Most of us view insurance as a necessary expense. We buy insurance because we have been taught this is how we can protect something that matters to us such as our car, our house, or our health. Or we buy life insurance in order to create financial protection for our family and those we love when we die.
It is time to expand our understanding of the world of insurance.
The Life Insurance Policy—An Overview
In its simplest form, life insurance is a legal agreement between the policy owner and the life insurance company. The policy owner agrees to make periodic payments to the insurance company. In turn, they agree to pay a sum of money, a "death benefit," to a beneficiary (or beneficiaries) of your choosing if the person who is insured dies.
The money received from the death benefit assists in the economic stability of family members at the time of death. Often, a tax-free death benefit replaces lost income which can then be used to pay the mortgage, provide for education, and meet other expenses.
You can also buy life insurance on someone other than yourself, as long as you have an "insurable interest" in this person. That is to say, the owner of the insurance policy (the policy owner) must have a clear economic interest in the continued life of the insured person in order to be able to buy insurance on someone other than themselves.
Businesses and corporations routinely purchase and own life insurance policies on key personnel as part of their business succession or continuity planning strategy.
Insurance companies offer two basic types of life insurance in various forms: term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance protects you for a specific "term." Term life insurance can be purchased to cover different time spans such as 10-, 20-, and 30-year periods. Term life insurance pays a death benefit if the person insured dies within the term covered by the insurance. Term life insurance does not have a savings component (or cash value) and you cannot cash it in.
Term life insurance premiums are level (i.e., they don't increase) over the initial period of the insurance. Once the initial period is reached (i.e., 20 years in a 20-year term policy), if the policy is renewable, you may continue to pay the premium for another period (usually year by year) at the premium rate stated in the policy without providing health information. However, the renewed term life insurance policy will cost more and more each year. At some point in time, this type of policy may become too expensive to continue.
Permanent Life Insurance
Permanent life insurance refers to life insurance policies that do not have a defined term and which combine a death benefit with a "cash value" component. Cash value is the equity component of the insurance policy, meaning that if you collapse the policy you will receive this amount of money.
The two main types of permanent life insurance are universal life and whole life insurance. Let's take a brief look at these two types of permanent life insurance.
Universal Life Insurance
Universal life insurance, Variable Universal, and Equity Index Universal life insurance are all insurance vehicles that share security products. Universal insurance products combine permanent life insurance policy characteristics with investment products.
Universal life policies are tied to an interest rate or the anticipated performance of an investment vehicle.
As the owner of a Universal life, Variable Universal, or Equity Index Universal policy you need to make sure that your cash value accumulation, via premiums and internal growth, is enough to cover the monthly insurance and policy expenses. These expenses are recalculated periodically and increase each year as your probability of dying increases and the cost of insurance goes up.
If your cash value is not growing at a fast enough rate, monthly insurance and policy expenses will use up the cash value and your policy could lapse. This can happen even when you make your premium payments on time.
Since these life insurance products are dependent upon interest rates or some other variable market, they inherently harbor more risk than insurance policies that do not have these characteristics.
Because of the risk that is built-into the Universal Life Policy, FinancialBallGame.com professionals do not use this type of permanent life insurance.
Whole Life Insurance
Whole life insurance is the traditional type of permanent life insurance. You pay fixed premiums annually or monthly. The policy endures for the entire life of the insured and is not subject to the whims of the market. The performance and value of a whole life insurance policy are not correlated to the stock market. And it is guaranteed by the insurer. This means that the cash value and death benefit are not affected by declining markets.
As long as premiums are paid, the policy is guaranteed to continue and your cash value will increase. The living benefits of whole life insurance make it one of the most valuable and flexible financial planning tools available.
FinancialBallGame.com professionals take the security and long-term growth of your money very seriously. Consequently, FBG professionals work specifically with the application of permanent, participating whole life insurance as a financial tool and as the cornerstone of a lifetime financial strategy. (The term participating is used to describe any insurance policy that pays a dividend to its policy owners).