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How much life insurance
should you own? |
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Rough rules of thumb suggest an amount
equal to 6 to 8 times your annual earnings. However, there
are other things to consider when determining how much
life insurance you need. Important factors include: income
sources (and amounts) other than salary/earnings; whether
or not you're married and, if so, your spouse's earning
capacity; the number of people who are financially dependent
on you; the amount of death benefits payable from Social
Security and from an employer-sponsored life insurance
plan, whether any special life insurance needs exist (e.g.,
mortgage repayment, education fund, estate planning need),
etc. Talk to an insurance adviser for a precise calculation
of how much life insurance you need. |
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Life insurance for a spouse
or children |
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Generally, that should not be done in
lieu of buying appropriate amounts of life insurance on
the family breadwinner(s). It is extremely important that
you protect the earning capacity of the primary breadwinner,
if possible, with the right amount of life insurance before
considering life insurance on children or spouse. In a
dual-income household, it is important to protect the earning
capacity of both spouses. Life insurance for a non-wage
earning spouse is often recommended for help in paying
for household services lost if that spouse dies. |
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Term insurance vs. cash
value life insurance |
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Term life insurance pays out in the event
of death. Cash value, which is more costly, has a cash
amount you can withdraw before death. Which one is for
you will depend on your circumstances. First answer an
insurance question - how much life insurance should you
buy? Then look at the financial aspect - what type of policy
should you buy? The amount of life insurance you need may
be so large that the only way you can afford it is by buying
term insurance, which carries a lower premium than cash
value policies. If your ability (and willingness) to pay
life insurance premiums is such that you can afford the
desired amount of life insurance under either type of policy,
you can consider the financial decision - which type of
policy to buy. Important factors affecting the financial
decision include your income tax bracket, whether the need
for life insurance is short-term or long-term (20 years
or longer is long-term), and the rate of return on alternative
investments. If you view life insurance as an investment,
you'll want to study rates of returns. If it's protection,
then your purchase is a matter of what you can afford and
want to spend. |
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Mortgage protection term
insurance vs. other types of term life insurance |
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The face amount under mortgage protection
term insurance decreases over time, consistent with the
projected annual decreases in the outstanding balance of
a mortgage loan. Mortgage protection policies generally
cover a range of mortgage repayment periods, e.g., 15,
20, 25 or 30 years. Although the death benefit decreases,
the premium is usually level in amount. Further, the premium
payment period often is shorter than the maximum period
of insurance coverage--for example, a 20-year mortgage
protection policy might require that premiums be paid over
the first 17 years. |
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Can an existing life insurance
policy be used to provide for the repayment of an outstanding
mortgage loan? |
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Yes. Lenders don't usually require that
you buy a new mortgage protection term insurance policy.
An existing policy, either term or cash-value life insurance,
can be used for many purposes, including paying off an
outstanding mortgage loan balance in the event of your
death. |
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Is credit life insurance
a good buy? |
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Credit life insurance is frequently more
expensive than traditional term life insurance. Further,
if you already own a sufficient amount of life insurance
to cover your financial needs, including debt repayment,
buying credit life insurance is normally not advisable
due to its relatively high cost. |
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Tax issues with life insurance
cash values, dividends, and death benefits |
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The "interest build-up" portion
of the annual increase in the policy's cash value is not
taxed. Dividends generally are considered to be a "return
of premium" and are not taxable. Although life insurance
death proceeds will not typically be subject to income
taxation, they may be subject to federal estate taxation.
If you own part or all of the policy when you die, those
can be included in your gross estate for federal estate
tax purposes. State inheritance taxes and federal gift
taxes may also apply to life insurance policies/proceeds
under specific circumstances. Contact your tax adviser
regarding questions about possible income, estate and gift
tax consequences surrounding any life insurance you own
or are contemplating buying. |
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What is participating whole
life insurance? |
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Participating (par) whole life insurance
has been marketed for many years in the U.S. The participating
feature means you can receive dividends if the underlying
investments perform successfully. The investments are generally
long-term, fixed-rate contracts, so experience doesn't
vary tremendously. Substantial amounts of participating
whole life insurance are still sold today, principally
by the large mutual companies. |
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Universal life insurance
vs. traditional whole life insurance |
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Both traditional whole life (WL) and universal
life (UL) products are examples of cash-value life insurance.
But there are several important differences between them.
One relates to product transparency. In UL policies, it's
easy to look at the internal operations of the policy and
to examine the relationships among various policy elements
(premiums, cash values, interest credits, mortality charges,
and expenses) and how they interact with each other. Another
difference is that unlike whole life policies, universal
life policy returns were freed from long-term, fixed-rate
contracts and replaced with policies whose returns were
tied to short-term interest rates and periodically adjusted.
After the initial payment, universal life allows you to
pay premiums anytime, in virtually any amount, subject
to certain minimums and maximums. You can also reduce or
increase the amount of the death benefit more easily than
under a traditional whole life policy. |
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Which is a better buy: universal
life (UL) or participating whole life (WL) insurance? |
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There's no simple answer to this. The
best performing product (from a financial perspective),
whether UL, WL or some other type of cash value life insurance,
will likely be the one that reveals the most favorable
interest earnings, actual expenses and mortality costs.
Insurers earning the highest investment income, and who
also incur the lowest expenses and the lowest mortality
costs, are in the best position to offer life insurance
at the lowest cost. This is true whether the cash value
product being offered is UL or WL. You and your adviser
should carefully examine the financial aspects of each
product under consideration. |
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Variable life (VL) insurance
vs. universal life (UL) and participating whole life (WL) |
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Variable life insurance is a type of fixed-premium
whole life insurance policy where changes in the policy's
cash values and death benefits are directly related to
the investment performance of its underlying assets. Policyowners
typically can choose among several investment options for
the assets backing the policy's cash values. The various
investment options offered in the contract generally possess
different risk/return relationships and frequently include
a money market fund, a bond fund, and one or more common
stock funds. The policy prescribes that the death benefit
will not fall below a minimum amount (usually the initial
face amount) even if the invested assets depreciate in
value by a substantial amount. Because the policyowner
assumes all of the investment risk, there is no similar "floor" to
protect the cash values. Variable universal life (VUL)
insurance has recently become a more popular product than
VL. VUL combines features of both UL and VL and, in essence,
is the flexible premium version of VL. |
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