Important factors to consider before choosing a life insurance product.

     The purpose of insurance is to provide financial security and stability in the event of a loss. If no one will suffer a financial loss if you were to die prematurely, then insurance is not necessary. In terms of life insurance, if the breadwinner dies prematurely, then the surviving beneficiaries should be financially stable due to the face amount/death benefit of the life insurance policy. The life insurance companies are betting you live while you are betting you will die. Therefore, if you do not die while you have life insurance, then the insurance company will have received the payment for the insurance and pay you nothing. Although, if you die while you have life insurance, then you will receive a substantial amount of money (death benefit) disproportionate to what you paid. Also, the death benefit received from your life insurance policy is not taxable which greatly increases the perceived benefit from having a life insurance policy.

     Some people probably don't need life insurance because they have suitable assets in place to provide financial security for their family. Those people have the capability of self-insuring themselves due to those assets. Although, most people are not financially secure. Therefore, those people need protection in place to secure their financial future while at the same time building their assets.

     Life insurance companies are a business that wants to minimize their risk of loosing money. Therefore, they may not insure people that have severe medical problems and partake in activities that increase their risk of dying. Such conditions may result in a higher (rated) premium than normal due to the increased risk. Although, once a policy has been approved, the insurance companies are not able to void the insurance contract or increase the insurance premium regardless of an individual's health or activities (Unless the insurance company can provide you misrepresented yourself in the life insurance application during the first two years of coverage). For example: A healthy woman does not want life insurance until she has a child, but during the pregnancy a doctor determines she has a medical condition. That medical condition may now cause her to be uninsurable, eventhough she was insurable before the exam. The preceding example is a reason for anticipating your future needs and a big reason for obtaining an insurance policy prior to someone suffering a financial loss if you were to die prematurely. Another reason is because the cost of insurance increases as you get older.

     The life insurance companies utilize the Medical Information Bureau (http://www.mib.com) as a source for determining medical information about individuals desiring an insurance policy. The MIB is an association of life insurance companies that compiles information about people with serious medical conditions and/or hazardous occupations and hobbies. The information is available for you to view and correct as necessary for a small fee. Although, it can be free if you have received notification of "adverse action" from an insurance company or have been denied coverage due to a medical condition.

     The simplest form of insurance is term. Term insurance has existed for the longest of all insurance policies. It ensures financial stability for beneficiaries in the event the insured dies at the most economical price for a predefined term of coverage, say 5, 10, 20, or 30 years, with either a level, increasing, or decreasing premium. The level premium is the most common and is useful for keeping the rates constant for the duration of the coverage with the death benefit remaining the same. An increasing premium allows for a lower premium in the beginning assuming you can afford the increasing cost of insurance later in life as your income increases. The decreasing premium provides a decreasing amount of coverage, but the premiums remain the same. You thus pay the same premium even though the amount of coverage decreases. Decreasing term is typically used for providing mortgage protection insurance (MPI) for those with a mortgage. The amount of the loan principal decreases, therefore, the necessary insurance coverage is also decreased. A concern with MPI is that a typical mortgage is 30-years which requires a 30-year decreasing term policy, but the typical homeowner will not live in the house for that long. The result is that the homeowner pays a higher premium for a term which will never be achieved. Also, the owner of the policy does not have control of designating the beneficiary because the beneficiary is the mortgage company and it is irrevocable. Everyone time a new mortgage is obtained, a new policy must be issued and your insurability must be determined. Do not obtain MPI. Instead obtain your own individual term insurance policy that will remain in place even if you move to different homes. If you are married, then ensure coverage is provided for both you and your spouse because even the breadwinner will be impacted if the spouse dies prematurely leaving behind the responsibilities of two people to one person. Be sure to look for a term insurance company who will combine individual policies to save the policy fee expense since most companies require individual policies to be issued which increases the overall life insurance price. If you have a term policy and need more insurance, then a new policy will typically need to be issued. Consider canceling the old policy to obtain a new one for the higher amount that will typically be cheaper than having the two individual policies. Remember, the more policies you have in effect, the higher the costs to you. Consolidate to one policy to save money. WARNING: Never cancel an existing policy until the new policy has been issued. Otherwise, you might find yourself without insurance if the new policy is denied for some reason.

     Whole life insurance products provide a death benefit, along with the capability of accumulating a cash value stored in a general account. The insurance company controls the general account by investing in conservative strategies. The premium paid is applied towards your cash value after deducting the cost of insurance and fees. The cash value allows your money to grow on a tax-deferred basis with the capability of withdrawing the money as a tax-free loan that does not have to be repaid. The result of not repaying a loan is that the loan amount and interest indicated in your contract is deducted from the death benefit. That interest is also accrued constantly until the loan is repaid. If the loan is never repaid, then the insurance company will withdraw the necessary interest payment from the existing cash value.

