Life Insurance

What is life insurance?



Life involves a series of risks. Life insurance can help to protect against the risk of loss due to the unexpected, death. Life insurance promises to pay money through death benefits when you die, or living benefits if you need a loan or income at retirement. Families use it to help protect loved ones who might die unexpectedly.



Life insurance is unique. The very event that causes a need for money – death – creates the money.



How does life insurance work?



How is life insurance used?



What are the main tax advantages of life insurance?



How much life insurance do I need?


 



How does life insurance work?



family1It's pretty simple, really. If the insured pays the premiums, i.e., the cost for the insurance policy, the company promises to pay the beneficiary the death benefit.


 


What some people often miss is that life insurance can have living benefits, too! You don't have to die to receive benefits from your policy! Here is a list of some living benefits in a life insurance policy:  Low cost policy loans for emergencies (policy loans reduce the death benefit)



  • income for life at retirement through one of several policy settlement options
  • extra coverage by add-on riders (at an additional premium)



People use life insurance in many ways, but the main reason to buy it is out of love — and responsibility.



 




 





family2A brief discussion of five uses for life insurance follows.


1. To replace income. The number one reason to buy as much life insurance as you can afford is to protect your earning power, which stops when you die. Death benefit proceeds can replace the income lost upon death when a wage earner dies. The funds go to the surviving family to help pay the normal ongoing bills: rent or mortgage payments, food, clothing, electricity and heat, loans, other insurances, etc.


2. To pay off final expenses. To pay off final expenses. Final Expenses add up to more than most people realize. Besides the costs of a funeral and burial, upon your death certain debts must be paid off right away. Examples are credit card debt, personal loans, expenses of a last illness, and income taxes. Depending on the amount of your assets when you die, there could also be fees to do a final settling of your affairs, such as executor's fees, attorney's fees, real estate appraisals and probate court costs. Finally, last expenses may include state and federal taxes, which are taxes on the right of your heirs to receive your property.


3. To accumulate money in a tax-favored account. Not counting term insurance policies, which usually do not build up any money inside the policies, most life insurance develops a savings portion called the cash value. These cash values grow without current income taxes. For this reason, many people like to use life insurance as another way to build savings. Think of the cash values as much like the equity that builds up when you pay off a home mortgage. As you continue paying premiums over the years, your cash value account builds up more and more.


 


family34. To provide benefits (in businesses). Companies want to hire the best people in leadership positions. To keep these employees happy so they will stay for a long time, business owners offer to pay for large amounts of life insurance on their lives to provide family protection and to build another way to put money aside for retirement income.


 


 


5. To transfer wealth smoothly to the next generation. Life insurance could be said to be the pennies paid today (premiums) to deliver dollars in the future at the exact time they are needed, at death. Wealthy people may need hundreds of thousands of dollars in cash at death to pay estate settlement costs and taxes. For example, a business owner or farmer may have a lot of wealth tied up in land, buildings or equipment. Much of that could be lost if the estate's executor was forced to sell these valuable assets to pay estate settlement costs. Life insurance bought on the owner provides an easy and inexpensive way to raise the money to settle the estate so the heirs can receive and keep the business or farm. That is one of the reasons why very wealthy people buy very large amounts of life insurance.


Life insurance has many uses because of its price – pennies paid today for dollars paid tomorrow – and many tax advantages. No other financial asset can do so many things. Take a close look at how you can use it to give your family a safety net and as another means to save some money for future use.


 




 





Some types of life insurance have more tax advantages than other types, but the main tax advantages are these:



  • Policy cash values grow in most cases without taxes.
  • If a policy is surrendered, only the gain over and above the premiums that were paid is subject to tax.
  • Death benefits are paid to the beneficiaries free of income taxes.
  • Policy loans may be received by a policy owner in an emergency, income tax free.



 




 





family4The answer to that question depends on your individual situation. For example, it might depend on who and how many people depend on your ability to earn a living, what types of property and savings you have, and what types of debts you have outstanding.


Also, how much life insurance you should own depends on what your goals are for your future financial security in retirement. Finally, it depends on your age and the life stage you are in.


Some people should own life insurance equal to six to eight times their income, with separate funds provided to pay off a home mortgage and final expenses. Yet, others may need life insurance of at least 10 times their income.


Your UIA agent is well-trained to help you take a careful look at your current situation and your future goals. Our goal is to help you buy the proper type and amount of life insurance to meet your needs and your budget and not a penny more.


 




 




Getting Started




Contact us or find a University Insurance Agency agent to help you determine which type of life insurance policy may be right for you.