Life Insurance Tips

What is Life Insurance?

importance of Life Insurance

Life Insurance: Blessing or A Curse?

Is this in line with your expectations? Without the appropriate will, the government will make sure all of your wealth passes to your children. If you do not have any children, it will pass down to surviving family members including parents, siblings, aunts, uncles etc.

If you own a property together and the estate is not planned correctly, your partner will either have no home to live in or your children could potentially be disinherited.

Different Forms of Life Insurance Products

There are different forms of life insurance available in the marketplace. It's important for you to recognise what each are however please do not construe the ideas represented in this article as giving or offering advice in any way.

Level Term Insurance

Level term life insurance is a type of life insurance policy that provides coverage for a specific period or ‘term'. This term can range from 10, 20, to even 30 years, depending on the policyholder's preference. The key feature of this policy is the ‘level' death benefit, meaning the payout amount remains unchanged throughout the duration of the policy term. So, whether the policyholder passes away at the beginning or end of the term, the beneficiaries will receive the same amount. This policy type is often chosen to cover financial responsibilities that decrease over time, such as a mortgage or college tuition.

Compared to other types of life insurance, level term life insurance is usually more affordable. This affordability stems from its lack of an investment component or cash value accumulation, making it purely a death benefit policy. This straightforward nature appeals to those who simply want to ensure their dependents are financially secure in the event of their untimely death. It offers peace of mind knowing that the payout sum is guaranteed and won't fluctuate over time, providing a reliable safety net.

Despite its advantages, it's important to note that if the policyholder outlives the term of the policy, no death benefit is paid out. Some policies offer a renewal option at the end of the term, but this is typically at a higher premium. Therefore, it's crucial to carefully consider the length of the term when purchasing a level term life insurance policy. Understanding your long-term financial obligations can help determine the most suitable term length, ensuring optimal coverage for your beneficiaries.

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Decreasing Term Insurance

Decreasing term life insurance is a type of life insurance policy that provides coverage for a specific period, like level term insurance. However, the distinction lies in the death benefit, which decreases over time instead of remaining constant. This decrease generally happens on a monthly or annual basis. The idea behind this type of insurance is that as you age, your financial responsibilities may lessen. For instance, your mortgage balance would reduce over time, or your children would grow up and become financially independent.

This policy is typically cheaper than level term life insurance because the death benefit reduces each year. It's often purchased to cover a specific debt that will also decrease over time, like a mortgage or a loan. If the policyholder passes away during the term, the payout will match roughly the outstanding debt amount, ensuring that dependents aren't left with significant financial burdens.

However, it's important to note that if the policyholder outlives the term of the policy, no death benefit is paid out. Some policies may offer a renewal option at the end of the term, usually at a higher premium. Therefore, when considering decreasing term life insurance, one should take into account their long-term financial obligations and how these might change over time.

Family Income Benefit (FIB)

Family Income Benefit (FIB) is a unique type of life insurance designed to provide a regular income to the policyholder's dependents if they die during the term of the policy. Unlike other life insurance policies that pay out a lump sum upon death, FIB pays a monthly or quarterly income until the end of the policy term. This feature makes it particularly suitable for those with young families who may find managing a large lump sum intimidating or impractical.

The appeal of Family Income Benefit lies in its simplicity and practicality. The policyholder can tailor the income to match their current salary or a portion of it, providing a familiar and consistent financial support system for their family. It can help cover day-to-day expenses, mortgage repayments, or school fees, ensuring the family maintains their standard of living even in the absence of the policyholder. The payments are tax-free and start immediately after the policyholder's death, providing immediate financial relief.

However, one potential downside to consider is that if the policyholder dies towards the end of the policy term, the family will receive less than if a lump sum were paid out, as the income only continues to the end of the term. Therefore, it's essential to consider the family's financial needs and circumstances carefully when choosing a life insurance policy.

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Level Term Life Insurance Fact #1

Level term insurance is a popular option for many people as it offers a fixed amount of coverage for a specific period, typically between 5 and 30 years.

Level Term Life Insurance Fact #2

The premium remains the same throughout the policy term, which provides security to policyholders who may have fixed budgets.

Level Term Life Insurance Fact #3

This type of insurance is often used to cover a mortgage, pay off debts or provide for dependants.

Decreasing Term Insurance #1

As the name suggests, decreasing term insurance offers coverage that reduces over time.

Decreasing Term Insurance #2

This type of Insurance works particularly well if you have a decreasing amount of outstanding debt like a mortgage or Inheritance Tax planning for large gifts over a set period of time.

Decreasing Term Insurance #3

Because the amount of coverage decreases over the policy term, premiums for this type of insurance are usually lower..

Family Income Benefit #1

Family income benefit insurance is structured to provide a regular income to a policyholder's beneficiaries rather than a lump sum payment.

Family Income Benefit #2

It is designed to replace lost income in the event of the policyholder's death, making it a good option for those with young families who depend on a steady stream of income.

