Solutions: Life Insurance | Retirement Genius

Everyone deals with the loss of a loved one differently. Unfortunately, it can be one of the most challenging and emotional times we will ever face. An added strain is the precarious financial realities that come with the loss of life. It only stands to reason that no one wants the stress and guilt of leaving a loved one behind with a significant financial weight.

While there’s no surefire way to make this challenging period easier for you and your family, a life insurance policy can ease the financial burden following the death of a loved one. But, before you purchase a life insurance policy, read on to learn more about how to qualify, your available options, and the financial benefits for you and your family.

What is Life Insurance?

A life insurance policy is an incredibly valuable asset for anyone to have. The ability to financially protect a beneficiary while having confidence that your business and real estate will be handled properly is powerful.

Upon applying for a policy, the insurance company assesses the applicant’s financial history, age, health, and overall lifestyle to understand whether to approve the applicant. The younger and healthier a person is when they apply for coverage, the lower the premiums will be. If the carrier lacks confidence in the applicant’s ability to pay premiums regularly or sees the potential for an early death based on their health, the applicant may be denied. Once a life insurance policy is approved, the insured must pay a premium upfront or in monthly, quarterly, semi-annual, or annual installments for an agreed-upon period. The premium amount is determined by a number of factors, including the health, age, and lifestyle of the insured individual, and the type of policy chosen.

As long as the policyowner pays regular premiums, the beneficiary is paid a lump sum of cash upon the policyowner’s death—called a ‘death benefit.’ This money is tax-free and can be used in any way the beneficiary sees fit. In addition to end of life, there are situations dependent upon the policy contract terms where the beneficiary will qualify for payment before the insured individual’s death, such as in the case of illness. However, these circumstances are exceptions; typically, contracts with these unique terms are typically established on a case-by-case basis dependent upon financial history and health factors.

Life insurance policies are assets that can financially protect a beneficiary or provide them with assurances in business and real estate contexts.
Premium amounts are based on the health, age, and lifestyle of the policyowner and the type of policy chosen.
Active policies provide the beneficiary a payout—the ‘death benefit’—upon the time of the insured person’s death.
The beneficiary can use their tax-free death benefit however they choose.
Applicants may not qualify for a life insurance policy depending on factors such as poor health, age, and riskier lifestyles.

Who Qualifies for/Needs Life Insurance?

Health and Wellness

Those at risk of contracting a life-threatening condition due to poor health are far less likely to qualify than a healthy person.

The Younger, The Better

Younger people tend to have an easier time qualifying for a life insurance policy than older individuals.

Lifestyle Matters

Insurance companies assess your lifestyle based on work and hobbies to determine your qualifications and premium rates. The riskier the lifestyle, the lesser your chance of securing a policy.

How does Life Insurance work?

When individuals purchase a policy, they choose a beneficiary such as a spouse or a child to receive the policy’s death benefit. The beneficiary must be informed that they have been selected to receive a death benefit. The insurance company can only pay the benefit if the beneficiary notifies the company of the insured’s death and files a claim. If the beneficiary does not know about the insured’s policy, they won’t be equipped to redeem the death benefit.

As long as all premiums are paid on time, and the policy is active, the beneficiary can claim the death benefit as soon as the insured passes away. The sum will be paid out to the beneficiary within 30 to 60 days. The insured person has options for payout to their beneficiary, including:

Lump-Sum Payments: One large, simple payment is made once the claim is approved.
Installments and Annuities: All proceeds and accumulated interest are taxable and paid in regular installments to the beneficiary. The policyowner can choose to distribute payments in a period of between five and 40 years.
Retained Asset Account: The insurance company offers beneficiaries a checkbook and keeps the payout in the account. Deposits cannot be made to this account, but interest is paid to the beneficiary. The insured can also write checks against the account’s balance.

Different Types of Life Insurance

Because there are several life insurance policy types available for purchase, each has unique terms which can be to your benefit—or your detriment if you’re not careful. Read on for a quick summary of the four basic life insurance policy types and the advantages and disadvantages of each.

Term life insurance policies enable you to define the level of coverage you’re looking for, as well as the length of the terms of your policy. As such, your policy can actually be shorter than the remainder of your expected lifespan. Once your policy goes into effect, you’ll begin paying premiums. You can pay monthly, quarterly, or annually, and if you die during your term, your beneficiary receives the death benefit. Term policies can be converted at a later date into permanent insurance, but if your term expires while you’re still alive, you’ll no longer be covered and will need to purchase a new policy if you want to be insured.

Pros and Cons of Term Life Insurance

This policy is cheap and affords young, healthy people plenty of coverage on a budget.
Terms are generally simple, meaning you can make this policy permanent without updating the medical underwriting.
Your premiums remain the same throughout the policy’s term.
However, you can outlive your policy, and new policies become more expensive as you age and your health deteriorates.
When the policy term expires, and you don’t buy a new one, your death benefit is no longer available to your chosen beneficiary.
Conversion riders allow policyowners to make a term-based policy permanent for the rest of their life without the need for a medical exam.

