Life insurance allows an individual to replace their income for many years into the future to support their family or provide a lump sum payout, business buy out, estate tax planning or other family or business need.
For most families and individuals protection would be classified as a need and not a want. However, not every family has the same needs. For businesses, each entity will also have different needs for their plan.
Whether you are looking to protect your family or business with a plan or using it as a vehicle to achieve tax favored retirement goals, you must have a plan. Once you determine your goal you will need to identify what type of plan will help you meet your personal goals.
How much protection is needed to adequately provide a safety net for my family? Calculators are a great tool to help determine your replacement income needs. Calculators use formulas that will calculate, current income adjusting for inflation, projected and future income and will take current assets and savings into account to meet future debt obligations. Obligations may include everything from mortgage payments, child care, college tuition, utilities, food, etc. Once you determine how much, the next thing you will need to consider is how long.
How long do you need protection to meet your needs? Example: your children are 5 years and 2 years old and one is on the way. Your goals are to have replacement income available for the family until the children are out of college and/or their 25th birthday. With one child on its way and the youngest child 2 years old, you will need to start considering coverage that will continue for a minimum of 25 years and most likely 30 years. This time frame would meet your overall objective.
Now you have two of the most critical questions answered (the how much and how long). You are now ready to consider what type of life insurance would be most appropriate for your family. There are only two types of traditional life insurance, term life insurance and permanent insurance. With each of these types you have a choice between Medical and Non-Medical Exam underwriting. Under these two kinds of options there are many different types of products for term and permanent policies.
Term & Permanent Products and Names
A. Term Life Insurance - Guaranteed Level term, annual renewable terms, increasing terms, decreasing terms, second to die term policies and many other variations, with new programs or variations coming on the market each day.
B. Permanent Life Insurance - policies have many types to include whole life, universal life, indexed universal life, variable life, and modified life, which are just some of the more popular policies sold.
General Benefits of each type of policy
Term Life Insurance - Guaranteed Level Premium for a known period of time, less premium per month than a permanent policy. Flexibility allows policy holder to convert to permanent policy on or before age 70 or prior to the end of the term without showing proof of insurability. This type of policy will have lower term life insurance rates.
Permanent Policies - This policy continues to provide coverage permanently. Builds cash value early in policy to ensure policy will stay in effect through the life of the owner. There are two tremendous advantages for retirement planning. You receive tax free cash value growth, and tax favored distribution, (consult with your tax professional). Additional benefits include flexible premium options, ability to borrow against policy and/or change coverage amounts and premium.
Financial or budget concerns should and will play a major role in what products will best meet your family protection needs. Determining the cost of an adequate plan can only be done once a probable health classification has been determined. Each carrier uses their own underwriting guidelines to determine the risk they are willing to accept for each published premium and health classification. Based on your current medical history prior to your exam you should have a good idea of what health classification you may qualify for. This will help you determine which product strategy and plan would best meet your goals and budget.
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