurance. This is because the Group Term offers pure insurance protection only, and no potential to build any cash value. We'll see in a moment why this feature might make Group Term, in the long run, much more expensive.

Another advantage of Group Term is that it is typically written on a non-medical basis. That is, the employee does not have to take a medical exam and provide "evidence of insurability" - coverage is typically guaranteed. In many instances one's employer will cover at least a portion of the cost of the insurance.

Finally, when you retire, your plan might offer you the opportunity to convert your Group Term to a whole life or universal life policy without any evidence of insurability.

The Disadvantages 
The first disadvantage can be found in the name - "term" insurance. That is, it does not last forever. If you leave your job, for any reason, you will lose it. Sometimes you can convert the term insurance into whole life or universal life, but you begin paying premiums based upon your age at the time of conversion. Also, because this conversion privilege is often guaranteed, the rates on these policies tend to be higher than they might be if you had gone through the normal underwriting procedure.

A second disadvantage, which can lead to term insurance ultimately costing more than whole life insurance, is that the premium typically changes every few years, even if you work with the same employer until you retire. If you do not ultimately convert the policy to a whole life or universal life policy (and then pay very high premiums), you may have nothing left.

 Do I still Need Life Insurance If...

I am Retired 
Many people think that the need and uses for life insurance are only applicable during one's working years. In fact, for many people, the only life insurance they ever have is that which is provided by their employer. Permanent life insurance, however, has a number of features that can provide benefits to you and your family both before and after your retirement. Some of these include: 

  • Premiums that will never increase
  • Cash value that builds on a tax-deferred basis and can be used at any time for any purpose
  • The creation of an instant estate at a time when your loved ones need it most   
  •  Permanent death protection that will enable you to spend down additional assets and maximize your income during your retirement years
  • The ability to maximize your pension benefits

The presence of a guaranteed death benefit from permanent life insurance will give you the ability to increase your retirement income by enabling you to spend principal over your lifetime as well as income from retirement investment assets.

A guaranteed permanent life insurance benefit will provide assurance to a surviving spouse that they will be well provided for. Of course, this is dependent on whether the policy is in effect on the date of the death and the amount of loans against the policy. For example: 

When the principal of retirement assets is being used to increase income during retirement, the guaranteed permanent death benefit of life insurance will provide the legacy to heirs that otherwise would come from income taxable retirement assets. 

Inflation's eroding effect during retirement years can be offset by electing to have the annual dividend on permanent life insurance paid in cash to supplement other retirement income.

My Children Are Grown? 
Providing funds to cover college cost for your children, even if you pass away prematurely, is a goal that many people share. After all, the benefits of a solid education far outweigh any cost for tuition. Many people use life insurance, either in the form of a death benefit, or by drawing upon the cash value, to ensure that this is accomplished.

Unfortunately, many people think that after accomplishing this goal they would be better off if they terminated all or a portion of their life insurance. What they fail to see is many of the other living benefits that a life insurance policy can provide. For instance, a permanent life insurance policy can help you increase the value of the assets that you pass on to your heirs. Through the use of various charitable gifting programs and permanent life insurance, both you and your children can realize increased wealth, and can avoid substantial income and estate tax burdens.

My Spouse Is Working? 
A common approach to determining how much life insurance to purchase involves two basic steps. In the first, you would add together all your cash "needs." This would include things like paying off debt, providing for education funds for your children, and providing income for your surviving spouse and family members. The second step is to subtract from this number all of your resources - things like current assets and your spouse's income. The result would be the amount of life insurance that you "need." While this method has some merit, it has one substantial flaw - this method does not consider your "human life value."

The human life value approach to determining how much life insurance one ought to own involves a capitalization of a wage earner's income based upon factors such as age and earning potential. Essentially, your human life value is the present value of the portion of your potential earnings which (assuming you live long enough to realize those earnings) will be used to provide for others (spouse, children, etc.). This approach is of particular importance to those families that are more dependent upon the earnings of a spouse or parent than on earnings from investment assets.

Let's look at a simple example. Suppose you are 45 years old and currently earn $50,000 per year. If you intend to retire at 65, you would earn approximately $1 million over the next 20 years (assuming no inflation and no pay increases). You could say that your human life value is, therefore, approximately $1 million, and this is the amount of life insurance you should carry to protect those potential earnings.

Company Ratings

Several large U.S. insurance rating services assign letter grades to insurance companies based on the company's financial strength and claims paying ability. These major rating services include A.M. Best; Duff & Phelps; Moody's; Standard & Poor's; and Weiss. You can find their rating information on the Internet or get it from your prospective insurance company.

According to some experts, if you're buying a permanent life policy or an annuity, the company should be rated by at least three of the five rating services and have one of the top three ratings by at least two of those services. This may sound extreme, but keep in mind that life insurance is not primarily an investment — you're buying it for the death benefit — so you want to feel secure that the company will be in business and able to pay a claim when you or your heirs need it.