Life Insurance – Legacies and Loved Ones
HIGHLIGHTS
Unlocking Financial Potential
Life insurance isn't just about security; it's a powerful tool that preserves your legacy, eases your loved ones' financial burdens, and supports your estate planning.
Business Resilience
Beyond personal benefits, life insurance safeguards businesses, facilitating smooth transitions and strengthening talent acquisition efforts.
Empower Your Choices
Understanding the nuances of term life, whole life, and universal life policies empowers you to make well-informed decisions about your financial future.
Fun Fact
Only 52% of American adults have secured life insurance and 41% of all adults (insured and uninsured) consider themselves underinsured, according to LIMRA.
Is life insurance trending?
Simple answer – yes!
A record high proportion of consumers (39%) plan to purchase life insurance coverage in the next year, according to a 2023 Insurance Barometer Study.
Acceptable?
The 41% who do not feel sufficiently insured reveal a significant gap in financial readiness, emphasizing the need for greater awareness and informed decisions about insurance.
Life Insurance Dynamics
Life insurance is an extremely effective and versatile estate planning tool that can preserve your financial legacy while providing for loved ones. It can be a vital piece of your integrated insurance strategy.
Your loved ones receive a financially secure future as the policy provides financial peace of mind and covers immediate expenses, replacement of lost income, and debt repayment.
Your financial legacy will endure as life insurance is incorporated into your estate planning to facilitate wealth transfer, shareholder buyouts, tax benefits, and more.
Overview
Life insurance is established through a contractual arrangement between an individual and an insurance company or provider. In exchange for periodic premium payments, the insurance company offers a designated payout or death benefit to the chosen beneficiary or beneficiaries upon the insured individual's demise.
Importance
The benefits of life insurance can extend beyond your immediate family and impact friends, colleagues, and global philanthropic initiatives. Such may include:
Peace of Mind
It can help ease the emotional burden on your family, allowing them to grieve without added financial stress.
Wealth Accumulation
Certain types of insurance policies (e.g., whole life or universal life) can be utilized as a source of savings or investment as they allow the insured to build cash value over the life of the policy.
Debt & Expense Coverage
It can be utilized to cover debts and expenses related to mortgages, student loans, personal loans, business loans, credit cards, funeral expenses, and other forms of credit.
Income Replacement
It can act as a vital source of income replacement for the beneficiaries. This ensures the beneficiaries, and their dependents can maintain their standard of living.
Education Funding
It can provide a means to secure educational funding for the beneficiaries and their dependents. Expenses may include tuition, books, housing, computers, and other related costs necessary to pursue and achieve their academic goals.
Dependents With Specific Needs
Supplying continuous financial assistance for the distinct requirements and costs linked with individuals who have specific needs can be vital for both the caregivers and the individual.
Estate Planning
It can provide liquidity to cover estate taxes, prevent the forced sale of assets, tax-efficient wealth transfer, and the equalization of inheritances among multiple heirs.
Philanthropy and Charity
The proceeds can be designated to support a chosen charitable cause. The allows the insured to ensure their legacy and philanthropic vision survives.
Business Protection
Life insurance can provide the funding for a business partner’s heirs to sell their stake to the surviving partners, ensuring a seamless transition for all remaining parties.
The policy can protect the company in the event of a key person’s death. Funds can be utilized for a variety of purposes including recruitment and operating costs.
Talent Acquisition
Group life insurance can be an attractive and integral part of a prospective employee’s compensation package.
Key Features
There are many types of life insurance policies. We will highlight the following three common types and their key features. Such features may vary by jurisdiction, policy, and provider.