     Variable life insurance products are similar to whole life products except the cash value resides in a separate account. You control the separate account, not the insurance company. This allows you the opportunity to invest in any strategy you wish from conservative to aggressive including mutual funds.

     The cash value benefits of life insurance are legal and are dictated by Internal Revenue Service tax codes. It is one of the last tax shelters available. IRC 7702 defines the use of life insurance policies. IRC 72, 72E allows for tax-deferred growth within the cash value without a 1099 dividend tax form each year. IRC 101A allows for the death benefit to be paid minus any outstanding loans and interest due.

     Be aware the face value of life insurance policies is included as part of your estate. If you exceed a certain amount of assets, determined by the IRS, within your estate, you will have to pay an estate tax on any amount over the estate limit (consult a tax professional for further details). A way around the tax law is to transfer ownership of the insurance policy to someone else, be it a beneficiary or a child. If you happen to have funds that can be liquidated, you can use the money to purchase a single premium paid up life insurance policy for your beneficiaries. The cash value benefits can then be used by your beneficiaries along with them having a new policy that takes care of their insurance needs.

     Individuals who have been deemed an insurable risk or want a more economical means of obtaining life insurance should consider a group life insurance policy. Your insurable risk factors will not be considered because the risk is spread among the entire group, not the individual. Group insurance policies are annual renewable term typically offered through employers, financial institutions, or many organizations you might already be involved. The group insurance policy rates are based on the risk for the entire group, not the individuals in the group. The problem with the group insurance policy is that it is only valid for the duration of your involvement with the group and that you may not be able to obtain the amount of insurance you desire. Group policies typically provide coverage equal to one or two and maybe three times your salary. Although, you may be able to request more insurance than offered to the typical individual in the group, but a death benefit greater than the group policy may require a medical or background check which would disclose your insurable risk. Once you leave the group, you are entitled to convert to a whole life insurance policy for only the same death benefit without showing proof of insurability. The premiums will be higher and based upon your current age. This type of situation indicates a perception problem with most people believing their insurance needs will always be covered through a group policy. Such is not the case when a larger amount of coverage is required and participation in the group no longer exists. Therefore, considerations should be made to include an individual insurance policy.

     The vast majority of the population is better suited for not having a cash value life insurance policy. Instead, they should buy term and invest the difference. The reason is because term insurance is much less expensive and can provide much more coverage than a cash value policy and the difference between the two costs of insurance can be invested in the stock market which will most likely achieve a greater return than what is offered by the cash value policy. Granted the cash value policy allows for a tax-free loan that doesn't need to be repaid. Although, the contracts for the policy can indicate you are not able to access the cash value for two or three years, you may have to wait six months for the opportunity for that loan to occur, you have to pay interest, and you can't take a loan for the full amount of the cash value. All this for what you thought was your money. Also, many policies indicate upon death the beneficiary will receive the face amount or the cash value, but not both. Another concern with many cash value policies is that the cost of insurance will increase while the premium will remain the same. The result can be the insurance company will have to take a loan from the cash value to pay for the insurance. The result can be the cash value is liquidated as you get older and the insurance company requires you to pay a very large yearly premium to keep the policy active. Doesn't sound very good now does it? Buying term and investing the difference is a principle that has been recommended by consumer organizations for over 50 years. It provides a death benefit for the duration of the policy with the opportunity to invest the remainder in a mutual fund offering you complete control and access to the funds. The only way you can give up some of your money (assuming you didn't make a bad investment) is through taxes when the funds are withdrawn. Although, you can avoid the tax concern when invested in a Roth IRA if you don't intend to make use of the money prior to 59 1/2. The choice is yours as to which direction to proceed. The idea is for the value of your investments to build to such a level as to exceed the death benefit in a couple decades thus resulting in the capability of self-insuring yourself. A small portion of the population who are very rich can really make good use of the cash value policies for the tax benefits, but the vast majority of the middle class are not well suited for those types of policies. Be sure to consider the tax consequences of canceling your cash value insurance policy. If the amount of total premiums paid to the policy is equal to or greater than the cash value surrendered, then no taxes should be paid. Otherwise, taxes will be paid on the difference. Also, if you intend to replace the cash value policy with a term policy, never cancel the existing cash value policy until the new term policy has been issued. Otherwise, you might find yourself uninsured.


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