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 Life Insurance Information


What is life insurance? Types of life insurance
Why do I need life insurance? Term life insurance
Uses of life insurance: individuals Yearly renewable term
Uses of life insurance: businesses Return of premium life insurance (ROP Term)
Determining your needs Whole life insurance
Beneficiary designations Universal life insurance
Settlement options Variable universal life insurance
Second-to-die life insurance policies

What is life insurance?

Life insurance is protection against financial loss resulting from death. It is an insurance company's promise to pay your beneficiary a specific amount of money when you die in exchange for timely payment of premiums.

Why do I need life insurance?

Although you may not think about it, your ability to earn income is a significant asset and life insurance helps replace lost income in the event of your premature death. Here are some reasons people buy life insurance.

Uses of life insurance: individuals

Funeral - Life insurance proceeds can provide the money to pay funeral and burial expenses.

Debt - Personal bills, credit card debt, student loans, and personal notes can be paid by life insurance proceeds.

Mortgage Protection - The proceeds of a life insurance policy can pay off the mortgage or provide an income stream to pay the monthly mortgage or rent payments.

Income Replacement - In the event of an individual's untimely death, life insurance proceeds can create an income stream for the surviving family members.

Education - Life insurance proceeds can fund education costs in the event of premature death.

Taxes - A life insurance policy can provide funds to pay Federal estate and state inheritance taxes.

Donations - A life insurance policy can be used to provide funds for charitable donations.

Gifts - Life insurance proceeds can be left as a gift to a relative or other individual.

Uses of life insurance: businesses

Key Person - A life insurance policy that can be used to protect a business from the loss caused by the death of a key employee or owner.

Business Continuation - Life insurance used to fund a buy/sell agreement or stock redemption plan.

Business Loans - Life insurance purchased on a key employee or business owner can be used to pay off the debts of a business.

Employee Benefits - Life insurance protection for employees is commonly included as an employee benefit.

Determining your needs

Although most financial planners agree that generally, people need life insurance in the amount of 6 to 10 times their annual salary. Special circumstances may dictate that even more is needed or that less is required. There are a number of factors that should be considered when estimating how much life insurance you should carry. They include:

Final Expenses - Final expenses usually include funeral expenses, unpaid debts, unpaid hospital bills, probate costs, and estate and inheritance taxes.

Emergency Fund - Due to premature death, your family may need to make adjustments in their lifestyle. They may need to move, or the surviving spouse may need additional training to qualify for a higher paying job. The emergency fund can cover the cost of making these necessary adjustments.

Educational Funds - The cost of your childrens' education, including elementary school, high school, and college, needs to be covered. Life insurance can help cover this expense.

Mortgage - Providing the money necessary to pay off the mortgage or provide an income stream to pay the monthly mortgage or rent payments should be a priority.

Payment of Debts - Funds needed to payoff any debts including auto loans, credit cards, and other loans should be included.

Income Replacement - There should be a continued income stream to help with the family's living expenses, such as mortgage payments, monthly bills and daycare.

Retirement Fund - The amount needed to replace your planned retirement income is suggested to be 5 times your current annual income.

Non-Employed Spouses - Non-employed spouses should be covered because they are making a valuable contribution to the family's needs. Fulfilling these needs will require additional income.

Everyone's life insurance needs are different. In general, an individual's needs are greatest when they start their careers and their family. When they reach retirement, their need for life insurance may be reduced. It is important to review your life insurance needs at least every two years.


Types of life insurance

Term life insurance

Term life insurance is often referred to as "pure insurance" because it involves only the payment of a premium in exchange for a promise to pay a death benefit in the event of your death while the contract is still in force.

Term life insurance provides protection for a specified maximum period of time and is usually renewable at the end of each period at progressively higher premiums. As you get older, your risk of dying increases, so the cost of term insurance goes up. Term insurance carries no cash value element, making it less expensive than permanent alternatives. Many term life insurance plans can be converted to permanent life insurance plans without evidence of insurability. Two types of term life insurance are yearly renewable term and level premium term.

Yearly renewable term

Yearly renewable term plans have premiums that increase each year, as the insured gets older. These plans are less popular than level premium term plans.