|
Aspect |
Term Life |
Whole Life |
Universal Life |
|
Coverage Duration |
Typically provides for a specific term (e.g., 10, 20, 30 years) |
Lifetime coverage |
Lifetime coverage with flexibility in premium payments and death benefits |
|
Premiums |
Generally lower, especially for young adults and healthy individuals |
Higher premiums, but they remain fixed throughout the policyholder’s life |
Flexible premiums: policyholders can adjust premiums and death benefits within limits |
|
Cash Value |
Does not accumulate cash value |
Accumulates cash value over time |
Accumulates cash value and offers investment opportunities; cash value grows over time |
|
Death Benefit |
Pays a death benefit if the insured individual passes away during the policy term |
Pays a death benefit regardless of when the insured individual passes away |
Pays a death benefit regardless of when the insured individual passes away, and policyholders can adjust the death benefit |
|
Guaranteed Values |
No guaranteed cash value or dividends |
Guaranteed cash value and often receives dividends |
Guarantees minimum interest rate on cash value but offers potential for higher returns |
|
Flexibility |
Limited flexibility: when the term ends, the policy expires |
Limited flexibility in premium and death benefit adjustments |
Greater flexibility in premium payments and death benefit adjustments |
|
Estate Planning |
Suitable for temporary needs and to cover specific debts or financial responsibilities |
Can be used for estate planning, wealth transfer, and to create a legacy |
Versatile for estate planning, legacy creation, and tax advantages |
|
Surrender Value |
No surrender value: no cash value to surrender |
Has a surrender value, which can be accessed if the policy is cancelled |
Has a surrender value, which policyholders can access if needed |
|
Investment Component |
No investment component |
Includes an investment component through the accumulation of cash value |
Offers investment opportunities through various sub-accounts |
|
Beneficiaries |
Policyholders designate beneficiaries who will receive the death benefit |
Policyholders designate beneficiaries who will receive the death benefit |
Policyholders designate beneficiaries who will receive the death benefit |
|
Policy Loans |
No policy loans available as there is no cash value to borrow against |
Policyholders can take policy loans using the accumulated cash value as collateral |
Policyholders can take policy loans using the accumulated cash value as collateral |
|
Underwriting |
Requires underwriting and may require a medical examination |
Requires underwriting and may require a medical examination |
Requires underwriting and may require a medical examination |
|
Riders |
Limited availability for riders |
May offer a variety of riders, such as long-term care or accidental death |
Offers flexibility for adding riders to customize the policy, such as critical illness or disability income riders |
Exclusion Clauses
The policies above typically have certain exclusions and limitations. Such may include,
Suicide
Most policies have a suicide exclusion that typically covers the first two years of the policy. If the insured dies because of suicide during the exclusion period, the death benefit may not be paid.
Material Misrepresentation
The death benefit may be reduced or denied if the insured individual provided false or misleading information to the insurance company.
Non-Disclosure
If the insured fails to disclose a relevant medical condition, the insurer may exclude coverage for that specific condition if it results in death.
High-Risk Activities
Some policies may exclude coverage related to death resulting from certain high-risk activities such as extreme sports or specific occupations.
War or Acts of Terrorism
Policies may exclude coverage related to death resulting from acts of war or terrorism.
Incontestability Clause
Usually, life insurance policies feature a clause that restricts the insurer's capacity to challenge the policy due to inaccuracies or misrepresentations made by the policyholder after the initial two-year period.
Premiums
Premiums are the regular payments (e.g., monthly, annually) policyholders make to maintain their coverage. The amount primarily depends on factors such as age, health, lifestyle, and coverage amount. Younger, healthier individuals typically pay lower premiums as they pose lower risks for insurers.
The type of policy selected also affects premiums. Term life insurance often starts with lower initial premiums but may increase with age or term end. Whole life and universal life policies usually feature higher initial premiums but remain level, with potential cash value.
Some employers offer group life insurance, partly or fully covering premiums.
Claims Process
Filing a life insurance claim involves submitting required documentation to the insurance company. They assess the claim for validity and completeness. Approved claims result in the payout of the death benefit, while denied claims can often be appealed with additional supporting evidence. It's crucial to understand this process, adhere to the insurer's instructions, and maintain accurate records for a smooth claims experience.
Settlement Process
Upon approval of a life insurance claim, the insurer calculates the death benefit based on the policy terms. After approval, they disburse the benefit to the beneficiaries.
Any remaining financial responsibilities typically fall to the beneficiaries. Reviewing settlement statements is essential to ensure accuracy and compliance with the policy's terms and conditions.
Your Next Steps
Many individuals will not be covered through an employer, or such coverage will be inadequate, and they will need to secure their own insurance. This can be a stressful, complex, and time-consuming process. Here are some tips to help individuals secure the right coverage:
Needs Assessment
When assessing life insurance needs, consider critical factors including, but not limited to, calculate your income replacement years, cover debts like mortgages, address future expenses (e.g., education, retirement), business requirements, philanthropic and charitable causes, and account for end-of-life costs.
Review existing coverage, consider inflation, and adjust for unexpected expenses. Evaluate health, dependents, and financial goals, and set a budget.
Choose the right policy type and regularly review during life events. This tailored approach ensures effective financial protection for your family.
Required Policy Type
Use the chart above to familiarize yourself with the key types of insurance policies available. Determine the most appropriate type that aligns with your objectives.
Review and Compare
When exploring life insurance options, it is essential to research and compare various insurance plans. Evaluate the coverages, exclusions, and any waiting periods associated with different policies. Quantitatively compare the monthly premiums, policy terms, and any associated fees.
By assessing your needs, comparing plans, understanding policy details, and utilizing available resources, an informed decision can be made.
FINAL THOUGHTS
Life insurance serves as a flexible financial tool, preserving your financial legacy, providing financial security to your loved ones, covering immediate expenses, and settling debts. It also plays a crucial role in estate planning, facilitating wealth transfer, offering potential tax benefits, and ensuring a stable financial future.
For businesses, it aids in buy-sell agreements, key person protection, and talent acquisition. Understanding the features of term life, whole life, and universal life policies is essential for informed decisions.
In summary, life insurance offers numerous benefits. Consult a licensed insurance broker in your jurisdiction to align your policy with your estate planning goals.
