Insurance Basics

Term Life
Cash Value Life
Cash Value Life Hybrids

Why life insurance?

Life insurance is the foundation of financial security for you and your family. Life insurance helps to ensure that your family and loved ones are protected against financial difficulties in the event of a premature death. Combined with investments and retirement and estate planning, life insurance is a fundamental part of a sound financial plan.

The main purpose of life insurance is to provide cash to your family after you die.

The money your dependents will receive is an important financial resource: It can help pay the mortgage, run the household and help ensure that your dependents are not burdened with debt. The proceeds from a life insurance policy could mean that assets will not have to be sold to pay outstanding bills or taxes. Plus, there are typically no federal income taxes on life insurance benefits.

The concept of life insurance is simple: You pay regular premiums over the term of the policy and if you die before the term ends, the insurance company pays a specified amount of money — called the death benefit — to your beneficiaries. There are two primary types of life insurance: term and cash value.

Term Life (pure protection)

Term life is the simplest type of life insurance. It provides death benefit coverage for a specific period of time ("term") generally ranging from one to 30 years. Since term insurance offers no savings plan, all of your premium payments are applied to the cost of the insurance. If you die at any point before the term expires, your beneficiaries receive the policy's death benefit. The death benefit is usually free from federal income tax.

You can add optional features to your term life policy. Many term life policies are renewable, which enables you to begin another term of coverage without taking a medical exam (important if your health has deteriorated since you purchased coverage). Some are also convertible, which means you can convert your term life policy into an equivalent cash value policy from the same carrier.

There are three basic types of term insurance policies:

Annual renewable term
Decreasing term
Level term

There are also some special hybrids, all of which contain the basic characteristics of term insurance.

Annual Renewable Term
With annual renewable term insurance, your insurance coverage remains the same, but your premium payments increase each year. The rationale is that as you grow older, the greater the likelihood you will die — and premium rates are based on the likelihood of death.

You can obtain annual renewable term coverage in most states to age 100. Many times, annual renewable term insurance is purchased by those with short-term insurance needs.
Decreasing Term
With decreasing term insurance, the premium remains the same and the amount of insurance decreases each year. Many times decreasing term insurance is purchased by those with a goal of paying off a particular decreasing debt, such as a home mortgage.
Level Term
Level term insurance means that the face amount of the policy remains level for the term of time chosen and the premium payments remain level for that term as well. The most common periods are 5, 10, 20, 30 and level term to age 65. Many times level term insurance is purchased by those who need consistent coverage, at a predictable cost, for a certain period of time.

Cash Value Life (term insurance plus a savings account)

Cash value insurance combines term life insurance with a tax-deferred savings plan. One of the most straightforward cash value policies is whole life. Whole life is permanent insurance protection that protects you for as long as you live (from the day you purchase the policy until you die, as long as you pay the premiums). Whole life insurance is also known as "limited pay life," "life paid up at 65," "endowment life" and "ordinary life."

With cash value life insurance, the face amount of your policy and your premium remain the same throughout your lifetime. Part of your premium — about the same as an equivalent term life premium — pays for your life insurance. The rest, less management charges, goes into a cash value savings account.

In the early years, when the likelihood of death is low, you will "overpay" for the insurance coverage. This "overpayment" builds up as cash value or savings over time. In later years, earnings on the "overpayment" are used to help pay premiums.

As the cash value portion of the plan accumulates, taxes are deferred until the earnings are withdrawn. The guaranteed death benefit is usually free from federal income tax. Furthermore, you may receive dividends from your life insurance company, which can fluctuate from year to year.

An important feature of cash value is that you can also borrow from the policy, usually at low interest rates, for expenses such as funding a college education. You can also surrender the policy and collect your savings. If you are a business owner, cash value life can be used to fund business continuation plans like buy-sell agreements.

Cash Value Life Hybrid Policies

Universal Life
Universal life is a flexible hybrid of cash value life, offering competitive returns on savings through investment in money market instruments. It also lets you vary your premium and death benefit to meet changing conditions.

Most universal life policies allow partial withdrawals from cash values although a fee is usually charged. Low-interest borrowing is permitted as well.
Variable Life
Variable life is another hybrid of cash value life. Here, the death benefit remains constant, but you can invest the "cash value" portion of the policy in either money market instruments or stocks or both. Policies usually allow you to switch among investment options at specified times throughout the year.
Flexible Premium Variable Life
These policies combine the principals of universal life and variable life and permit policy holders to adjust their coverage by increasing or decreasing premiums. Depending on the performance of the investment portion of the policy, the death benefit and cash value will vary.
Single Premium Life
Unlike policies that require annual premiums, single premium life insurance calls for a one-time premium when you initially purchase the policy. These policies are flexible and permit borrowing and cash withdrawals under certain circumstances. Investment returns are usually competitive, but often are not guaranteed beyond the first year.

Dearborn & Creggs Can Help

Although today's life insurance plans offer a lot more options, they are a lot more complicated, as well. There are many factors to consider when determining the kind of life insurance coverage you need. You'll need to consult an expert for guidance.

Your Dearborn & Creggs financial representative has the experience, skills and resources to help you find the best coverage for your unique situation.