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The Life Insurance
Basics
When you buy a life insurance policy, you specify whom you
want to receive the policy’s death benefits when you die. The people you specify are called “beneficiaries.”
It’s important to understand that the primary purpose of life insurance is to help your beneficiaries maintain their
standard of living after you die. Life insurance isn’t an investment. A life insurance policy is generally
guaranteed to pay death benefits when the policyholder dies. With an investment, however, there’s a risk to the
payoff – an investor might earn money, but he or she also might lose some or all of it. While some types of life insurance include a savings component that can provide some retirement income, Texas
law prohibits marketing life insurance as an investment or retirement income source. If an agent or company tries to
sell you a life insurance policy as a good investment, be careful. Complicating matters somewhat, many life insurance
companies also sell a legitimate investment product called “annuities” that are similar in principle to life insurance.
People often purchase these investments to provide for retirement because they can provide a steady stream of income over
a long period of time. Insurance companies use a process called “underwriting”
to determine which policy applicants to accept and what premium rates to charge. The company will consider certain “risk
factors,” including your age, gender, medical condition, and whether you smoke. Younger applicants who are in
good health and who don’t smoke will generally be charged lower premiums. The insurer expects that these policyholders
will live longer and thus be able to make more premium payments. Older applicants who have health problems or those
who smoke can expect to pay significantly more because their risk of early death is statistically higher. Some companies
may determine that, based on its review of an applicant’s risk factors, the applicant is too great a risk and may decline
to issue coverage altogether. If a company declines to cover you or charges you more for
coverage because of your health status or other factors, keep shopping. Different companies have different underwriting
guidelines. If you are accepted for coverage at a higher rate, ask whether your premium can be lowered later.
Some companies will lower your premium if you maintain good health for a specified period of time, give evidence that your
health has improved, or change to a less-hazardous occupation.
So, Do I need
Life Insurance?
When purchasing life insurance, be sure to consider your
individual circumstances and the standard of living you want to leave for your dependents. If you don’t have anyone
depending on you for financial support, you may not need life insurance, or you may need only enough to cover funeral expenses
or other financial obligations. The following guidelines can help you decide if life insurance is right for you: - Families, including single-parent households, generally
need life insurance because children depend on their parents’ incomes. Typically, the younger a child, the greater
the family’s need for life insurance. It’s a good idea to consider insuring both parents, even if only one
is a primary wage earner. This can help ensure that the surviving parent can pay for any increases in the cost of child
care if the parent primarily responsible for child care dies.
- Single
adults typically don’t need life insurance, unless they are single parents or support someone such as an elderly parent.
- Working couples without children or dependent parents typically
don’t need life insurance, particularly if the survivor would earn enough to meet expenses and pay debts without exhausting
savings. However, life insurance may be a good idea if only one spouse is employed because the nonworking spouse could
maintain his or her standard of living should the working spouse die. Young couples who plan to start a family may want
to consider purchasing life insurance since life insurance can cost significantly less when purchased at a younger age.
- Older people whose children are grown and independent are
less likely to need life insurance. A well-planned savings program can decrease a family’s need for life insurance
as wage earners near retirement age.
Although life insurance is sometimes
used to pay for prepaid funeral arrangements, it is often not the best funding source. Make sure you fully review your
needs and all of your options to pay for funeral expenses. You may
purchase a life insurance policy on your own life or on the life of anyone who gives their consent for you to do so and agrees
to undergo the insurer’s underwriting process. The person who purchases the policy is known as the “policyholder”
and is the person responsible for making the premium payments to keep the coverage in force. Most often, life insurance is purchased by policyholders to insure their own lives and provide a death benefit
to a spouse, dependent child, or other family member. However, in some cases you may wish to buy a life insurance policy
on someone else and name yourself as the beneficiary. For instance, if you are divorced and your former spouse provides
child-support payments, you might want to purchase a life insurance policy on your ex-spouse to guarantee continued support
payments if he or she dies. You may name any individual, organization, or trust as the
beneficiary of the policy’s death benefit, or you may choose to name multiple individuals as “shared beneficiaries”
and stipulate how the benefit will be divided among them. You may also choose to name “secondary beneficiaries”
who will only receive the benefit if the primary beneficiary is no longer living. In
some cases, a creditor may have an interest in the life of a loan recipient. The creditor may purchase a life insurance
policy to cover the balance of the loan in case the recipient dies before repayment. Businesses also sometimes purchase
policies on the lives of certain key employees who are vital to company operations.
