BY: CARTER GRAY
BY: CARTER GRAY When thinking about life insurance, it all begins with the need. What is the purpose of the coverage? How did you arrive at the amount of insurance? This is the alpha of life insurance. There has to be a justifiable need and insurable interest between the owner (person or entity looking to purchase coverage), the insured, and the beneficiary of the insurance contract. An individual or entity has an insurable interest when he or she will obtain some type of financial benefit from the preservation of the subject matter or sustain a loss from the insured s death or illness. Ideally, the life of each productive member of society should be insured for an amount equal to their full economic value, as determined by the insured and those who depend on that income. If there is justification for the life insurance death benefit, people can also supplement their retirement tax-free through withdrawals and loans from a cash value policy. In addition, policyowners can use it to create their own bank, which can be done through multiple financial vehicles. However, people typically do not incur income tax or short / long-term income tax when they transact monetary movement through the life insurance cash value. There are multiple ways people can determine the correct amount of life insurance they should have. The most common calculation is the needs approach that analyzes various needs a family or other dependents would experience if the income producer died. This approach takes into account the immediate cash needs, such as mortgage balance, current debt and final funeral expenses, as well as ongoing income needs such as replacing income sources. Another calculation is the human life value approach, which analyzes how much life insurance a person should carry. This calculation is based on the proposition that one should carry life insurance in an amount equal to the capitalized value of his or her net earnings until retirement. In layman s terms, what do you think you are worth? If you died today because of someone else s cause, how much would the judicial system determine you were worth? It is kind of a strange topic, but most people don t accurately calculate and protect their true worth. 1
Life insurance policies are contracts of adhesion. This means the policyowner and the insurer do not negotiate the terms of the contract. The insurer determines the wording of the contract and makes an offer to the prospective policyowner who can only accept or reject the contract offered by the insurer. Typically, contracts of adhesion rules provide that all ambiguities in the contract of the issuer are resolved in favor of the other party in the case of insurance the policyholder. Furthermore, many people are unaware of the incontestable clause, which makes the life insurance contract incontestable by the insurer after it has been in force for a certain time period. The courts have recognized three exceptions to the incontestable clause: If there was not insurable interest at the inception of the policy If the policy had been purchased with the intent to murder the insured If there had been a fraudulent impersonation of the insured by another person (someone else taking the exam) There are two types of life insurance, term and permanent. Term insurance pays a death benefit if the insured does not survive a specified period written in the contract. Typically, term insurance goes for 10, 15, 20 or 30-year increments. When comparing term insurance policies, it is extremely important to look at the conversion privileges in the contract because certain policies allow the policyowner to exchange the term contract for a permanent plan without evidence of insurability. You need to take it a step further and find out what permanent life insurance options your policy is convertible to in case your needs change. Permanent life insurance refers to whole life and universal life, which is intended to last until the insured s death. When analyzing which type of insurance meets your needs, it is very important to pay attention to the guaranteed elements of the policy, along with the current assumptions to determine the right contract you should purchase. It is very important to understand the minimum and maximum you can pay into the policy without it becoming a modified endowment contract, which makes the cash value taxable if you take withdrawals or loans. There are 2
a lot of opinions about what type of insurance you should purchase, but after people do the research, they see the value in both term and permanent. About five years ago, a handful of life insurance companies started developing riders and accelerated benefits that are added to the policies at no additional charge. This means the policyowner can accelerate the death benefit while the insured is still alive and receive some of the death benefit. Examples of these riders and accelerated benefits are: Terminal illness if a physician diagnoses the insured with an illness projecting a life expectancy of 24 months or less to live Chronic illness if the insured is permanently unable to perform at least two activities of daily living (bathing, continence, dressing, eating, toileting and transferring), or if the insured suffers from severe cognitive impairment Critical illness if the insured has a heart attack, cancer, stroke, major organ transplant and kidney failure are some examples These riders and accelerated benefits are built into the term and permanent insurance policies, giving the owner the ability to accelerate the death benefit due to a triggering illness. It is important to be aware of the extra benefits you could be receiving for the same cost or less. If you currently have a life insurance policy, you should review it sometime in the near future. Term insurance is pretty straightforward. Look at the amount of time left on your term policy and pay attention to the guaranteed premium period left on your current contract. Consider the incontestability period and any change in health before you make a change. Examine the policy for any riders you may or may not have when going over your options. If it is permanent, request an in-force illustration and pay close attention to the guaranteed elements of the illustration, along with current assumptions to see if 3
there is a net benefit for you to make a change. There are many concepts in the life insurance world pertaining to utilizing cash value in many advantageous ways. These strategies are not complicated if you understand and can determine the policy expenses in the long run and the difference between a minimum and maximum funded policy. When it comes to the decision of life insurance, it is important to speak with an advisor who understands the difference between term, whole life and universal life, so you can make the right decision for you and your family. IF YOU HAVE TROUBLE FINDING SOMEONE WHO UNDERSTANDS THE INTRICACIES BETWEEN THE DIFFERENT CONTRACTS, YOU CAN CONTACT ME DIRECTLY AT: CARTER@PACIFICINSURANCEGROUP.COM OR 425-246-1676 3