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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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