Life Insurance

Life insurance is most commonly known as a tool used to make sure you can avoid a financial loss or hardship in the event of an untimely death.

However, due to the guarantees and tax benefits, life insurance can be used in a wide variety of ways including:

• Legacy and Estate Planning
• Retirement Planning
• Charitable Giving
• Buy-Sell Agreements
• Executive Bonus IRC 162
• Tax-deferred savings

Types of Life Insurance

There are various types of life insurance plans available. As a general rule, though, they are broken down into two distinct groups: Term and Permanent Life Insurance.

Term Life Insurance

This insurance is designed to cover a specific amount of time (the term) with level payments. Examples would be terms between 1 and 30 years, with more common terms being 10 and 20 years.

If a person passes away during the term of the policy, the death benefit is paid to the beneficiaries (tax-free in most cases). If the person lives past the term of the policy, the policy will either expire or some will turn into one-year renewable term policies with increasing premiums. Many carriers allow you to convert term to permanent insurance at a later date.

Term life insurance is designed to be the least expensive way to cover life insurance needs for a specific period of time since you are simply paying for the death benefit, and there is no value in the policy if you cancel it or let it expire. Cost for this insurance is based on age, health, the term of policy, and the amount of death benefit. These plans can be paid monthly or annually.

Permanent Life Insurance

Unlike term insurance, permanent life insurance is designed to last your whole life and pay out a death benefit upon your death, regardless of how long you live.

There are a wide variety of ways to set up permanent life insurance and various ways to fund it, including limited pay options. Some of the options include the following:

Whole Life

Whole life insurance can be funded in a single payment (as a modified endowment), but it is usually paid for over time to take advantage of the tax-deferred savings and the accessibility you have to cash value.

Policies can be funded with guaranteed level payments over specific periods like 10 or 20 years, or on a continuous basis. Some plans offer other options such as paid up at age 65 or 85.

Whole life policies are known for paying dividends that can be taken out of the policy or used to grow the cash value of the policy and increase the death benefit over time.

Often, whole life plans are used as a retirement planning tool as the wealth that builds within it is tax-deferred. It’s also tax-free to borrow money out of the policy without losing your death benefit. The cost of the insurance is level, so the value of the policy will continue to grow with continued payments.

Universal Life

Also known as UL, universal life is a life insurance that builds cash value.

Although it is often described as a permanent insurance plan, not all policies are guaranteed to last a lifetime.

Universal life insurance policies have more flexibility in payments as you can pay more or less in any given year. Money that is paid in excess of the insurance cost is credited to cash value which will earn interest based on a minimum rate. It can also be linked to an index.

Because of the rising cost of the insurance inside the contract, these policies can lose cash value if enough premiums are not paid or if the interested credited is too low.

Guaranteed Universal Life

GUL is a policy designed to last your entire lifetime and pay a death benefit out at the end. It is like whole life but is usually designed with lower premiums and lower cash value than a whole life policy.

Many plans offer additional features like being able to lower the death benefit down the road to reduce premiums or to cancel for a return of premium if needed. It is often described as a middle-ground policy.