The Complete Guide
There are various life insurance products that are designed for many different situations to help folks take care of their beneficiaries. There are a few that are more popular than others but when purchasing a life insurance product most people have the following reasons:
Paying final costs is the most popular reason most people purchase life insurance. Benefits can be used to pay final expenses, including funeral or cremation costs, medical bills not covered by health insurance, estate administration fees or other unpaid obligations. Even expenses such as a mortgage. For example: let’s say the primary bread winner of the family passes away, the benefits of the plan can assure the home in which the surviving family resides, has the ability to pay the balance of the mortgage.
Paying off debt or replacing income. Life insurance benefits can help replace your income if you pass away. Your beneficiaries can use the money to help cover essential expenses, such as paying off a mortgage as discussed, a vehicle loan or lease, home equity loan, credit cards or securing college educations for children.
Another popular reason to purchase life insurance is an inheritance for your loved ones. The death benefit can also serve as a supplement to other inheritance funds you may wish to leave your heirs.
Some folks use it for paying federal or state estate taxes. Your heirs may face an estate tax upon receiving their inheritance, depending upon the state of residence and the amount. Life insurance benefits can be used to partially or completely offset this cost for your heirs.
A lot of people have favorite charities and would like to name that charity the beneficiary. This can help ensure your philanthropic goals are met after you die, and that benefits are provided to your charity of choice — even if you don’t have a very large nest egg or estate.
With that said, let’s look at the most popular life insurance plans and examine what each one offers.
Final Expense Insurance policies are designed to offset potential medical bills, small debts and most importantly the cost of a funeral, burial or cremation. These types of policies have a much smaller face value ranging anywhere from as low as $2,000, going as high as typically $30,000 depending on the insurer.
A big convenience to final expense planning is the low affordable premiums associated with these plans. Unlike a pre-paid funeral plan or draining your bank account, you aren’t required to make an initial large investment; instead you can pay a much lower monthly premium.
This type of plan is very popular with the senior market. There are some seniors we meet with that did not plan properly regarding their own passing. These folks do not want to burden their loved one’s or subtract funds from their estate so they purchase a final expense plan to cover that part of their retirement planning.
Most final expense plans have a level benefit plan and a graded benefit plan.
A level benefit plan is usually for the insured’s who are considered healthy without diseases or major chronic conditions. If you are approved for the level benefit plan you will pay a lower cost premium than someone who only qualifies for a graded benefit plan. With final expense plans you pay the premium for as long as you remain alive.
In most cases if you reach 100 years old you stop paying your premium. The other benefit with a final expense plan is that it does build cash value that you can borrow. If you borrow any cash value from the plan it will reduce your death benefit unless you pay it back. The cash value in a final expense plan does not build significant cash value as a universal life plan can.
A graded benefit plan is usually sold when someone answers yes to the qualifying health questions on a final expense plan. In this case the proposed insured can still qualify for the death benefit they are seeking but pay a higher premium than someone who qualifies for the level benefit plan.
The good news is that you can still purchase life insurance. Some examples of qualifying questions are major diseases such as heart disease, insulin dependent diabetes, stroke in the last two years, cancer, Parkinson’s, kidney disease, muscular dystrophy etc.
Questions? No Problem!
Term Life Insurance
Term Life Insurance is another avenue people look at when in the market to purchase life insurance. Term life is very inexpensive and that’s why a lot of people are drawn to it. It is the most affordable life insurance purchased but it’s not for everybody. Just like purchasing a home or a car you still need to weigh your options when looking at life insurance especially when it comes to term life.
I always like to say term life is great for young couples who are just starting out in life building a family. For example, let’s say that young couple purchases a home and is starting a family and can’t afford a universal life plan premium with a $300,000 death benefit to cover the mortgage in case either husband or wife passes away. You can purchase a term life plan for a fraction of the cost than a universal plan would cost for that same $300,000 death benefit.
