The purchase of California life insurance may be one of the most important decisions that you make in your financial life. However, its a decision that most of us will put off until something happens that hits close to home. That is not to surprising considering most people don’t like to think about death, but at the same time being unprepared can have serious consequences.
There 3 questions you should ask yourself if you feel you may be a candidate for life insurance
Do I need life insurance?
How much do I need?
What kind should I buy?
The answer to the first question is simple. If someone will suffer financially when you die, you need life insurance! This could mean your family, aging parents or even your business partner and employees.
The best way to figure out how much coverage you need is have an insurance professional conduct what’s called a financial needs analysis. You will start by gathering all your personal financial information and then estimate how much money your family members will need after you’re gone to meet their financial obligations. To calculate this figure you will need to think through 3 types of expenses:
Immediate Expenses
• Funeral expenses
• Uncovered medical costs
• Mortgage and other debt
• Taxes
• Estate settlement costs
Ongoing expenses
• Food
• Housing
• Utilities
• Transportation
• Insurance
• Clothing
Future expenses
• College
• Retirement
After tallying up these expenses you will be able to determine how much coverage you will need to keep you family financially stable in the event of your death.
There are 2 fundamental questions to ask yourself when trying to determine what kind of life insurance to buy.
How long will you need the insurance?
How much money do you have in your budget for this coverage?
How long you need a policy for will determine if you what term or permanent life insurance.
Term life insurance
This insurance lasts for a specific period of time and is good to cover temporary needs. The policy could last 5 years, 10, 20 or maybe even 30 years. Remember that the shorter the policy term, the more affordable the premium. However, once the policy term has expired you may have to take another physical to qualify and you will have to pay a considerably higher premium to maintain the policy.
Permanent life insurance
Exactly what the name implies, its with you for life. The premium for this type of policy is scheduled to remain level for your lifetime. These plans build a cash surrender value that is available if needed for things like emergencies, opportunities or college for your children. Of course these benefits of permanent insurance come at a price and are often more expensive than term insurance.
Term life refers to insurance which provides a ‘pure’ or temporary protection. This type of life protection typically provides the maximum amount of life insurance coverage for any given level of capital outlay.
The insurance policy’s face amount is payable to the insured if they die during the specified term. For example, a 10 year term policy offers a specified term of 10 years. If the insured dies within that specified 10 year time frame, their listed beneficiaries would receive the death benefit proceeds.
Advantages of Term Life Insurance
There are several advantages to purchasing term life insurance coverage, including:
- The cost is typically less expensive than forms of whole life protection.
- The guaranteed renewable option offered by many insurance companies allows the insured to maintain life coverage without insurability at the end of their specified term.
- The death benefit proceeds can be utilized to pay off specific debts, such as a mortgage.
- Term life can be used in conjunction with whole life policies to provide a greater death benefit.
As with any form of life protection, there are both advantages and disadvantages which should be taken into consideration when determining the type of life insurance which is most suitable for an individual’s given financial needs and goals. In addition to the general type of life insurance coverage (term vs. whole life), the variations of that type as well as the death benefit must be chosen.
Level vs. Decreasing Term Life Insurance
There are two primary forms of term life insurance- level and decreasing.
Level- Level term is the most common form of term life insurance, providing a constant of fixed amount of death benefit coverage as long as the policy remains in force. Level term is characterized by a level death benefit and increasing premiums. While the premiums for any given term policy will remain constant throughout the specified term (i.e. 5 years, 10 years, 20 years), they will adjust according to one’s age at each renewable period. For example, if the insured party wishes to renew their 10 year term policy at the end of the term, the new premium will be based upon the insured’s age at that time and the term duration selected. The new premium will not remain the same upon renewal as the original 10 year term policy. One feature which many life insurance companies offer is the ability to renew their coverage for another renewable period without proving insurability.
Decreasing- Also referred to as non-level term, the coverage amount decreases on an annual basis while the premium remains level throughout the specified term. The most common purpose of this type of insurance is to provide funds at death for survivors to pay off a specific debt obligation (i.e. mortgage, boat loan, home equity loan, etc.). The premiums for decreasing term are typically lower than level term as the policy’s face amount decreases as the rate of $1,000 of coverage increases.
Term life insurance is one of many types of protection available today. As you determine which type of coverage is appropriate for your given situation, be sure to consider your current income and expenses, accumulated assets, survivor income needs and financial goals in order to make the best decision for your household.
Purchasing life insurance in California involves more than selecting the level of death benefit to cover your specific financial needs. You must also determine which type of life coverage is best suited for your household budget, financial goals and objectives and to provide for your survivor’s current and future income needs. There are four primary types of California life insurance coverage available today- term life, whole life, universal life and variable universal life.
Term Life
Term life is a form of ‘pure’ life protection, also referred to as temporary coverage. Term life provides a specified death benefit to the insured’s listed beneficiaries in the event that the insured dies within the specified time frame. For example, if John purchases a 10 year, $500,000 term at age 45, the policy will pay this death benefit to John’s listed beneficiaries in the event that he dies prior to age 55, as long as the policy remains in force. Term life provides the maximum amount of life protection with the lowest initial outlay of funds.
Whole Life
Whole life insurance provides payment of a death benefit of face amount of coverage to the listed beneficiaries upon the death of the insured, whenever this may occur. This type of life policy provides death benefit coverage for the insured for their ‘whole life.’ In addition to providing a death benefit, whole life policies enable the insured to build a cash value up within the policy, earning a stated interest rate on an annual basis.
Universal Life
This type of life protection provides the insured with more flexibility than a traditional whole life policy. When an insured makes a premium payment, a portion is applied as a premium payment, while the other portion is deposited into the policy’s cash value account. Universal life can also be referred to as interest sensitive as unlike whole life, this type of policy utilizes changing rates to determine cash values. The interest rate paid on the cash savings plan will vary annually based upon market conditions, however the underlying interest rate is guaranteed annually. More importantly, the premium amount is variable on annual basis. The policy owner can pay whichever premium amount they wish on an annual basis.
Variable Universal Life
This type of policy combines a guaranteed death benefit with a non-guaranteed savings feature. Because this policy integrates securities and investment vehicles with insurance principles, the individual representing offering this strategy must carry dual licenses with their respective insurance agency and the SEC. Due to the growth potential of the underlying equities (stocks, bonds, mutual funds) within this type of policy, the cash value may outperform other plans. The variable universal life policy also offers the policy owner flexible premium options. The primary purpose for purchasing this type of policy is to leverage the potentially tax free cash accumulation amounts for financial goals and objectives, such as college or retirement planning.
Each of these four insurance policy types offers a variety of advantages which should be considered prior to making a purchasing selection.
