Life Insurance
- Term Life Insurance
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Is the simplest and least expensive type of policy, with no cash value. A term life policy has only one function to pay a specific lump sum to the beneficiary that has been designated, upon a specific event the death of the insured person. The death benefit and the policy limit are the same — for example, a $200,000 policy pays a $200,000 death benefit. The policy protects your family by providing money to replace your salary, income or other contributions, as well as covering final expenses incurred at death.
As agreed in the contract, the premium must be paid, and if you stop paying, the policy ends (lapses.) You won’t owe the insurance company and they won’t owe you a refund for the premiums paid if it lapses before the end of the term.
If the insured person is still alive at the end of the term, you do not get your money back. A term insurance policy is over unless you can renew the policy. If you renew (if the policy has that feature), it will renew at a higher price reflecting the current age of the insured person. Term insurance has no buildup of cash value as some other types of insurance allow. (There are some term life insurance policies that offer a return of premium; be sure you understand the policy you are buying.)
Term life insurance is for people who don't need life insurance for an indefinite period of time. It provides for people who depend on you, but generally ends by the time children are grown and independent, often when the policy owner is ready to retire.
Other types of life insurance provide both a death benefit and a cash value. Their premiums are higher than term life premiums, because they fund the cash value account in addition to providing insurance. These policies are often referred to as cash value policies. - Whole Life Insurance
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Is designed to provide protection for dependents while building cash value. The policy pays a death benefit if the insured person dies. However, there is also a savings component (called cash value), which builds over time.
In addition to paying a death benefit, a whole life policy allows accumulation of cash value that the policy owner receives if the policy is surrendered.The premium is fixed and won’t increase during the lifetime of the insured person as long as premiums are paid as agreed, for the entire time the policy is in force. The policy pays upon the death of the insured or when the insured person reaches a specific age stated in the policy.
Whole life policies cost more than term insurance, but have the benefit that the policy builds cash value.
- Universal Life Insurance
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Gives the policyholder more control over premiums, provides permanent protection for dependents and is more flexible than a whole life policy. It pays a death benefit to the named beneficiary, and allows the ability to accumulate cash value.
Generally, a universal life policy provides flexibility by allowing the policy owner to change the death benefit at certain times, or to vary the amount or timing of premium payments.
Both the universal life policy and whole life policy allow withdrawals or loans against the cash value of the policy. Another type of insurance, variable life, offers additional investment options in separate accounts. It also requires that the policy owner take time to manage the investments.
- How Much Insurance is Enough?
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Multiply your family’s annual expenses, allowing for inflation, using the number of years in the future you believe your dependents would need your support.
Remember to include the future costs of items you want to pay for such as a mortgage or educational expenses. Some options to consider:
- How long will any children remain at home and be supported?
- What are possible education costs for dependents, whether a child or an adult who might need to enter the workforce after the death of the primary provider?
- Do you want to cover mortgage or vehicle payoff costs?
Some advisors recommend an amount of life insurance that equals or exceeds two to six times the annual income of the policyholder. However, this figure should be adjusted according to the number of dependents, their relative ages and unique needs of the family.
Annuities
What is an Annuity?
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid to the insurance company. Annuities are often purchased for future retirement income.
Annuitization results from your election to receive regular income payments from your contract. Once you choose to annuitize your contract, that decision cannot be changed. If you elect to annuitize your contract, you will no longer be able to change the terms of the payments to you. You will no longer have access to money that you have paid to the insurance company outside of the payment plan that you elected.
- Types of Annuities
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- Single Premium - An annuity where you pay the insurance company only one premium payment.
- Flexible Premium - An annuity where you pay multiple premium payments to the insurance company.
- Immediate - An annuity where income payments to you start immediately, but no later than one year after you pay the premium.
- Deferred - An annuity where income payments are not scheduled to start for several years after you pay the premium.
- Fixed - An annuity where your money, less any applicable charges, earns interest at rates set by the insurance company or in a way specified in the annuity contract.
- Variable - An annuity where the insurance company invests your money, less any applicable charges, into a separate account based upon the risk you want to take. The money can be invested in stocks, bonds or other investments. You may direct allocations of your money into separate accounts. If the fund does not do well, you may lose some or all of your investment.
- Equity Indexed - A variation of a fixed annuity where the interest rate is based on an outside index, such as a stock market index. The annuity pays a base return, but it may be higher if the index goes up.
- Qualifications for Selling Annuities
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Insurance professionals have developed an array of designations and certifications. Some designations, such as a CSA (Certified Senior Advisor), require no prior experience and simply attending a three-day seminar and passing a multiple-choice exam. The CPCU, or Chartered Property Casualty Underwriter, designation is recognized industry-wide and has been certified for having undergraduate and graduate degrees.
- Questions You Should Ask the Agent or the Company
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- What is the guaranteed minimum interest rate?
- What charges, if any, are deducted from my premium & when?
- What charges, if any, are deducted from my contract value & when?
- What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
- For how many years will surrender charges apply?
- Can I get a partial withdrawal without paying charges or losing earned interest? Does my contract have vesting?
- Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
- What annuity income payment options do I have and when?
- What are the terms of the death benefit?
- What are the risks that my annuity/earned interest could decline in value?
- Is interest compounded during the term of the policy?
- What is your commission on this product?
- Additional Questions You Should Ask Regarding Equity Indexed Annuities
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- What is the participation rate?
- For how long is the participation rate guaranteed?
- Is there a minimum participation rate?
- Does my contract have a cap on interest earned?
- Is averaging used? How does it work?
- Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?
- Which indexing method is used in my contract?
- What is the minimum interest the contract can earn?
- What is the maximum (cap) interest the contract can earn?