Purchasing Life Insurance

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Purchasing Life insurance

Would your family suffer financially, were you to die unexpectedly? According to research conducted for the National Association of Insurance Commissioners (NAIC), less than half of young families have life insurance, for either spouse, that they have purchased on their own. Because planning for life’s uncertainties will help secure a financial future for those you love, you should review your insurance needs to help ensure you have the right policy for your financial situation and your family composition.

LIFE INSURANCE:
Securing Your Family's Financial Future in Case of Unexpected Death

Decide How Much You Need: The first step to purchasing life insurance is to decide how much coverage you need, for how long and what you can afford to pay. Keep in mind the major reason you buy life insurance is to cover the financial effects of an unexpected or untimely death. Life insurance also can be one of many ways to plan for the future.

Here are some questions to ask before buying:

How much of the family income do I provide? If I were to die, how would my survivors, especially my children, get by? Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
Do I have children for whom I'd like to set aside money to finish their education in the event of my death?
How will my family pay final expenses and repay debts after my death?
Do I have family members or organizations to whom I would like to leave money?
Will there be estate taxes to pay after my death?
How will inflation affect future needs?

When considering your coverage, be sure to factor in life insurance you currently have, including group insurance where you work or veteran's insurance. Don't forget to include benefits from Social Security or survivor's benefits from a pension plan.

The Right Kind of Policy: All policies are not the same. Once you have determined how much coverage you need, it's time to find out more about the types of policies available. There are two basic types of life insurance: term insurance and cash value insurance.

A term life insurance policy covers you for a specific number of years, or term, such as 10, 20 or 30 years. It pays a death benefit only if you die in the insured term. Term insurance generally offers the largest insurance protection for your premium dollar. A term life policy has lower premiums than a cash value poilcy of the same amount; however, it does not build up cash values that can be used in the future. For a cash value life insurance policy, premiums are higher at the beginning than they would be for the same amount of term insurance. With a cash value life insurance policy, the part of the premium that is not used for the cost of insurance is invested by the company and builds up cash value. You may borrow against the policy's value, use the cash value to increase your income in retirement or even help pay for needs, such as a child's tuition, without canceling the policy. Cash value life insurance may be one of several types, such as whole life, universal life or variable life.

Before You Buy: After you have decided which kind of life insurance is best for you, compare similar policies from different companies to find which one is likely to give you the best value for your money. A simple comparison of the premiums is not enough. There are other things to consider. For example:

Do premiums or benefits vary from year to year?
How much do the benefits build up in the policy?
What part of the premium or benefits is not guaranteed?
What is the effect of interest on money paid and received at different times on the policy?

Remember that no one company offers the lowest cost at all ages for all kinds and amounts of insurance. You should also consider other factors:

How quickly does the cash value grow? Some policies have low cash values in the early years that build quickly later on. Other policies have a more level cash value build-up. A year-by-year display of values and benefits can be helpful. Your insurance agent or company will give you a policy summary or an illustration that shows benefits and premiums for selected years. Be sure to ask questions to help ensure you fully understand the policy summary.
Are there special policy features that particularly suit your needs?
Do you understand how non-guaranteed values are determined? Ask your agent how the policy is affected by interest rate changes, changes in mortality (deaths), profits of the company, changes in the value of the investments supporting the policy, and changes in other key factors.

Stop. Call. Confirm: Before buying, be sure you are dealing with an authorized insurance agent and company. STOP before signing anything or writing a check; CALL the Florida Department of Financial Services to Verify Before You Buy. Call 1-800-342-2762 or go to www.myfloridacfo.com.

Finding an insurance agent who is a member of the Florida Association of Insurance and Financial Advisors is very easy. Click here to find one in your area:http://www.naifa.org/consumer/advisor.cfm

Life Insurance: Providing

Financial Protection

Life insurance is a key component of Americans’ ability to take individualresponsibility for the financial futures of their families and businesses. It is unique in guaranteeing the delivery of financial security at precisely the moment it isneeded, while contributing significantly to the nation’s storehouse of savings and nvestment capital.