Level premium term plans have premiums that remain level for a specified number of years. AAA Life Insurance Company's level premium term plans have premiums that remain level for 5, 10, 15, 20, 25, or 30 years. After the level premium period, the premium will increase each year, but never more than the guaranteed maximum stated in the policy.

In the first year, a level premium term policy's premium may be higher than that of a yearly renewable term policy, but the total outlay for a level premium term policy will generally cost less after just a few years. The longer the term premium guarantee period, the lower the total expected outlay.

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Return of premium life insurance (ROP Term)

Return of premium life insurance is a newly introduced term life insurance policy that provides both death benefit protection and a return of premium insurance feature. It's simple to understand: If you keep your policy for the term period, at the end of that time whether 15, 20 or 30 years, the life insurance company that issued the insurance with the return of premium policy returns all of the premium that you paid for the insurance. There also is some partial return of premium for policies canceled before the end of the term (depending on the year it's canceled - the longer it's kept , the higher the amount of the return.

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Whole life insurance

Whole life insurance is permanent life insurance designed to provide protection for a lifetime. Whole life insurance policies are generally designed to have a level premium. This type of policy does have a cash surrender value and the cash value accumulates on a tax-deferred basis. The cash surrender value of a whole life insurance policy is guaranteed.

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Universal life insurance

you go through life, you'll no doubt experience changes in your personal situation that will require changes in your insurance planning.

Universal life insurance, with its flexible coverage and premium options, was designed to help you accommodate these changes. It offers the benefits of lifetime insurance protection, tax-deferred accumulation of cash values, and a variety of riders to customize coverage to meet your specific needs and objectives.

Universal Life Insurance provides:
  • Tax-free death benefit to help cover final expenses, estate taxes, tuition, and other ongoing living expenses
  • Ability to extend coverage to additional family members, such as a spouse or children
  • Flexibility to adjust policy coverage and premium amounts to accommodate your changing needs
Benefits of Universal Life Insurance
  • Ability to vary the amount and timing of premiums without notice or negotiation provided your policy has sufficient policy value to cover ongoing charges and expenses
  • Option to suspend premiums during periods of tight or seasonal cash flow provided there is sufficient cash value accumulation
  • Tax-deferred growth of cash values
  • Ability to change your policy's death benefit amount as your needs require (increases may require evidence of insurability)
  • Three death benefit options:
    • "Benefit Option A" pays a level death benefit
    • "Benefit Option B" that pays a death benefit plus any accumulated cash values
    • "Benefit Option C" pays death benefits plus rate of premium
  • Ability to access cash values through loans and withdrawals (loans and withdrawals will reduce your policy's death benefit)
  • Cash values earn a guaranteed* minimum interest rate
  • Riders which allow you to customize coverage to meet your needs and objectives
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Variable universal life insurance

Variable universal life insurance offers the flexibility and control you need to accommodate those changes. It combines the advantages of premium and death benefit flexibility with the benefits of tax-deferred cash accumulation through participation in the equity markets.

Variable Universal Life Insurance provides:
  • Ability to invest accumulated cash values in professionally managed sub-accounts consisting of stock and bond portfolios
  • Tax-free death benefit to help cover final expenses, estate taxes, tuition, or medical costs
  • Ability to extend coverage to other family members, such as a spouse or children
  • Riders that allow you to customize coverage to address your needs and objectives
Benefits of a Variable Universal Life Insurance
  • Tax-deferred growth of cash values
  • Control of how premiums are invested to match your risk tolerance and investment time horizon
  • Access to cash values through loans and withdrawals to meet emergencies, assist with college expenses, supplement retirement income, or take advantage of opportunities (loans and withdrawals will reduce your death benefit)
  • Ability to increase or decrease coverage based on your needs and objectives (Increases may require evidence of insurability)
  • Option to skip premium payments during periods of tight or seasonal cash flow provided there are adequate cash values
  • Potential for excellent cash value growth during strong equity markets
  • Ability to transfer funds between sub-accounts on a tax-free basis
  • Numerous investment options, including an account paying a guaranteed* rate of interest
  • Two death benefit options: "Benefit Option A," that pays a level death benefit, and "Benefit Option B," that pays a death benefit plus any accumulated cash values
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Second-to-die life insurance policies

A second-to-die life insurance policy, or survivorship life as it's sometimes called, insures two lives - usually a husband and wife. Unlike traditional life insurance, the death benefit isn't paid out until the second insured person dies.

