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| Frequently Asked Questions |
Do I need life insurance?
Your income can be considered your family’s most valuable asset because it
allows you to obtain the necessities of life and, of course, the creature
comforts. Someday you may not be here to provide that income, yet the need for
income may continue for those who are financially dependent upon you.
Consequently, your need for life insurance and the amount required will depend
on your personal and financial circumstances. If any of the following
statements applies to you, you probably do need to consider life insurance:
You have a spouse.
You have dependent children.
You have an aging parent or disabled relative who depends on you for support.
Your retirement pension and savings are not enough to insure your spouse’s
future against a rising cost of living.
You have a sizable estate.
You own a business.
How much life insurance do I really need?
A good rule of thumb is that you should get between 6-10 times your annual
income. For example, if your annual income is $60,000, then you will look at
getting between $360,000 and $600,000 worth of life insurance. What you will be
doing is securing your loved ones by taking care of any immediate expenses and
debts and providing income to your beneficiaries for several years to come.
How does life insurance work?
Life insurance is a financial resource for your loved ones in the event of your
death. You enter into a contract with an insurance company that promises to
provide your beneficiaries a certain amount of money upon your death. In
return, you make periodic payments, known as premiums. The size of the premiums
is generally based on factors such as your age, gender, medical history and the
dollar amount of life insurance you select. Some policies may require a medical
exam before premiums are established.
Certain types of life insurance may also provide benefits for you and your
family while you’re still living. Policies such as whole life or universal life
accumulate cash value on a tax-deferred basis, and that value can be used to
supplement your retirement income or help provide for a child’s education.
Federal taxes are due upon withdrawal and prior to age 59 1/2 a 10% tax penalty
may be incurred. Loans and withdrawal will decrease the policy's cash value and
death benefit.
What if I already have life insurance?
Even if you have life insurance, keep in mind that life changes and so does
your need for protection. Review your life insurance needs every few years. Any
of the changes listed below should prompt you to sit down with your insurance
agent or financial advisor to make sure your plan is still appropriate:
You have recently married or divorced.
A child or grandchild has been born or adopted.
Your health or your spouse’s health has deteriorated.
You have begun to provide care or financial help to a parent.
A child requires assistance or long-term care.
You have recently purchased a new home.
You are planning for your child or grandchild’s education, or he or she is
about to enter school or college.
You or your spouse is concerned about retirement income.
You or your spouse has been promoted recently.
You have refinanced your home mortgage in the past six months.
You or your spouse has received an inheritance.
Can I trade or replace my policy?
You can trade or replace your policy, but it’s not something to be considered
lightly, regardless of whether you are thinking of switching policies within
the same company or switching from one company to another. Term insurance is
particularly competitive and is replaced from company to company with varying
degrees of ease. However, remember that the new policy will incur new start up
costs and may have new surrender charges, and there is normally a new
“contestability period” during which statements in the application can be
contested and the insurer may cancel the policy and refuse to pay death
benefits.
If you want to increase your total life insurance, it is probably better to
keep your old policy and simply add a new one. Suppose, for example, that your
objective is to have $100,000 of life insurance and you currently have $50,000.
It may be better to keep the existing $50,000 policy and buy a second $50,000
policy to total $100,000. Your existing policy premiums will generally be less
than those for the new policy because you bought it when you were younger, and
you won’t lose any existing cash value.
Do not cancel an already existing policy until the new one has been delivered.
What is the difference between permanent and term life insurance?
Term insurance is commonly referred to as temporary coverage. For example, a
newly married couple may want to buy life insurance to protect their mortgage
on their house. Another may want it to assist a spouse and children in the
event of his untimely death. Term insurance is usually less expensive than
permanent insurance because insurance companies charge premiums based upon the
likelihood of you dying. If you are 30 and you buy a 20-year term plan, the
likelihood of you dying between the ages of 30 and 50 are relatively small. If
your term plan runs out, you must re-qualify for coverage based upon your
current age a health conditions.