A big fear for many American families is the death of a wage-earner or caregiver,leaving the surviving family members unable to cope financially. Life insurance offers peace of mind through immediate financial protection for dependents. Life insurance enables individuals and families from all economic brackets to maintain independence in the face of financial catastrophe, helping relieve pressure on government entitlement programs. For this reason, there has been strong public support for continuation of current tax policy for life insurance products.

By providing tools for self-protection and savings, life insurance is an efficient way to promote personal responsibly and foster less dependence on government programs. A recent survey showed that three-quarters of Americans agree that life insurance is a critical part of a financial plan.1

SUCCESS OF THE PRODUCT

Life insurance protects families from financial loss from the death of a loved one. It enables families to pass on more assets from one generation to the next, providing a source of reliable liquid assets when the need arises to pay for deathrelated expenses. Very few Americans can self-insure the risk of premature death through their own financial means. Life insurance makes managing this risk affordable through the pooling of risk. Industry data shows that in 2006, there were 161 million individual life insurance policies in force providing $10 trillion of protection. Sixty-five percent of American families are protected by life insurance.2

Permanent life insurance has an additional advantage—it is guaranteed to remain in force for one’s whole life, regardless of age. By design, the level premiums of permanent insurance are used to both pay for the term cost of a policy’s face amount and to create a savings component (cash value), which helps cover the rising cost of insurance as one gets older. If an insured’s needs change and death benefit protection becomes less acute, the policy’s cash value can be used to pay various expenses, such as those for tuition or long-term care. Or, the cash value can be converted into a retirement income producing annuity that can guarantee regular payments for life or for a specified period of time, an option also available to beneficiaries of life insurance policies.

Some policies allow an insured to collect all or part of the death benefit if he or she becomes terminally or chronically ill. Fifty-nine percent of the individual life insurance policies issued in 2006 were permanent policies.3

1 ACLI, Monitoring the Attitudes of the Public. 2004.
2 “Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances.” Federal Reserve Bulletin, 2006.
3 ACLI, Life Insurers Fact Book 2007.American Council of Life Insurers

Businesses use permanent life insurance to protect against financial uncertainty and secure their employees’ futures. By owning life insurance on key employees, businesses have a secure funding source to pay for important employee and retiree benefits and to protect jobs and families from financial loss and instability that can result from the death of an owner or key employee.

CURRENT TAX TREATMENT

Policy-makers have long-recognized the important social policy served by encouraging individuals and families to protect themselves against financial risks, rather than depend on government to do so. Since its inception in 1913, the tax code has provided that death benefits—and the cash value in permanent life insurance—are not subject to income tax. Premiums are paid with after tax dollars—there is no deduction for premiums paid. Earnings on a permanent life insurance policy’s cash value are not taxed as long as the policy remains in force. However, if a policyholder gives up his or her insurance protection, earnings in excess of the total premiums paid are subject to tax.

The protection afforded by life insurance is an important societal benefit that public policy has consistently validated. This policy has been reviewed several times over the last century, and each time Congress has chosen to preserve the current tax treatment of permanent life insurance.

CONCLUSION

The current tax treatment of permanent life insurance encourages individuals, families, and businesses to efficiently manage risk and prepare for long-term financial needs, despite a general environment that focuses more on the shortterm. Any changes to public policy must not limit or disadvantage the critical protection only permanent life insurance can provide.

ISSUES AND TRENDS

• The financial plans of 65 percent of American families include life insurance.4
• These families are covered by life insurance policies and group certificates that provide more than $19 trillion worth of protection.5
• In 2006, there were 11 million individual life insurance policies issued.6
• Of all the individual policies issued in 2006, 59 percent were permanentinsurance policies.7
• In 2006, beneficiaries of life insurance policies received $56 billion in death benefits. Of this total, individual life insurance policies accounted for nearly two-thirds.8
4 “Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances.”
Federal Reserve Bulletin, 2006.
5 ACLI, Life Insurers Fact Book 2006.
6 ACLI Product Line Report: Life Insurance. November, 2006.
7 ACLI Life Insurers Fact Book 2007.
8 Ibid.