April 20, 2018


If you have not purchased or even thought about acquiring life insurance, now may be the time to consider it.

Check out some of these guidelines to see if you’re prepared to obtain a life insurance policy.

Q: Why should I purchase life insurance?

A: Life insurance will provide cash to your family once you pass away. The money (death benefit) can assist your beneficiary with daily expenses, covering the mortgage and other outstanding loans and more. One of the benefits of life insurance is that your beneficiary will not have to pay federal income taxes on the money allotted to them.

Q: What is the level of life insurance I should buy?

A: Keep in mind that all individuals will have different needs. The main factors to consider will be your financial responsibilities and sources of income. While figures vary, a number of analysts suggest that you have a life policy that can pay a benefit equal to seven to 10 times your annual income.

Q: How many different life policies are there?

A: The two basic types of life insurance are term and permanent.

With permanent insurance, your beneficiary is paid whenever you may die, while term coverage pays your beneficiary should you pass away during a certain period of time.

Q: How would you define permanent insurance?

A: Permanent (cash value) coverage offers lifelong protection as long as premiums are met. The policy may build up cash value over time and the cash grows tax deferred. Cash value means the amount available if you cancel your policy prior to death. Face value is the amount of money to be paid to your beneficiary should you die. Your beneficiary will not receive the cash value of your policy.

There are different types of cash values, which include:

  • Whole life – This is the most traditional type of cash value insurance. In most cases, premiums and death benefits remain the same over the life of the policy. The policy’s cash value increases at a fixed rate.
  • Variable life – With a variable life policy you can select from different investments offering various risks and rewards, stocks, bonds, combination accounts, or options that guarantee principal and interest. Death benefits and cash value will differ depending on the performance of the investments you choose. By law, you’ll be provided with a prospectus for variable life insurance. This prospectus includes financial statements and outline investment objectives, operating expenses, and risks. Keep in mind the cash value of a variable life policy is not guaranteed. If the market doesn’t do well, the cash value and death benefit can drop, although a number of policies guarantee that the death benefit won’t decline below a certain level.
  • Universal life – This gives you flexibility in setting premium payments and the death benefit. Changes must be made within certain guidelines set by the policy; to increase a death benefit, the insurer usually requires evidence of continued good health. A universal life policy can have a variable component.

Q: How would you define term insurance?

A: Term insurance gives you protection for a defined period of time from one to 10, 20, or even 30 years and pays benefits only if you die during that time frame. Term insurance is often used to cover financial obligations that will be removed over time, such as tuition or mortgage payments.

Premiums for term insurance either can be fixed for the length of the term or can increase at a point marked in the policy. They also can be less costly than for a cash value policy.

Term policies can include a return of premium benefit that will refund all or a portion of the premiums paid at the end of a term if no death benefit was paid. Term policies with this feature are more costly than those without.

A number of term policies can be renewed at the end of a term. However, premium rates will usually go up at the time of renewal. Many policies want evidence of insurability to qualify for renewal at the cheapest rates. When the term is completed, you also may be able to convert the policy to a cash value policy. Term policies in many cases do not build up a cash value, but policies with a return of premium benefit will have a small cash value.

Q: What occurs if I miss a payment?

A: Should you miss a premium payment, in most cases you will have a 30 or 31 day grace period whereby to make your payment without consequences.

If you pass away during the grace period, your beneficiary will get the death benefit without the overdue premium. However, the policy will lapse (terminate) if you don’t make your payment by the end of the grace period. If you own a cash value policy, your company with your approval can draw from your policy’s cash value to pay the premium. This method of keeping your policy active can work only as long as your cash value remains.

Q: What happens if my policy lapses?

A: Some life insurance contracts will allow you to reinstate a lapsed policy during a certain time frame. However, you must prove insurability, pay all overdue premiums (plus interest), and make sure any outstanding policy loans are taken care of.

Along with the death benefit, there other features you should be aware of when contemplating a life insurance policy?

A number of policies offer purchase options or riders. Some riders let you purchase more insurance without taking a medical exam; others waive premiums if you become disabled.

Some companies offer accelerated benefits, which also go by living benefits. An accelerated benefits rider allows you, under some conditions, to receive the death benefits of your life insurance policy prior to your death. Such conditions may include terminal or catastrophic illness, confinement to a nursing home, or need of other long-term care needs.

Finally, some policies offer an accidental death benefit that pays an additional amount if death happens as a result of an accident.