Permanent insurance is just that, permanent. In the analogy of buying a house
or renting an apartment, permanent insurance is like buying a house. That is
why it is more expensive. You own it until you die. If you want insurance to
pay a death benefit to your family or loved ones, then permanent insurance is
the safest way of doing it. Mortality tables suggest that most people will live
well into their 70's and many to age 80 and beyond. Permanent Insurance takes
the guesswork out of the equation. It will pay benefits even if you live to 110
years old.
What added benefits do I gain from having a permanent life insurance
policy?
In addition to the comfort of knowing that you have provided for your family
after your death, there are several other reasons you may want to consider life
insurance. For one, cash value policies enjoy a tax-deferred status, meaning
you do not pay taxes on the cash value accumulation until you receive funds
from the policy. Second, the cash value earned within a permanent life
insurance policy can be borrowed or withdrawn to help with big-ticket items,
such as a college education or down payment on a home. Of course, any loans
and/or withdrawals plus unpaid interest will reduce the death benefit. Third,
life insurance can be used to pay estate taxes and funeral expenses. The
proceeds can go directly to your beneficiaries without going through the
probate process. If your estate (including real estate and investments) should
exceed the federal state tax exemption (currently $650,000, scheduled to
gradually increase to $1,000,000 by 2006), it can be taxed at a rate from 37%
to 55%. So, even if you have a substantial sum of money, life insurance can be
a benefit to your heirs, allowing them to pay taxes without liquidating other
assets.
Federal taxes are due upon withdrawal and prior to age 59 1/2 a 10% tax penalty
may be incurred. Loans and withdrawal will decrease the policy's cash value and
death benefit.
What is a fixed annuity?
Fixed annuities earn a guaranteed rate of interest for a specific time period,
such as one, three, or five years. Once the guarantee period is over, a new
interest rate is set for the next period. This guarantee of both interest and
principal makes fixed annuities somewhat similar to a certificate of deposit
purchased from a bank. Unlike a typical CD, however, an annuity is not backed
by the Federal Deposit Insurance Corporation (FDIC); its guarantees are
directly related to the financial health of the insurance company that issues
the annuity.
What is a deferred vs. immediate annuity?
While you can put money into a deferred annuity with a single payment or
flexible payments, immediate annuities are usually purchased with a single
payment. When you receive payments also differs. Just as the names imply, you
get money earlier from an immediate annuity and you delay getting money from a
deferred annuity. You will generally prefer a deferred annuity if you are
saving for retirement, do not want to take out money until you are at least 59
and a half years old, you contribute the maximum deductible amount to your IRA,
401(k) or 403(b), or you need an account that will earn tax-deferred
interest for many years. You will generally prefer an immediate annuity if you
are retired or very near retirement now, have a lump sum of money and want to
begin drawing an income from it, you want immediate return from your account,
or you want to receive a steady monthly check for the rest of your life.
Federal taxes are due upon withdrawal and prior to age 59 1/2 a 10% tax penalty
may be incurred. Loans and withdrawal will decrease the policy's cash value and
death benefit.
Is an annuity any more than a glorified savings plan?
Yes, absolutely. The power of tax-deferred growth is the key to an annuity. For
example, let's say that you're thirty-five years old when you make an
initial purchase payment of twenty thousand dollars. Now add two
hundred dollars every month at a six-percent annual interest rate. Your total
tax rate is twenty-nine-percent, and you will not take out any money until you
retire at age sixty-five. By then, your balance in the tax-deferred annuity is
$236,223. And that compares very nicely to a taxable savings plan such as a
certificate of deposit, which would yield only $165,000 dollars. A certificate
of deposit is FDIC insured up to $100,000 per depositor. Annuities are not FDIC
insured and may have associated fees and expenses.
But you should note one thing. When you start receiving payments from the
annuity, you will be taxed on the gain at your then-ordinary income tax rate,
which will most likely be lower than during your years in the work force. Thus,
the power of tax-deferred growth still brings you out ahead.
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