How would your family survive if you were to unexpectedly pass? Would their standard of living and quality of life diminish? Who would generate the shortfall in income if you were no longer around to earning a living? Will your loved ones be able to afford all the costs associated with your passing, such as estate taxes, funeral expenses and burial services? Although it is a tough concept to wrap one’s head around, these are just some of the questions that would need to be answered if an unexpected critical financial event, such as death, were to transpire. In addition to the insulation from financial devastation provided by these income replacing vehicles, other applications such as estate planning is another inherent use of life insurance. While various types of policies offer different benefits, each performs the same vital function; to provide a measure of security and a financial safety-net for your family and loved ones, should a critical financial event ensue.
What exactly is Life Insurance? It is the protection against the shortfall of income that would result from the passing of the insured. The named beneficiary would receive the proceeds, tax free, in the form of the death benefit. This tax free death benefit functions as a safeguard from the devastating financial impact resulting from the death of the insured. While all Life Insurance policies provide this death benefit, there are four main types. Each one operates in a different capacity in order to accommodate one’s specific circumstances. The main types of Life Insurance policies are Term Life, Whole Life, Universal Life and Variable Universal Life Insurance.
The most basic type of life insurance is Term. The policy is written for a specific term. If the insured dies within that stated term, the insurance company must then pay the death benefit to the named beneficiary, tax free. The insurance coverage will end when the term ends. The premiums for term insurance tend to be the lowest compared to the other different types of life insurance. Unless it is a level term contract, the premium amounts will increase as the age of the insured increases. Term insurance would serve the greatest benefit to someone who only needed the death benefit for a certain period of time. What about a policy that won’t leave you guessing how long of a timeframe you may need it for?
Whole-Life will last for the entire life of the insured; thus the death benefit is guaranteed. Although the premiums tend to be significantly higher with a Whole-Life policy, there is one added benefit that is not seen with a Term policy. The policy has the ability to build cash value. The differential between the premium amount and the cost of the insurance itself is placed into what is known as a cash-value account. The account feature enables the insured to borrow from the accrued cash-value.
Although Universal Life also grants the insured lifetime coverage, there is some added flexibility seen with this type of insurance. A Universal Life policy is similar to a Whole Life policy, however, the policy owner has the ability to change both the premium and death benefit. Like Whole Life, the Universal policy has a general account that also has the ability to accumulate cash-value. Another variation of Universal Life is Variable Universal Life.
The major difference between Universal and Variable Universal Life is seen with the way which the general account is invested. With the Variable Universal Life, more risk is taken on by the policy holder, as the general account tends to be invested in stock, bond and other various sub-accounts, as directed by the policy owner. Someone who wants life coverage and can tolerate a higher risk level may be most interested in a Variable Universal Life policy.
Another very common application of life insurance is seen within estate planning. Life insurance is present in many estate plans and can serve as a source of support, education-expense coverage and a means to fund business buy-sell agreements. Additionally, upon the death of the insured, the deceased’s loved ones would soon become responsible for paying the estate taxes (Death Tax). The death benefit from the life insurance contract is a great source of added liquidity. The monies from the tax free death benefit can be used to pay the death tax. This use of life insurance can help to alleviate a great deal of unnecessary financial pressure and stress during a family’s time of grieving.
Life insurance has been known to serve as an elemental means of protection with regard to dealing with devastating critical financial events. With any of the many policies listed above, the insured and their family may feel peace of mind. Life insurance may be a great tool in allowing their family and loved ones to maintain their standard of living and potentially not fall victim to many of the detrimental expenses associated with critical financial events.
Be sure to check out the latest Mitlin Minute on life insurance! Contact MitlinFinancial, Inc. today at (631) 952-4466 x12 and learn about the applications of life insurance and the ways you can best insulate your loved ones from critical financial events.
Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.