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Life Insurance: Whats the difference?

Buying life insurance these days is liken to buying another product on the shelf. In a LIMRA study, it was determined that 35 million US households have no insurance at all.

LIMRA’s 2010 Life Insurance Ownership Study has found that 30 percent of U.S. households (35 million) have no life insurance protection at all.

In another starling statistic, LIMRA study shows 44% of US households have individual life insurance.

Only 44 percent of U.S. households have individual life insurance. This is a 50-year low.

It is most unfortunate that consumer concern themselves with insurance that are not protecting their most important asset, which is themselves. People buy insurance for their car, home and appliances (TV, computers).

It is more important how one view the importance of life insurance. I am of the opinion it is our moral and fiscal responsibility to protect our biggest asset. Life insurance should be a core fundamental in our fiscal planning along with saving and retirement.

I frequently asked my client what is their value to their family. A good number of times they scratched their head and looking to utter some good answers. They blurted out some numbers like a million here or there. It seems amazing that people don’t seem to value themselves like they valued some of their own possessions.

I believe the answer should be along the line of priceless. Unfortunately life insurance companies cannot underwrite a priceless policy. It can, however, underwrite the economic loss using the current income and other liabilities a person might have. A good way of estimating the amount of life insurance need is to use a factor between 10-20 times of annual income.

There are many ways to purchase life insurance. There is the option to purchase them through an employer that is termed as group life insurance. Typically the employer provides every employee a minimum of 1-2 times of salary or a flat dollar amount of coverage like $20,000 or $30,000.

There is no medical underwriting and there is one rate class that is based on age-band. In this instance, an employee who might not typically enjoyed such a preferred rate due to possible pre-existing conditions, will get a rate better than an individual policy.

One has to be aware of the portability issue that comes with group life insurance. Not all group life policies come with portability clause.

Another option is to purchase individual life policy. Typically the application is subject to medical underwriting requirement as well as other company’s specific requirements.

There are two ways to buy individual life insurance; term and permanent. Term life insurance is a contract that is purchased for a certain time period like 10-, 15-, 20- or 30-years. At the end of the agreed term period, there is no further protection offered. If something happens during the contractual period and premium payment is current, the life insurance company will pay out the death benefit to the beneficiary income tax free.

There is another option to term insurance and it is termed as Return of Premium. In this policy, the premium is more than a level term policy. At the end of 20- or 30-years policy, assuming there is no death claim, the insurance company will refund the total premium paid to the owner.

The permanent life insurance has an additional component that is the cash value. The premium paid into a permanent policy will have a typical sale charge deducted and then the net premium is credited to the cash value. From the cash value the cost of insurance, administrative charges and policy charges are then deducted.

The cash value in a permanent life insurance can potentially grow in value and it grows tax-deferred. It can earn a guaranteed interest as declared in a policy (whole or universal life) or earn an interest based on a specific market index (S&P 500) (indexed universal life) or a mutual fund like account which can earn or lose value (variable universal life).

The gain portion of the cash value can be accessed via a loan without current tax consequence. The loan does not have any usage stipulation and one can use it for any purpose. There is a cost associated with this loan provision. The interest rate charged for this loan is typically around 2-8% (dependent on policy). However, once the loan is repaid, the insurance company will credit your cash value with interest rate close to or equal to your initial interest rate charged.

There is a myriad of life insurance choices out in the market place. A good life insurance agent is indispensable to building your financial future. Good agents understand a client’s financial needs and design a program with various options to meet the client’s goal and objectives. They then go about shopping for comparable products that can meet the goals and challenges of the client. Shop around and have a good life agent be part of your financial team.

Albert K. Law