Life Insurance - Introduction to Life Insurance
CONCEPTS AND PERSONAL USES
Life insurance has long been a major tool in basic estate planning. Life insurance can provide an income tax-free death benefit far in excess of the premiums paid.
Concepts - insurance is based on two fundamental principles:
- Risk Pooling - Risk is transferred from an individual to a group, each sharing the losses and has the promise of a future benefit.
- Law of large numbers - The larger the number of individual risks that are combined in a group, the more certainty there is as to the amount of loss incurred in any given time frame.
- Life Insurance is based on actuarial or mathematical principles, guarantees a specified sum of money upon the death of the person who is insured.
- The true significance of insurance is its promise to substitute future economic certainty for uncertainty and to replace the unknown with a sense of security.
If you own property in excess of your estate tax exemption amount, you may have a taxable estate. If you own a life insurance policy or name either yourself or your estate as beneficiary, you may have exposed the policy's death benefit to estate taxes. For this reason, when estate tax is a concern, an insurance policy on your life is usually best owned by someone else.
Term Life Insurance
Term insurance is usually the least expensive form of insurance coverage and is very affordable to purchase when you're young. As you get older, your risk of dying increases, so the cost of term insurance increases exponentially. As with most other insurance coverage, you pay premiums annually, semiannually, or quarterly for the term. For this premium, you receive a predetermined amount of life insurance protection. Term insurance is very inexpensive and is generally used for a temporary insurance need. However, it only provides for death protection and there is no cash value built up from paid premiums. Statistics show that the majority of term policies lapse without collection of death benefits.
Renewable- Most term policies are renewable up to age 70 without evidence of insurability.
Convertible- These policies have a provision to convert to permanent insurance without evidence of insurability for a specified time frame (may be less than the full term).
Waiver of Premium- If the insured becomes totally disabled; the premiums are waived during the period of disability.
Types of term insurance
- Annual Renewable Term- Level face value with increasing premium payments.
- Level term- Level face value, but premiums remain fixed for period of term.
- Term to age 65 or 70- Exponentially increasing premiums.
- Decreasing term- Level premium payments, but decreasing face value.