Whole life insurance policies are a type of permanent life insurance containing both a death benefit and a cash value covered by your premium throughout the first few years of your policy. As the name implies, a permanent life insurance policy is one that’s designed to last for the remainder of the policyowner’s life, as long as their premiums are continually paid. You can borrow from the policy’s cash value in exchange for reducing the beneficiary’s death benefit and the cash value itself. Once your policy grows large enough, you can surrender all or part of it in exchange for the built-up cash value, at which point you’ll pay a surrender fee and pay taxes on that cash value.

Pros and Cons of Whole Life Insurance

Policyowners can take out a policy loan against the accumulated cash value, and your coverage remains as long as you make your payments, regardless of health status.
As of 2022, If you have an estate worth more than $12.6 million (or $24.12 million per married couple), this policy offers you a proven tax shelter.
Whole policies typically cost four to 10 times more than term policies.
Fees compromise the fund’s growth, especially during the first years, and high costs can make premiums too expensive for many people to maintain throughout their lifetimes.

A variable life insurance policy is permanent life insurance subject to investment gains and losses. The death benefit amount is determined by underlying securities embedded within the policy. This policy depends on market rates, so fees and premiums fluctuate and can be lower than a whole life insurance policy or much higher. That means a variable life insurance policy can be financially risky but potentially lucrative in the long run.

Pros and Cons of Variable Life Insurance

You can earn more money depending on market rates, but financial risks are associated with investments.
policyowners have limited investment options available to them with variable life insurance.
You should expect to continually pay expensive premiums to avoid lapsing this policy.
Variable life insurance policies can offer tax benefits regardless of if the underlying investments in the policy’s sub-accounts perform well.

Universal Life Insurance

Universal life insurance is another type of permanent insurance offering the policyowner both a cash value and a death benefit, while paying interest on your savings. With this type of policy, you have the option to alter your death benefit and premium while maintaining the policy’s terms. Once the cash value has built up, you can opt to skip making payments and use the policy’s value to pay off your flexible, non-alterable premiums instead. Universal policies are debited monthly by an insurance charge. There may be cash value fees as well as charges for decreasing the death benefit leading to an underwriting process that could include medical questioning and a medical exam.

Pros and Cons of Universal Life Insurance

Policyowners are offered both a cash value in addition to the death benefit.
You can skip payments and use the policy’s cash value to pay off your premiums.
Premiums are flexible, and insurance carriers cannot alter policy fees.
The death benefit and premium amounts can be altered.
You may incur additional fees when you decrease the death benefit.

Life Settlements

Over 100 years ago life insurance was legally recognized as personal property and has the same status as an asset like a home. People pay mortgage payments for years and would never abandon a home without selling it. Yet, nine out of ten life insurance policies are in danger of being abandoned by the owner without ever paying a death benefit.

If you no longer feel the need to hold a life insurance policy, you can always evaluate selling your policy to a third-party buyer in exchange for a life settlement. A life settlement is a more financially beneficial way to get rid of your policy than surrendering it back to the insurance company. This solution often returns the seller four times the amount they would see if they surrendered their policy back to the insurer. However, lapsing a term policy does not result in any money, as these policies lack any cash surrender value. Seniors own over $200 billion worth of policies that could potentially qualify for a life settlement every year, and there are about $4.5 billion of life settlements done annually.

Money earned from a settlement can be used for anything you want, and in many cases, you won’t owe income taxes on life settlement proceeds unless the settlement is greater than the total amount paid on the policy.

Key Takeaways

Now that you understand the life insurance basics, you’ll be better prepared to make a purchasing decision to best secure the future of your loved ones. Work with your financial advisor to understand the life insurance policy options available to you or your loved ones to ease your peace of mind, and start living a more stress-free lifestyle with the people who matter to you.

Life insurance policies help financially secure a beneficiary of a person’s choosing at the time of their death through a non-taxable death benefit.
There are many types and sizes of life insurance policy packages to meet the financial needs of different people and families.
Some policies offer customers a cash value they can use in life, as long as they make their payments.
The younger and healthier a person is when they buy life insurance, the lower the premium will be to pay.
Life settlements are a great way to make more money from a policy than a person would see from forfeiting their policy back to the insurance company.

View Transcript

Life insurance is a legal contract between an insurance policy holder and an insurer where the insurer promises to pay a designated beneficiary a specified amount of money tax-free in exchange for premium payments upon the death of the insured person (often the policy owner). Life insurance is taken out to protect insurable interests Life insurance comes in a variety of forms such as term policies which last for a specified period of time at a fixed and often more affordable premium level but will allow for the option to convert the policy later from term to permanent coverage, permanent policies such as universal life or whole life that will remain in-force as long as premiums are paid and that have the ability to build up cash surrender value, and variable policies which can act as investment vehicles where they can be tied to the performance of securities markets. Depending on the policy, other events such as terminal illness, critical illness, or need for long-term care can also trigger payments.

Policy owners are responsible for making premium payments to keep policies in-force, and they have the legal right to assign any beneficiary they want, take out loans with their policies, surrender the policy for any built up cash value, or they can sell the policy through a life settlement and receive a lump sum payment.

As is always the case with purchasing insurance, the younger and healthier a person is when they buy the policy, the better their options and the more affordable premiums they will be able to obtain.

It is always best to work with information and experts to help you navigate these tricky issues, visit Retirement Genius today to learn more about how to Retire Like a Genius!

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