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Insurances Types:

Life Insurance

First, let's take a general look at life insurance. When do you need it? You need it when you have someone or some thing to protect. We do not view insurance as a good investment, but rather a necessary expense for your family's protection. Your mental well being is also part of this equation; if it makes you more comfortable to have it, then you should.

How much insurance should you have? When it is for family protection, each partner should be covered, but for how much? Here you need to do your homework. By using our Planning section, you can determine what additional income the survivor would need. Once you have that number, divide that annual need by 5% to arrive at the amount of life insurance you should have for each partner. For example, a $5,000 annual supplement divided by 5% or .05 gives a policy need of $100,000. Term life insurance is the cheapest, but you need to become familiar with its down side. Details are given in that section below.

The proceeds paid on death are generally not reportable as taxable income, but the income they earn when invested is reportable. The proceeds of the policy are included in the estate tax computation if the policy was owned by the deceased. As we have described in the section on Asset Protection, in 2005, $1,500,000 can be excluded from estate tax. Consider that a large policy, a nice home and investments could very well put you over that 1.5 million. We promise you do not want that to happen. If you are close to the amount where estate tax due becomes an issue, take steps to protect yourself and your family. See Estate Planning in Asset Protection for further information. Life insurance policy "pay outs" to deceased estates are the single largest contributors to the government's estate tax system, and often a surprise to the family paying the bill.

Who are the parties to an insurance policy and who should they be? The first party would be the insured: the person to be covered against loss of life. The second is the person or entity who actually owns and is in charge of the policy, the owner. Third, of course, is the beneficiary, the person(s) designated to receive the proceeds of the policy. If the insured decedent is the owner, for tax purposes the proceeds are included in the decedent's estate. To avoid the estate tax problem, an irrevocable insurance trust can be established to own the policy and receive the proceeds. Consider putting the insurance policy into trust ownership if estate taxes are a consideration. Gift taxes could be an issue if the value of the policy has become too high. Make no mistakes here; get qualified professional help if this is an issue.

Term Insurance

As we said above, 'term' is probably the cheapest way to go because you are buying protection for only a limited period of time. Term insurance is also the simplest to understand. Just realize that at the end of your contracted period of protection, the policy is terminated. At that time, the policy has no value, as opposed to a whole life policy which accumulates cash value. You determine the length of time you want the policy to be in force by calculating how long your protected person would need that additional income. When doing your calculation, decide if you need protect against loss of income until the kids are raised or until retirement when you are no longer a needed provider (sorry). In our experience, the issue of when you are finished with raising the children seems to be a receding target. The longer the protection period the more premiums will cost. Maybe you are a senior citizen and do not need to have life insurance.

As with all products, do some research first and then shop around. Those companies that advertise on TV that they will give you the best rates on term policies offered by various insurance companies are probably okay to use. The companies I have seen in those advertisements are large and respectable. Insurance companies determine rates in essentially the same way but for one reason or another, their rates vary.

The insurance premium is based on statical analyses of how long you are likely to live. Unfortunately, each year that we live increases the probability of our death. Out of a sample of 100,000 45 year old people, more are going to die than will out of a sample of 100,000 25 year olds. So if you are a 45 year old man and want a $150,000 policy for 20 years, the company uses tables statistically predicting the number of deaths of males in that age group. The probability continues to increase and therefore is much higher at 60 than at 50, so they average the cost of probable death claims into the premium. Next they add in the costs of commissions, administration and fees to determine your premium. Men have the opportunity to pay a higher premium than women because women live longer.

It is worth noting that those insurance companies that ask all kinds of questions about health, smoking, sky diving, and medical history, tend to charge a lower premium. If they are insuring a healthy non-smoking person, they will have fewer death claims and can have reduced premiums. On the other hand, those companies that will take you with no questions asked figure a higher rate, on the assumption that the applicant is high risk. So if you are healthy, look for the sound company with lower premiums.

Insurance
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