Usually, the death benefit from a second-to-die life insurance policy is intended to pay taxes owed after both spouses pass away. The product was developed in the early 1980s in response to a law that postpones estate taxes until both spouses pass away.

Under federal tax law, there is a marital deduction permitting you to leave an unlimited amount of assets to your surviving spouse. If you leave all your worldly possessions to your husband or wife, no federal estate taxes are owed at the time of your death. Those assets then become part of the estate of the spouse and might be taxed when he or she dies. The death benefit from a life insurance policy could help pay those taxes.

There are also estate tax ramifications for small businesses, which is why business partners also purchase second-to-die policies

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What is a beneficiary designation?

Beneficiaries are the people or entities named to receive all or a portion of the death benefit proceeds from a life insurance policy. The policy owner may name one beneficiary or multiple beneficiaries, and the policy's owner may change the beneficiaries anytime prior to the insured person's death.

There are two types of beneficiaries: primary and contingent. A primary beneficiary(s) will receive the proceeds of the life insurance policy should the insured person die. There may be one or more than one primary beneficiary and the proceeds do not have to be shared equally. The policy's owner may also name one or more contingent beneficiaries. A contingent beneficiary will receive the death proceeds should the primary beneficiary(s) die prior to the death of the insured. Many individuals name their spouse as the primary beneficiary and their children as the contingent beneficiaries. You should consult with an attorney prior to naming a minor child a beneficiary of a life insurance policy. Naming your estate as the beneficiary of your insurance policy can cause an increased estate tax liability and may cause the proceeds to be probated. Consult with an estate-planning specialist prior to doing so.

Settlement options

The life insurance policy's owner may state that a specific settlement option be used to pay the beneficiary(s) upon his or her death. If the policyowner does not choose a specific option, the beneficiary(s) will be given the opportunity to choose one of the following:

  • Lump Sum Payment: The death proceeds of a life insurance policy are paid to the beneficiary(s) in one lump sum payment.
  • Fixed Period Payments: The death proceeds of a life insurance policy are paid to the beneficiary(s) for a fixed period.
  • Life Income with Installments Certain: The death proceeds of a life insurance policy are paid to the beneficiary(s) in installment payments for the life of the beneficiary(s) with a guarantee to be paid for a certain period (e.g. 10 or 20 years).
  • Interest Payments: The death proceeds of a life insurance policy remain with the insurance company and the company pays the beneficiary interest payments.
  • Fixed Installments: The death proceeds of a life insurance policy are paid to the beneficiary(s) in fixed installments until the proceeds and interest on the unpaid balance of the proceeds are exhausted.
  • Single Premium Annuity: The proceeds of a life insurance policy are used to purchase a single premium annuity from the insurance company.
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Return of Premium Life Insurance
Return of premium life insurance is a newly introduced term life insurance policy that provides both death benefit protection and a return of premium insurance feature. It's simple to understand: If you keep your policy for the term period, at the end of that time whether 15, 20 or 30 years, the life insurance company that issued the insurance with the return of premium policy returns all of the premium that you paid for the insurance. There also is some partial return of premium for policies canceled before the end of the term (depending on the year it's canceled - the longer it's kept , the higher the amount of the return.)
read more »

What Is Term Life Insurance?
Term life insurance is often referred to as "pure insurance" because it involves only the payment of a premium in exchange for a promise to pay a death benefit in the event of your death while the contract is still in force.
Term life insurance provides protection for a specified maximum period of time and is usually renewable at the end of each period at progressively higher premiums. As you get older, your risk of dying increases, so the cost of term insurance goes up. Term insurance carries no cash value element, making it less expensive than permanent alternatives
read more »

Insurance FAQ
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Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.





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