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How to Protect Your Family Using Life Insurance

Do you need life insurance? Chances are yes.

Life insurance is designed to protect your family and loved ones after you’ve passed away. Investing in life insurance is especially important if you’re financially responsible for a child, partner, aging parent, or disabled loved one.

Why? Life insurance helps to provide financial security for your family and loved ones following your departure. Let’s discuss how to protect your family and loved ones with life insurance.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is paid income tax-free to the beneficiary.

Life Insurance Options

There are two main categories of life insurance available:

  • Term life insurance, and
  • Permanent life insurance

Simply put, term life insurance is less expensive and lasts for a period of years whereas permanent life insurance lasts for an insured’s lifetime, and is, therefore, more expensive. Permanent insurance also has a tax-advantaged cash value component that can be accessed by the policy owner during the insured’s life.

Interested in learning more about the differences between each? Check out our article “Term Life Insurance vs. Permanent Life Insurance.”

The Benefits of Having Life Insurance

Life insurance coverage can help in the following ways:

Provide Financial Security

Life insurance can help replace lost income after one passes away. The death benefit of a life insurance policy can be used for any number of reasons, including to:

  • Pay monthly bills and day-to-day expenses
  • Pay off debt (i.e. mortgage, car loan, or credit card)
  • Pay federal and/or state estate taxes
  • Provide an inheritance

Cover End of Life Expenses

Death is expensive—and often is a cost most families don’t want to be troubled with, especially following the death of a loved one. Life insurance can help a family pay for end-of-life expenses like burial and funeral services, cremation, burial plots, caskets, etc. 

Pay for Medical Bills

Life insurance can help a family pay for hefty medical bills if the insured passes away from health-related issues. There are also policies with optional benefits that can help pay for ongoing chronic or terminal illness care expenses.

Supplement Educational Expenses

If the deceased loved one has children or grandchildren, life insurance can help pay for educational expenses (i.e. college or private school).

Consider Cash Value Life Insurance

Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive.

(Yes, cash value life insurance allows you to financially help your family and loved ones while you’re still living – and it grows tax-deferred!)

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or withdrawals. This component adds flexibility and provides an immediate tax-favored source of income for retirement, travel, healthcare needs, or emergencies.

Read on to learn more about cash value life insurance.

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There are many other benefits to owning life insurance. Life insurance could help keep a family business running or provide a charitable legacy—the options are endless.

Remember, it’s better to buy life insurance sooner than later. Why? Life insurance is less expensive the younger and healthier you are.

Moreover, your life insurance needs will evolve over time – so best to get familiar with your options now. Interested in learning more? Read on to see how your life insurance needs might change in our article “Can I Change My Life Insurance?

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How Does Life Insurance Premium Financing Work?

In many situations, it can make economic sense for a family to finance the premiums needed to acquire life insurance coverage for estate and wealth transfer planning purposes. Here’s how a basic Life Insurance Premium Financing transaction is structured:

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Life Insurance Underwriting Process

Life insurance underwriting is the process of evaluating the level of risk an applicant for coverage may pose to the insurance company. There are several things that an insurance underwriter will typically review, including: lifestyle, health, and motor vehicle history. The underwriting process is subjective and can take between two and six months to complete.

Step 1: Informal underwriting and pre-qualification

Medical records are ordered based on the information provided on your signed HIPAA authorization. You will also complete a physical exam conducted by a licensed medical professional at your home or office. Some carriers may waive the exam for younger, healthier insureds.

Results from your exam combined with your medical records will allow the carriers to determine your
insurability and offer an initial health rating. This could help narrow down your options to carriers who
feel you are the healthiest.

Step 2: Formal application and additional requirements

You will then complete and sign the selected carrier’s life insurance application. Upon receipt, the carrier may also require additional information.

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Types of Life Insurance

Life insurance comes in several different flavors, so learning the options and then selecting the right type of policy for your goals and budget is crucial.

In general, life insurance is a contract between a policy owner and an insurer, whereby the insurer promises to pay a designated beneficiary a sum of money, called a “death benefit,” upon the passing of the insured person, in exchange for a premium, paid in a lump sum or over time. Under current tax law, death benefits are exempt from Federal income and capital gains tax; with additional planning, they can be exempt from Federal estate tax, too.

Term life

Term life insurance is designed to last for a specific amount of time or “term,” which can range from 1-to-40 years. Term life is pure coverage without a cash value component. Premiums are inflexible but they are guaranteed not to increase for the length of the term. At the end of the term, a new policy and updated medical underwriting is typically required. Some term policies offer a feature that allows conversion to a permanent policy of the same or smaller amount within a certain period and without evidence of insurability. This can be valuable if the policy owner wants to extend coverage beyond the term, but the insured cannot medically qualify.

Permanent Life

As opposed to term, permanent life insurance is designed to last until the insured’s death, whenever it may occur. It combines term insurance death benefit protection with a cash value account that grows tax-deferred. Each year, the life insurer deducts what it needs from the premium to cover mortality and administrative costs; the rest goes into the cash value account. The owner can access the cash value during the insured’s lifetime for different purposes, including reducing premiums, pledging it as collateral for a loan, receiving in cash, or leaving it to accumulate. There are five main types of permanent life insurance policies, discussed in detail, below. Many of the differences come down to the option chosen as the mechanism that drives the growth of the cash value account.

Whole Life

Like all permanent life insurance policies, whole life provides lifelong coverage and includes a cash value component. Although it’s more complicated than term, whole life is the most straightforward form of permanent life insurance. This is because the premium is designed to remain the same for as long as the insured lives, the death benefit is guaranteed, and the cash value account grows at a guaranteed rate. Most whole life policies can also earn annual dividends on cash value, which represents a portion of the insurer’s financial surplus, but they are not guaranteed. Whole life premiums are not as flexible as other types of permanent insurance, and policy loan interest rates can be high. Whole life is most appropriate for those with a conservative risk profile.