Life Insurance,
Answered Plainly

At its simplest, life insurance is a contract between a policyholder and an insurance company. In return for a regularly paid premium, the insurance company promises to pay a pre-specified amount of money upon the death of the person named in the policy as the "insured." Worth noting: the policyholder and the insured don't have to be the same person.

The face amount is the amount of death benefit stipulated in the policy.

The death benefit is the amount of money paid to the beneficiary upon the death of the insured.

Ask the harder question: what would happen to your family if you died unexpectedly, or after a long illness? Would there be enough money for your spouse to pay the bills? To send your kids to college? To cover your student loans, your funeral, and everything attached to it?

Life insurance exists so those questions have answers that don't involve loans or bankruptcy. It provides the security of knowing your family will be taken care of if you leave them behind.

Term life policies provide coverage for a pre-determined number of years, called the "term," which is specified in the insurance contract. In contrast to permanent life insurance, term policies don't build cash value over time. The primary advantage is cost: term life policies are typically significantly less expensive than permanent ones, which is why they're where most families start.

A permanent life insurance policy provides coverage for the insured's entire lifetime, and builds cash value over time. Assuming premiums stay paid and up to date, permanent policies guarantee a payout. There are three primary types:

1. Whole Life: coverage throughout the lifetime of the insured. Policyholders can take out loans against these policies once they've accrued significant cash value.
2. Universal Life: lifetime coverage with flexible premium amounts and flexible face values. Especially useful as part of a retirement portfolio or for long-term financial goals.
3. Variable Life: the cash value and death benefit vary based on underlying investments (stocks, bonds, or money market funds) into which premiums are directed. Like any investment, these carry a degree of risk, but earnings accrue tax free until payout.

A policy beneficiary is the person (or persons) who receives the death benefit upon the death of the insured. Without a named beneficiary, the policy itself dictates who receives the payout. These automatic beneficiaries are stipulated by the policy terms and could include a spouse, children, parents, siblings, other family members, or your estate.

If your estate becomes the beneficiary, the payout becomes subject to estate taxes, which is a compelling reason to keep named beneficiaries on the policy. It's also important to review your beneficiary list regularly. Has someone died? Has there been a birth? A marriage or divorce? Life events like these are exactly when your named beneficiaries need updating.

You can always name a new primary beneficiary. However, if you've named a contingent beneficiary (also called a secondary beneficiary) in the policy, that person automatically becomes the primary beneficiary.

To take out a policy on you, the prospective policyholder must have an insurable interest in your life. Those with insurable interest usually include family members, but can also, in some cases, include employers, business partners, certain organizations, and even major creditors.

No. As the policyholder on your own life, you can name any beneficiaries you want.

Life insurance through your job is a valuable benefit, but such coverage is usually limited to between $10,000 and $20,000. For most people, especially those with families, that's far from sufficient. Additionally, unless you purchase premium coverage through your employer, you'll likely lose the coverage entirely if you switch jobs. Work-provided life insurance is best considered supplemental coverage, not the foundation.

The honest answer is a definite "maybe." It depends on your company's size, how many employees it has, and how many of them have opted into the premium coverage. These factors drive the group rates your company can offer.

Before purchasing any life insurance, it pays to shop around and compare rates and policy types. That's precisely what we do. Our large pool of carriers lets us do the shopping for you, and chances are good we can find a comparable policy at comparable, if not better, rates than those offered through your job.

Exact calculations are difficult, but you can make dependable estimates based on a few honest questions:

• What percentage of my family's income comes from my salary?
• If I died, could my family live without that salary?
• How much would be available to them through my 401(k) and other retirement savings?
• How old are my children, and how long until college?
• How much have we already saved for their education?
• What are our monthly bills? Our mortgage payment?

Remember that prices rise over time. If your children won't reach college for ten or more years, the cost of that education will likely be significantly higher by then. Build inflation into your estimate.

This depends on your age, the ages of your children, the balance remaining on your mortgage, how much you've saved for retirement, and similar factors. The younger your children and the larger your mortgage balance, the longer you'll want coverage to stretch. Conversely, substantial retirement savings may mean you need coverage for fewer years. Call our office; we're happy to review your situation in depth.

Premiums depend on several factors, including:

• Your age
• Sex
• Height and weight
• General health condition
• The type of policy you choose (whole, term, or universal)
• Your status as a smoker or nonsmoker
• The length of coverage you choose

Several things, actually:

• Buy early. Premiums generally rise as you get older, and rates locked in young stay with you.
• Don't smoke. Nonsmoker rates are dramatically better.
• Maintain a healthy weight and diet.
• Consider combining term and whole life. Term coverage generally costs less, and blending the two can bring total premiums down while keeping protection strong.
• Look at group coverage through work as a supplement. Depending on your company's size, it can be a solid value, especially for term life.

Once your policy reaches fully paid up status, you won't need to pay any further premiums, but you'll continue to receive coverage for the rest of your life, unless you withdraw money from the policy.

On a fully paid up policy, the insurance company uses the cash value to pay the premiums, so coverage continues without further payments from you. However, if you take cash from the policy, you may be required to resume paying premiums or accept a smaller death benefit.

You can calculate your current cash value using the tables laid out in your policy contract. Or skip the tables entirely: call our office and we'll be glad to quote your current cash value.

Generally, no one. Although some policies pay both the death benefit and the cash value at death, typical policies pay only the stipulated death benefit, making the cash value at time of death irrelevant. One important note: if you have an outstanding loan against the policy when you die, your beneficiary receives a payout reduced by that loan balance.

An accelerated death benefit allows a terminally ill insured person to receive a significant portion of the death benefit while still alive. The amount taken, along with interest on the early payout, is subtracted from the death benefit ultimately paid to beneficiaries.

Yes, several. Death benefits paid to your beneficiaries are generally exempt from taxation at the local, state, and federal levels. With permanent life products, cash values accrue on a tax-deferred basis; you won't pay taxes on those funds until receiving a payout. Additionally, loans and withdrawals against a permanent policy generally aren't taxed.

Insurability is a measure of how suitable a prospective insured is for coverage, based on overall health and the presence of any diseases or other health conditions. Providers assess it before issuing a policy.

Most providers require a medical exam before issuing a standard life insurance policy. If you're in reasonably good health, that's actually a good thing: policies that skip the medical exam tend to cost considerably more.

It depends on the type of policy purchased and the number of steps required to finalize coverage. Approval can take anywhere from several days to several weeks.

Coverage starts after approval, immediately upon receipt of the first payment.

Over the course of a lifetime, your coverage needs are extremely fluid, which is why it's smart to reassess your coverage annually or even twice a year. Certain life events call for immediate reassessment. Consider adjusting your coverage if you:

• Get married or divorced
• Purchase a new home or refinance your mortgage
• Welcome a new child or grandchild
• Have a child or grandchild about to enter college
• Begin providing care or financial assistance to a family member
• Need to ensure long-term care for a family member

Policy riders add benefits to an existing life insurance policy beyond its base coverage. In most cases, riders are purchased separately from the primary policy.

Yes. Life insurance coverage for children can generally be added to existing policies as a rider.