Comparing the Major Types of Life Insurance| | TERM
LIFE | WHOLE LIFE | UNIVERSAL LIFE | | PREMIUM | Lower initially. Increases with each renewal. | Higher initially than term. Normally doesn´t increase. | Flexible premiums. | | PROTECTS FOR | A
specified period. | Entire life if
you keep the policy. | A flexible time
period. | | POLICY
BENEFITS | Death benefits
only. | Death benefits and eventually
a cash and loan value. | Flexible death
benefits and eventually cash and loan value. | | ADVANTAGE TO BUYER | Low outlay. Initially buyer can purchase a larger amount of coverage for a lower premium. Buyer could
consider developing outside investment program. | Helps
buyer with financial discipline. Generally fixed premium amount. Cash value accumulation. Buyer can take loan against policy. | More flexibility. Takes advantage of current interest rates.
Offers the possibility of improved mortality rates (increased life expectancy because of advancements in medicine, which may
lower policy costs). | | DISADVANTAGES
TO BUYER | Premium increases
with age. No cash value. | Costly if
you surrender early. Usually no cash value for at least three to five years. May not meet short-term needs. | Same as whole life and buyer assumes greater risks due to program
flexibility. Low interest rates can affect cash value and premiums. | | OPTIONS | May be renewable or convertible to a whole life policy. | May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted. | May pay dividends. Minimum death benefit. Partial cash surrenders
permitted. |
Modifying your CoveragePolicy “riders” and “endorsements”
are additional policy benefits that you may be able to add to the basic coverage, usually for an additional premium.
You can use riders or endorsements to modify the coverage of an existing policy to better suit your needs. Some of the
most common endorsements are: - Additional
term insurance essentially adds term life coverage to a whole life
or universal life policy. For instance, if you need $500,000 worth of total coverage, you could purchase a $100,000
cash value policy with a $400,000 additional term insurance rider. As your financial resources grow, you could convert
some or all of the term rider into the main cash value policy, in the same manner that most stand-alone term life policies
are convertible to cash value insurance.
- Guaranteed
insurability ensures that you will be able to purchase additional coverage from the insurer in
the future, regardless of your age or health condition. These factors may still be used to determine your premium rate.
Options to purchase additional coverage must generally be exercised by certain named dates or life events, such as retirement
or reaching age 65.
- Accidental death
provides for an increased death benefit – typically double the value – if the insured dies as the result of an
accident. Certain restrictions may apply.
- Disability
waiver of premium suspends your obligation to pay premiums if you become disabled as defined
by the rider. The benefit lasts for the duration of the disability. This rider is typically only available to
individuals under age 60.
- Accelerated death
benefit option provides for prepayment of some or all of the death benefit while the insured
is still living if the person is diagnosed with a terminal illness, specified disease, or a long-term care illness.
The rider is typically purchased to help pay the costs of end-stage care for the insured, which can be expensive. To
qualify as a long-term care illness, the rider will usually require a physician’s determination that the insured is
unable to perform a specified number of defined “activities of daily living,” such as bathing, continence, dressing,
eating, toileting, or transferring.
- Spousal
rider provides an amount of additional term insurance coverage for the spouse of the primary
insured. Essentially, this rider combines two policies into one.
- Children’s rider provides additional term
insurance for the insured’s children. Age limitations for this coverage typically extend from at least 14 days
old until age 21 or 25.
AnnuitiesAn annuity is a type of investment contract
that is often sold by life insurance companies, agents, and brokers. Certain types of annuities are popular investments because they can be structured
to provide a steady stream of income over a long period of time. These annuities are often purchased to provide income
in retirement. An important feature of annuities is that their earnings grow tax deferred. For this reason, the
contracts are also frequently purchased by investors largely concerned with limiting their tax liability. However, they are not the
best investment for everyone; annuities typically take seven to 10 years, or longer, to become profitable. This is due
to surrender charges that may apply. Annuities are almost never a good purchase for the short-term investor. When you purchase an annuity,
you agree to pay a regular premium into a particular investment fund or account. Many investors purchase versions of
the same annuity contract, and the fund or account is actually the pool of all the premiums and earnings to date of the purchasers
of that particular annuity. In return for an administrative fee, a share of the profits, or both, the company managing
the annuity agrees to pay annuity purchasers a return on investment in a specified manner at a future date.
Get a quote today and
start saving!!!!!
For more information or would like to speak to a representative, please call: (979) 822-4912
ARCA Insurance Services * 3620
E. 29th St. * Bryan, TX. * US * 77802
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