Broker Check

Life Insurance

What type of insurance and how much coverage you have is an important aspect of a sound financial strategy. As you consider the purchase of a life insurance policy there are three important questions to answer.

  • How much life insurance should be purchased?
  • How long do you want the policy to stay in force?
  • Which type of policy will best suit your needs?

In order to arrive at an adequate amount of life insurance, consider:

  • Lost income
  • Debt
  • College funding
  • Retirement funding
  • Help for Special Needs family members
  • Legacy planning
  • Estate planning situations — life insurance can be a valuable tool to help provide estate liquidity to pay for final expenses and possible estate taxation
  • Business planning — to fund buy/sell agreements between partners or shareholders. It can also help deal with the financial ramifications of the death of a key employee

How long you will need your life insurance to stay in force and which type of policy is right for you can be answered with an understanding of the needs and personal situation of the applicant

Term Life Insurance versus Permanent Life Insurance

Term life insurance can take care of short-term needs, generally 5 to 20 years. At the time of application, you choose the number of years you need the premium amount to remain constant. After that time elapses, the premiums will increase substantially. If you miss a premium payment, the insurance lapses and unless you take steps to pay the premium within a set period of time, the contract terminates. There is no cash value to this type of contract.

Permanent insurance can take care of longer term needs. If your need for life insurance has no foreseeable end, then a permanent, flexible premium contract may better serve your needs. Flexible premium contracts are more expensive than term contracts but the excess premium paid earns interest and accumulates cash value, thereby providing a pool of money to cover a missed premium. The interest rates on these contracts vary but they have a guaranteed minimum rate of return.

Other types of permanent life insurance include Whole Life and Survivorship Life insurances. Survivorship Life Insurance contracts insure two people, paying a benefit when the second insured dies. Whole Life Insurance is a life insurance policy that remains in force for the insured's whole life and requires premiums to be paid every year or the contract will lapse.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.