Tuesday, August 16, 2011

Why Life?

Life insurance is one of the most necessary, and yet, can be one of the most confusing, of coverages. It is available for several reasons. The primary purposes of a good life policy are to see that those who depend on you in some way can go on in a similar fashion after your death.

Life may be purchased by a person who has an "insurable interest" in you. If they could suffer from your death, they may insure you -- this goes for companies and family members, but generally for oneself with the beneficiary being a loved one.

These policies can provide an immediate estate if a large enough death benefit is selected. The death benefit passes on financial stability to survivors. Burial expenses are the most basic of purposes. But payment of debt, including a mortgage, or payments on other debt. Other features that may attract a family are favorable tax treatment, and even preparation for college expenses if a family provider passes on. The cash that is accumulated can help one in times of difficulty, providing a low interest, or no interest (in some cases) loan to oneself that may never need to be paid back. The funds will simply be reduced from the death benefit if necessary.

There are several forms of life policy. Whole life and term life are simple. Whole life insures you for exactly that, your whole life. You can drop premium payments at any point, but you will lose the death benefit. Cash accrual is possible, even likely, with a whole life policy and you may have access to that cash as you get older, or when it is necessary. It can take some time for any cash to accrue, but once it does, it is a plus to the policy holder. "Riders" - or little side policies -  may be added to this type of  policy for specific purposes, such as insuring yourself against untoward events that cause financial stress, but do not result in death, or covering a juvenile.

The most common way to describe term insurance is that it is like renting instead of buying a home. For a specific period of time you will have insurance on your life, a death benefit of perhaps $100,000 - $250,000, in case you or a loved one lost their life. Term policies are very inexpensive, especially if you are young and in good health.

In any life policy there is the issue of incontestability. After two years (this may vary according to your jurisdiction) life policies are virtually incontestable. They may be contested (or revoked) perhaps under certain conditions, but generally the death benefit is payable to you upon death. Within two years of purchasing the policy, things like preexisting conditions that were not disclosed at the time of application can be reason to deny the claim or limit it.

There are two more policies that get more tricky. One is a universal life policy and the other is variable life. Paranthetically, the agent you purchase a variable policy from must pass special registered representative licensing for selling variable life, because it is indexed to the markets.

Universal life, however, is a very flexible plan that, depending on the policy, allows you to adjust premium, death benefit, and/or cash accumulation. Universal life may be like moving from a one gear bike to a ten speed. The various speeds give one the ability to climb those hills when times are difficult and maximize the benefits of an insurance policy when times are easy.

You may be perfectly content with a "one speed" plan, but the options or gears of this plan make it very attractive to many people. These plans were developed in the 1980's when the idea developed to get term and invest in perm. So, as it goes, one can make minimal payments in times of difficulty to simply fund the death benefit. There's a target premium that is disclosed to the insured at the time the policy is written that will keep the policy running for the future. And there are also maximums that may be paid to the policy to reap the full benefit, if the insured so chooses.

No comments:

Post a Comment