What are the benefits of Life Insurance?
Life insurance protects families and businesses from financial loss associated with the death of a loved one or key employee and as a financial tool for retirement planning. Life insurance protects American families by providing benefits to survivors when a primary wage earner dies. The money from a life insurance policy can be used to help families to cover expenses such as mortgage payments, tuition, or sending children to college. Often the benefits from a life insurance policy can keep a family from poverty and welfare. Because of these benefits, the financial plans of 65 percent of American families include life insurance.
Businesses use life insurance to protect against financial uncertainty and secure employees’ futures. Life insurance on key employees enables businesses to create a secure funding source to pay for important employee and retiree benefits and to protect jobs and families from financial hardships that can result from the death of an owner or key employee.
Life insurance enables individuals and families of all income brackets and lifestyles to maintain financial independence in the face of financial hardships. Coverage is just as important for two-income families as it is for single-income families. Stay-at-home parents also need protection to help cover the costs of services they routinely provide, such as cooking, cleaning, and caring for children. Retirees who are living on limited income also find peace of mind knowing that an aging spouse will not be faced with a financial burden after their death.
Choosing a life insurance product is an important decision. As with any major purchase, it is important to understand your family’s needs and the options available.
What is Term Life Insurance?
Term Life Insurance covers a defined period (one to 30 years) and only pays benefits if you die during the defined period of time. Depending on the terms of the policy, premiums will remain constant or increase each year. Some policies can be renewed at the end of the term, but premium rates will usually increase.
Term insurance is designed to cover needs that will disappear in time, such as mortgage or tuition payments. Initially, premiums for term insurance are lower than for permanent insurance, which enables you to buy higher levels of coverage at a younger age.
However, term insurance does not offer cash value buildup and it becomes more difficult to attain coverage as you get older.
What is Whole Life Insurance?
Whole Life Insurance is the traditional type of permanent life insurance. Generally, the premiums remain constant over the life of the policy. The cash value grows based on a fixed interest rate.
The cash value is different from the policy’s face amount. The face amount is the money that will be paid to your beneficiary. Cash value is an amount that increases over time tax-deferred. The cash value can be used to cover premium payments, to purchase additional insurance, or as collateral for a loan. Loans must be paid back with interest or the death benefit paid to the beneficiary will be reduced. You also can convert the cash value into an annuity, which can provide you with an income for life. The policy also can be canceled or surrendered for its cash value. You may owe taxes on some of the cash value if the sum exceeds what you have paid in premiums.
What is Universal Life Insurance?
Universal Life Insurance policies are similar to traditional whole life policies because they build up cash value over time and provide lifelong protection as long as you pay the premiums.
The advantages of Universal Life policies over traditional whole life policies are premium flexibility and adjustable death benefits. The death benefit can be increased (subject to insurability), or decreased at the policy owner’s request. Premiums can be flexible and paid periodically to meet your personal financial needs.
What is Indexed Universal Life Insurance?
Indexed Universal Life Insurance policies have additional advantages over traditional Whole Life policies. Along with providing a death benefit if you die, certain indexed universal life products also provide tax-deferred growth of your account value, growth linked to a formula based on changes in an equity-index, flexible premium options, a variety of riders and waivers, and two death benefit options.
What are Annuities?
Annuities are insurance contracts that offer tax-deferred savings for retirement and a choice of income options to meet an individual’s needs in retirement. Since half of Americans who reach age 65 today are expected to live to age 83, and more than one-fifth are expected to reach age 90, long-term thinking is essential. Many are turning to annuities to bridge the gap between savings and the prospects of a long life: Annuities are the only financial product that can turn a sum of retirement savings into guaranteed income for life. Some annuities also provide guaranteed income for a surviving spouse or dependent.
Finding a way to make savings last is a challenge for today’s workers and retirees. Fewer workers today are covered by traditional, employer-sponsored pension plans promising life-long benefits and Social Security is not likely to provide future retirees the level of benefits it provides today. Because an annuity can provide lifetime income it helps offset worries many people have about managing their finances, running out of money in retirement, or living more frugally than they need to. No other personal financial product offers guaranteed income for life.
An annuity is a flexible retirement planning tool. It can be purchased over time (through a series of premium payments) or with a single lump sum. It can accumulate value that is based on a fixed interest rate or through investments in equities. You choose how and when payouts are made to you.
What are Fixed Annuities?
Fixed Annuities are the traditional form of annuities. The insurance company guarantees both the rate of return and the payout, as the name implies.
What are Equity-Indexed Annuities?
Equity-Indexed Annuities are a type of tax-deferred annuity whose return is indexed to an equity index, typically the S&P 500 but which also guarantees a minimum interest rate and against a loss of all or most principal. An Equity-Indexed Annuity is a contract with an insurance or annuity company. The objective of purchasing an indexed annuity is most often to realize greater gains than those provided by fixed annuities, while still protecting principal.
Unlike traditional fixed annuities, the policy owner may receive zero interest for a single period on a specific premium payment if the index performs poorly. However, with most Equity-Indexed Annuity policies, the premiums are protected and guaranteed to grow over time. This is a feature unavailable with any form of direct participation in the marketplace, such as through a mutual fund or a variable annuity.
Moreover, in better market conditions, the owner of an Equity-Indexed Annuity may experience interest credits that outperform traditional fixed annuities. Because it is an annuity rather than a mutual fund, an Equity-Indexed Annuity offers important insurance features including tax deferral, a death benefit that may be paid outside probate, and annuitization.
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