Life insurance comes in various forms. It is a promise made by an insurance company to pay a death benefit to a beneficiary on the death of the insured, in exchange for a series of premium payments from a policyholder. Typically, the death benefit will be many times larger than any single premium.
What are the benefits of life insurance?
In the most general terms, owning life insurance guarantees that, in the event of the insured's death, a death benefit will be paid to the insured’s beneficiaries. In addition, permanent insurance provides a cash value component from which cash can be accessed for various financial needs such as college tuition, a down payment on a home, business opportunities and more.
Types of life insurance
- Term life insurance typically has the lowest out-of-pocket cost of all life insurance policies. It does not provide permanent coverage, but instead provides a death benefit for a specified period of time (the "term").
- Whole life insurance is designed for permanent coverage on the life of the insured. With a whole life insurance policy, the premium is guaranteed to never increase and the death benefit is guaranteed for life. It also has a cash value component that builds guaranteed cash value that can be accessed for various needs. Whole life insurance may pay dividends to policyholders. Dividends can be used to purchase additional coverage, reduce the premium, pay back loans or may be received in cash.
- Universal life insurance (UL) can provide permanent coverage for the life of the insured, and also gives the policyholder a little more flexibility with respect to the timing and amount of premium payments. The cost of insurance is deducted from the policy’s cash value. UL comes in two different forms: Current Assumption UL and Death Benefit Guarantee UL.
Current assumption UL bases policy performance on interest rates available in the financial markets and on a company’s current mortality experience. If interest rates and mortality perform according to expectations, the premiums needed to keep the policy in force should remain the same. If interest rates fall, or mortality gets worse, higher premiums may be required to keep the policy in force. On the other hand, if rates rise or mortality improves, future premiums may be reduced.
Variable universal life (VUL) is a variation of a current assumption UL policy. It offers a death benefit and cash accumulation. The primary difference between a UL policy and VUL policy is that the cash value in a VUL policy is allocated to underlying portfolios of securities in a separate account based on the policyholder's selection. The cash value is not guaranteed and fluctuates based on the market performance of the underlying portfolios selected.
Everyone needs life insurance, if only to pay final expenses. People with children, or other family members that are financially dependent on them, may need more life insurance than those with other needs or goals. Perhaps the best way to determine if you need life insurance is to ask yourself: "Financially, would my family be able to live tomorrow as they do today, if I were no longer around?" If your answer is no, then you probably need life insurance.
Your questions answered …
Q: If I take a loan from my whole life or universal life insurance policy, will I have to pay it back?
A: Not necessarily. While outstanding loans will reduce the death benefit and may slow the growth of cash value in your policy, there is no requirement that you repay the loan. Before you take a loan, you should be aware of what will happen to your policy if you do so, as some permanent policies are more sensitive to loans than others.
Q: Do I have to pay taxes on the money I take out of my whole life or universal life insurance policy?
A: Generally, you may withdraw cash from your policy, up to the amount of premium you paid, without incurring any taxes under current tax law. However, any withdrawals over your premium payments would be taxable to you as income.
You may take loans from your policy without being subject to taxes as long as your policy remains in force. Any outstanding loans will be deducted from the death benefit of the policy at the time of a claim.
Q: What type of life insurance should I purchase?
A: It depends on your unique needs and financial situation. Only someone familiar with your needs, goals, financial situation and your hopes for the future will be able to discuss this question fully with you. We are happy to sit down with you and discuss your particular situation.
Q: If I buy permanent life insurance, will I have to pay premiums for the rest of my life?
A: Maybe. The guarantees of whole life insurance require that a premium be paid, but that doesn't mean you have to pay it out-of-pocket. Although dividends are not guaranteed, many policyholders use dividends they may receive to pay some or all of their premiums, eliminating out-of-pocket costs.
Universal life insurance only requires that there be enough cash surrender value in the policy to pay any policy charges. In practice, this means that when you've accumulated enough cash value in the policy, you may be able to suspend premium payments. However, not paying premiums will ultimately reduce cash value.
Q: Will I need life insurance after my children are grown?
A: Certainly. Life insurance provides a death benefit that can provide a legacy for your family or beneficiaries. Plus, the death benefit may be an effective way to offset estate taxes or may be used for business succession planning. You may also want to use the cash value you've accumulated in your policy to provide cash flow to you and/or your spouse during retirement.