Thursday, February 27, 2014

Which is Better For You: Term or Permanent Life Insurance?

Have you been considering life insurance but are overwhelmed with all of the different options? What is the difference between term and permanent life insurance? Do you need either of these now, or should you wait until you are older before getting a policy? Read this article about the pros and cons of term and permanent life insurance.

Permanent life insurance is one of the most confusing topics in personal finance. This makes a discussion of whether to buy term or permanent insurance a daunting task.
Let’s first define some terms:
Term insurance provides a level premium and a level-death benefit protection for a stated period of time, such as 10 or 20 years.
Permanent insurance typically provides both a death benefit and cash savings. There are different types of permanent insurance, including whole life, universal life, index-universal life, variable life and variable-universal life.
The initial premium for permanent insurance is higher than for term insurance with a comparable death benefit. A portion of the premium may be invested, eventually providing a buildup of cash value.
Pros and cons of term insurance. Term insurance can be a good fit for younger individuals and families, who need protection against the loss of income of a primary earner for a stated period of time, at an affordable cost. In most cases, a medical examination will be required.
Term insurance does not build cash value, so at the end of the term, the policy will have no value.
An additional benefit of term insurance is that it is a simple product, so comparison shopping is quite easy. The market for selling term insurance is competitive, presenting good values for consumers.
Brant Steck, director of client relationships for Brokerage Unlimited, Inc., in St. Louis, recommends buying a level term insurance policy and matching the length of the level premium period to the amount of time the need exists. At the end of the level-premium period, the policy should not automatically cancel (unless instructed by the policy owner), but the premium will likely increase quite markedly if you elect to continue the coverage. You should consider a term policy with a conversion privilege, which will permit you to convert the policy into permanent insurance, without proof of insurability, and lock in the rate class you had at the inception of the policy.
For many consumers, the only way they can afford the coverage they need, for the time when they need it, is through term life insurance. For those people, it’s the insurance product of choice. Jeremy Ragsdale, vice president, Life Insurance and Annuities at TIAA-CREF, notes that more than 85 percent of the policies sold by TIAA-CREF are term policies, although they represent a much lower percentage of total premiums.
Pros and cons of permanent insurance. Permanent insurance may provide protection for your entire life. If a guaranteed level premium is important to you, make sure your policy provides for one.
Permanent insurance accumulates a cash value, and the policy owner may be able to borrow against it tax-free or use it for retirement or other goals (like education). Premiums are initially higher than for term coverage.
Who should consider permanent insurance? According to independent insurance consultant Glenn Daily, permanent insurance can make sense for consumers who need to create liquidity in order to pay projected federal estate taxes. He also recommends permanent insurance to those concerned about asset protection, where state law provides that the cash value and death benefits of insurance policies are not subject to claims by creditors.
Permanent life insurance also has an element of forced savings that can be attractive. In this environment of low interest rates, Daily notes that some policies have been paying a tax-deferred return of 4 percent or more. Of course, mortality and administrative costs of the policy will still be deducted.
Steck notes another situation in which permanent insurance may be the preferable option. If you are a retired couple concerned about spending money because it will deplete the inheritance you wish to leave for your children, Steck recommends designating a small portion of available funds and buying a survivorship-permanent policy. This policy should have a no-lapse guarantee. Steck believes this kind of policy will assure the couple that their children will receive the intended inheritance, while allowing them to enjoy their retirement.
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Wednesday, February 5, 2014

The Facts About Life Insurance

For some people, obtaining life insurance is something that you do when you are older, when your children are grown. The thought of doing something so distinctly responsible can seem daunting for those who never think of the future. As we all know, life has a way of passing us by quickly, and when we most need something like life insurance it is too late.
Starting a life insurance policy should not be a scary task, as long as you go into it with a clear understanding of what kind of coverage that you need. Making sure that your loved ones are taken care of when you are gone is not the only reason for life insurance. It should be considered an investment, just like opening a 401k or buying a second home. The following article is helpful as it breaks down the different aspects of life insurance and what to consider before obtaining it.

Let's face the facts: life insurance does not get a lot of attention in our daily lives. It requires us to address a subject that many prefer to avoid -- our own mortality. Yet, for most people life insurance is important for building a sound financial plan, and it's something that shouldn't be ignored. September is Life Insurance Awareness Month, so my musings this month are devoted to this topic.
I've seen certain themes emerge based on countless discussions with my clients about life insurance. Some of them get tripped-up on which type of policy, term or cash value, is most appropriate for their situation. Others may have misconceptions about how much life insurance coverage is needed.
Invariably, over the course of any discussion, a light bulb goes on when clients are asked a very basic question: "How long would your family be secure financially if you were suddenly gone?"
Life insurance is often a taboo topic, even within families. A recent ING U.S. study found that close to half (45 percent) of married respondents have never or rarely talked about what would happen to the family finances if a spouse were to pass on. While this can be a sensitive issue, even between couples, there needs to be open communication. I am fortunate to be in a position to help facilitate these critical dialogues.
For those interested in securing life insurance coverage but having trouble getting started, here are some of the common questions I get from my clients, along with a few thoughts that may help guide you during the process.

1. How do I calculate how much I need?
 While seven to ten times your annual salary is a generally accepted rule-of-thumb for coverage, it's best to conduct your own personal needs analysis. Countless online calculators may give you a rough sense of your needs. Yet, I encourage you to dig deeper and consider the following variables, which, when added together, will get you closer to your real number. Consider final expenses, which are one-time costs such as for the funeral and burial. In addition, factor in outstanding debts that need to be paid off and readjustment expenses that arise during transition, such as shifts in child care, housing or medical insurance. Parents need to take into account dependency expenses to cover a family until all children are self-supporting, as well as education costs to help with college tuition for each child. Don't forget to properly insure a stay-at-home parent or someone working part-time; their unpaid contributions to the household could result in significant additional expenses if they were to die. A final variable to take into account is providing lifetime income to the surviving spouse.

2. Who else do I need to involve in this decision?
 Life insurance is not a stand-alone decision. It is a selfless act that protects the future of your family, yet can bring up difficult emotions. Anyone affected by the policy should be involved in conversations and understand the rationale behind the amount of coverage. It is often helpful to have the conversation after doing some homework about coverage options first -- whether that work is done through the workplace, a financial professional or independently. Your spouse or partner should be involved and additional family members may also need to be involved, particularly adult children or parents.
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