The drawback to term life as compared to final expense or universal life is that there are terms as to where it would pay out the death benefit. Term life plans have periods of terms attached and depending which term you purchase the plan will not pay out a death benefit once that term is up. For example, if you purchase a 10-year term policy and you die in that 10-year period your beneficiary will be paid the death benefit agreed upon.
The same goes for a 20-year or 30-year term period. Most people when they purchase a 30 mortgage will also a purchase a 30-year term plan so in the event of a death the remaining loved one’s have peace of mind knowing they don’t have to leave their home and that mortgage is satisfied.
Another reason someone may buy a term plan is because it is very inexpensive and affordable knowing that if they pass during that term their loved ones are provided for.
With term life if you are still alive after the term period expires you can choose to walk away from the plan and not pay any further premiums. In most cases insurance companies provide you with the option to renew the policy after the term expires but at a much significant higher cost.
Term life insurance plans build no cash value at all.
Universal Life Insurance
Universal Life Insurance in most cases have taken over for what most people know as whole life plans. Most universal life plans are designed for all the reasons we just discussed with regarding to final expense and term plans but build significantly more cash value over the life of the plan.
As we discussed earlier people purchase universal life plans for final expenses, leaving a legacy to loved ones, estate taxes, charitable contributions, college funds etc. However, one of the biggest reasons people, as I did myself and for my family, purchase universal life, is for tax free retirement planning.
Universal life insurance offers a lifetime of protection, and is similar to whole life insurance, but there are major differences. Unlike whole life insurance, universal life allows you to pay flexible premiums, meaning the insured can modify the amount and scheduling of premium payments. In addition, a side fund known as your cash value account is set up with your policy and the excess premiums, beyond the cost of the insurance, are placed here and earn a conservative rate of interest.
Now let’s look at why universal life can also be used as a tax-free retirement plan. Over the course of a significant number of years you can over-fund your universal life plan and it should be building up a significant amount of cash value depending on the interest rates over the course of the planned years.
The benefit a cash value accumulation account is that as it grows, the cost of insurance can be pulled from there, meaning you don’t have to pay premiums if sufficient funds are available. Once you reach a retirement age where you want to draw a tax-free income you can then borrow against the policy over the course of a 10, 20, or 30-year period depending on how much cash value you built.
I personally purchased this plan for myself for this exact reason, and purchased it for my wife and daughter as well. We all know that our IRA’s, profit sharing plans, mutual funds etc. are not tax exempt, why not have a plan in place for your retirement that is tax exempt? As in the case of my daughter I’m often asked why I purchased this type of plan for her being she was only 9 years old at the time.
I was able to buy her a $200,000 death benefit at only $100 a month in premium. It was very affordable for a 9-year old but not only that, when she graduates college she will assume the $100 a month premium herself and will have a nice tax free retirement plan that should build a nice nest egg of cash value by the time she retires.
Now in my case if I pass away before I retire my wife and daughter will receive a very large death benefit to take care of their needs, otherwise I will have a significant cash amount I can use for tax-free retirement.
Ask your BGA agent to put an illustration on paper for you so you can see the benefits of this plan that I just outlined.
Also, you can purchase a universal life plan for a much lower premium. In this case, you can pay a flexible premium that you can afford that will keep the death benefit guaranteed until the day you pass-away, however you will not build cash value in the plan. This plan is called Guaranteed Universal Life.
When it comes to universal life there are quite a few different products to choose from depending on your goals, so before making a decision, be sure to sit down with your BGA agent and outline what is best for your retirement needs.
Knowing about Final Expense, term life and universal life options can help address all of these concerns.
If you’ve had a policy for years that you’re still paying on, it may have built a significant amount of cash value that you didn’t even realize. Maybe you’re over insured with a large whole life or universal life policy you bought early in life and no longer need to worry about the mortgage payments, your children’s tuition, your loss of income, etc.
All the reason to sit down and review this information with a BGA Insurance agent. There are many instances we’re able to reduce life insurance premiums and keep the same death benefit amount you originally purchased.
Contact us if you are in or near any of the following areas:
- Philadelphia, PA
- Allentown, PA
- New Jersey