Life Insurance Questions

Q: What is the general purpose of life insurance?

A:
Life insurance is a unique asset which is a valuable addition to your overall estate due to its potentially high yield and tax-favored benefits. Life insurance can be used for any number of reasons. Some of the most common uses are:

1. Creating an estate
2. Paying estate taxes
3. Funding a business transfer
4. Funding college
5. Paying off the home mortgage
6. Protecting a business
7. Creating a retirement fund
8. Replacing a charitable gift
9. Guaranteeing loans
10. Equalizing inheritances

Q: How much life insurance should an individual own?

A: Rough "rules of thumb" suggest an amount of life insurance equal to 6 to 8 times annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed. Important factors include income sources (and amounts) other than salary/earnings, whether or not the individual is married and, if so, what is the spouse's earning capacity, the number of individuals who are financially dependent on the insured, the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. It is recommended that a person's insurance advisor be contacted for a precise calculation of how much life insurance is needed.

Q: How much will it cost?

A: The cost for life insurance varies widely depending on the health and age of the person to be insured and the coverage amount of the policy. Individuals are rated by their age, health history and in some cases, by their careers. All other things being equal, younger people will generally have lower premiums than older people. The best way to find out how much life insurance will cost is to get quotes from multiple carriers.

Q: What's the difference between term and cash value life insurance?

A: Although a difficult question ­ one whose answer will vary depending on circumstances ­ several principles should be followed in addressing this issue. It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered:

A. "How much life insurance should I buy?"
B. "What type of life insurance policy should I buy?"

The question contained in (A) involves an "insurance" decision and the question contained in (B) requires a "financial" decision. The "insurance" question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the "financial" decision ­ which type of policy to buy. Important factors affecting the "financial" decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.