BJA | Financial Planning

Life Insurance Basics Part I

1. What is the function of life insurance in the overall estate planning picture?
2. What types of insurance are best suited for keeping my legacy alive?
3. Tell me more about a whole life or permanent insurance policies and why it may be the best choice for meeting the "legacy alive" standards.
4. I have heard about numerous other types of insurance such as:

Universal Life Insurance
Variable Universal Life Insurance
Survivorship Life Insurance

1. Question: What is the function of life insurance in the overall estate planning picture?

Life insurance is an essential ingredient in keeping your legacy alive. It provides you with the comfort and the knowledge that you have taken care of the following:

family protection
estate and settlement costs
emergency funding
next generation gifting

Life insurance is sometimes called an instant estate planning tool. The proceeds from a life insurance policy can:

help ensure that your family is not burdened by significant debt by covering the payment of taxes and other transfer taxes
help satisfy other debt including funeral costs and outstanding medical expenses
provide immediate income to loved ones.

2. Question: What types of insurance are best suited for keeping my legacy alive?

In most circumstances, the types of insurance policies that are best suited for keeping one's legacy alive are policies that have the following characteristics:

they are permanent
the premiums for the most part remain fixed
they provide a death benefit and a cash value accumulation opportunity which grows over the years (tax deferred)
they stay in force throughout one's life time
they provide flexibility such as the opportunity for the owner to borrow against it. (Loans and withdrawals will decrease the policy's cash value and death benefit. Loans and withdrawals frompolicies classified as "modified endowment contracts" are subject to current income tax and, if the policy holder is under age 59 1/2, and additional 10% penalty tax.)
at the time of death, the beneficiary collect the proceeds generally free of income tax
they provide the opportunity to transfer ownership of the policy to another person or benificiary. In this instance, the proceeds can go directly to the beneficiary without being subject to probate.

The type of insurance policy that meets all of the above criteria and are usually best suited for keeping one's legacy alive are called Whole Life Insurance Policies.

3. Question: Tell me more about a whole life insurance policy and why it may be one of the best choices in meeting the "legacy alive" standards.

In order to fully understand whole life insurance you need to have an understanding of its opposite: term insurance. You will hear people debate these two main types of life insurance frequently. In a nutshell:

Term Insurance
Term insurance offers a low premium (in comparison to a whole life policy) during the early years of the insured individual. This type of policy has a specific time frame or term as the name implies.

These policies will typically include renewal opportunities with premiums that can increase substantially as one ages. Often times these types of policies will include a clause requiring evidence of insurability. So, if you were ill, it might be impossible to get insurance in a time when you might need it most.

In addition, this type of policy does not build cash value and is only used for death protection.

Whole Life Insurance
Major Benefits of Whole Life or Permanent Insurance

The cost is guaranteed for life.
Premiums remain constant throughout one's life.
Coverage is permanent when premiums are paid on time.
Provides cash value accumulation with tax deferral.
Borrow against the cash value with no penalty.
Dividends can be earned.
Numerous customizing options.
Death benefit is usually free from federal estate taxes.
Your insurance estate is not affected by the economy.

Whole life insurance policies are more expensive initially, although part of your premium is invested. You benefit from a "cash-build up" value. Sometimes this cash value is used to offset the premium. Any earnings that are gained are not taxed while the policy is in effect.

Think of a whole life insurance policy as providing permanent protection, like home ownership. Home ownership provides security and the opportunity for accumulation of wealth, whereas renting (comparable to term life insurance) may be cheaper initially, but there is no equity or opportunity for "growing" your estate.

Generally, the annual premiums (payments) for a whole life policy remain the same throughout the life of the insured individual. During the early years of the policy, the premiums are higher than those of a straight term life policy. As time passes, the level premium, combined with a build-up of cash values, tends to keep whole life policies in force.

Probate expenses and delays can be avoided in settling an insurance estate when the policy is payable to a named beneficiary. It is also important to note that life insurance proceeds are generally income tax free and depending upon the state you live, favorably treated in terms of inheritance tax. Your estate planning team will help you set up everything properly.

A term insurance policy provides protection and pays a death benefit during the term of the policy. Usually the policy owner pays one year of premium and receives one year of death benefits.

Like rent, as long as you are paying the premium you have protection. Although some term policies can be renewed, typically the premium rate increases as one becomes older and there is no guarantee that the policy will be renewed.

So, as you can see, long term security and peace of mind comes from whole life insurance in much the same way home ownership provides us with long term protection.

4. Question: I have heard about numerous other types of insurance such as:

Universal Life Insurance
Variable Universal Life Insurance
Survivorship Life Insurance

Continue on to Life Insurance Part II to learn about these different types of Whole Life or Permanent Life Insurance. This overview will give you a basic understanding and reference point for questions to pose to your life insurance underwriter.