By Benjamin Hovland, email@example.com
Insurance protection is the foundation of a holistic financial plan. Although it can be uncomfortable to approach the topic regarding your own demise, it is a necessary tool to protect your loved ones, build wealth and leave a legacy. Life insurance provides reassurance that your family can continue to live the lifestyle you have provided and envisioned for them. There remains a great deal of confusion surrounding life insurance which can cause resistance to explore this type of safeguard. You can simplify the decision making process when you are armed with the necessary information on each insurance option, each having its own benefits. One can choose to insure through temporary (term) insurance and/or permanent insurance which can be whole life, universal life, variable universal life and index universal life insurance.
Term insurance allows the insured to select the length of coverage from 10, 20, up to 30 years. One of the benefits of term insurance is the ability to have a large death benefit with a lower premium relative to permanent insurance. Important features of a term policy are that it is non-cancelable, renewable and convertible. Non-cancelable insurance means the insurance carrier cannot cancel the policy, increase premiums or reduce the death benefit as long as the insured pays the premiums. Renewable insurance allows the insured to extend the coverage on an annual basis after the term expires without having to prove insurability. One of the more important features of this type of policy is the ability to convert it into a permanent policy without having to prove insurability. This allows the insured to purchase a term policy while in good health, lock-in their underwriting class and later covert into a permanent policy while maintaining their underwriting class even if their health has change or is now uninsurable. The premiums, however, will be based off your life expectancy in the year of the conversion. For these reasons, I generally recommend term insurance for families with children in their home to allow for minimal life insurance premiums, so that remaining cash flow can be allocated toward their retirement and education goals.
Permanent life insurance is more complex than term insurance due to the cash value that builds within the insurance policy. I generally recommend permanent policies for clients who have fully funded their retirement accounts, are on track to meet their education funding goal, and have the cash flow to continue to fund their policy. For these policies to perform at their best, you generally want to fund at the maximum premium allowed, which allows for more of the premium to be allocated toward the cash value.
Whole life insurance is guaranteed to remain in force for the insured’s entire lifetime assuming premiums are paid. Whole life policies generally have a maturity date at age 100 of the insured. These policies build guaranteed cash value.
Universal life (UL) is a cash value policy that allows for the excess premiums above the current cost of insurance to be credited to the cash value. These policies build cash value with a fixed rate of return.
Variable universal life (VUL) is a cash value policy that allows for the excess premiums above the current cost of insurance to be allocated to the cash value, which is invested into separate accounts (similar to mutual funds). Separate accounts have conservative (bonds) to aggressive (equity) options so returns are not guaranteed since they are determined by market performance.
Index universal life (IUL) is a cash value policy that allows for the excess premiums above the current cost of insurance to be allocated into a fixed account or an equity index. Examples of the equity indices are S&P 500, NASDAQ and EAFA.
All of these options can provide benefit for individuals in different life circumstances. Your financial professional should guide you to understand what type of life insurance is best in your overall financial plan I believe holistic financial planning is extremely important so the insured can understand how it impacts their overall goals. I am always available to give feedback on your current or desired benefits at an initial no cost consultation.
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