Family Income Benefit #3

This policy pays out a regular income to your beneficiaries, rather than a lump sum payment, which can help them maintain their lifestyle and cover any expenses they may have.

non married couples: if you died yesterday…

The Main Benefit of Placing a Life Insurance Policy into A Trust…

Life insurance policies are a means of ensuring that your loved ones are taken care of when you are no longer able to do so yourself. The benefit that life insurance provides can extend well into the future, beyond your lifetime even, safeguarding your family's financial interests long after you have passed away. However, simply having life insurance is not enough. You need to make sure that the payout from your policy goes to the right beneficiaries, in the right manner, and without attracting undue taxes. Placing your policy into a trust can significantly enhance the benefits you derive from your life insurance coverage.

First and foremost, placing your life insurance policy into a trust ensures that the payout from your policy goes directly and efficiently to your intended beneficiaries. Often, when beneficiaries are named directly in the policy, it can take a long time for probate courts to release the funds to the estate. This can cause confusion and delay during an already stressful time for your family. Placing your policy into a trust will not only bypass probate court but can also provide clarity and direction for your beneficiaries, both in terms of when the payout will be made and how it will be utilized.

Aside from the benefits of avoiding probate, trusts can offer a higher degree of protection and control over your life insurance proceeds. Placing your policy into a trust enables you to guide the use and distribution of funds in a tax-efficient and financially responsible way. In some cases, life insurance payouts can be subject to high taxes, which could eat up a significant portion of the payout intended for your beneficiaries. With a trust in place, you can ensure that your loved ones receive the maximum benefit from your life insurance policy while minimizing the tax implication.

Life Insurance

When the term of a life insurance policy ends and the policyholder is still alive, the coverage ceases and no death benefit is paid out. This scenario often leads people to think they've wasted money on premiums. However, it's crucial to remember that the purpose of life insurance is to provide financial protection for dependents during the policy term, whether or not the benefit is ultimately used.

Some insurers offer renewable or convertible term life insurance policies to address this situation. A renewable term policy allows the policyholder to continue their coverage at the end of the term, albeit usually at higher premium rates due to increased age. This option provides continued protection without requiring a new medical examination, which can be beneficial for those whose health has declined.

Convertible term policies offer another solution. These allow the policyholder to convert their term life insurance into a permanent life insurance policy, such as whole or universal life insurance. The advantage here is that the policyholder can maintain their coverage for their entire lifetime, with the added benefit of cash value accumulation. However, premiums for these types of policies are generally higher.

Generally speaking, life insurance payouts, or death benefits, are not considered taxable income for the beneficiaries. This means that the recipients typically do not have to pay income tax on the amount received. This tax-free status is one of the primary advantages of life insurance, making it an effective tool for providing financial security to loved ones after the policyholder's death.

However, there are exceptions to this rule. For example, if the death benefit is paid out in installments rather than a lump sum, any interest earned on the balance is taxable. Additionally, if the policyholder decides to cash in their permanent life insurance policy, any gain over the amount of premiums paid into the policy is considered taxable income.

Furthermore, while the death benefit itself may not be taxable, the total amount of the life insurance proceeds could be included in the deceased's estate for estate tax purposes. If the total estate, including the life insurance payout, exceeds the federal estate tax exemption limit, estate taxes may be due. It's always advisable to consult with a tax professional or financial advisor to fully understand the tax implications.

Yes, it is entirely possible and sometimes advisable to have multiple life insurance policies. This strategy, known as “laddering,” involves having several policies with varying term lengths and coverage amounts. The idea is to match different financial needs and obligations that occur at various stages of life.

For instance, when you're younger, you might have a larger policy to cover a mortgage and the cost of raising children. As you age and these expenses decrease or are paid off, you might let these larger policies expire and maintain a smaller policy to cover final expenses and provide an inheritance. This approach can provide more tailored coverage and potentially save money over time.

However, managing multiple life insurance policies requires careful planning and organization. Policyholders must keep track of their different policies, premium payment dates, and ensure beneficiaries are aware of all policies. If payments on a policy are missed, the policy could lapse, leaving the policyholder without coverage.

Life insurance premiums are influenced by several factors, the first being the age of the insured individual. Generally, the younger and healthier a person is at the time of purchasing the policy, the lower the premium rates will be. This is because younger individuals typically pose a lower risk to the insurance company, as they're less likely to pass away during the term of the policy.

Another significant factor is the health status of the insured. Insurers usually require medical examinations or health questionnaires before issuing a policy. Individuals with existing health conditions, such as high blood pressure, diabetes, or heart disease, or those who smoke or have a high-risk lifestyle, may face higher premiums. Family medical history is also considered. If there's a history of certain genetic diseases in the family, that could also lead to higher premiums.

The type of job an individual has can also impact premium costs. Occupations that involve high risks, such as construction work, commercial fishing, or firefighting, may result in higher premiums. Lastly, the type and amount of coverage chosen will significantly influence the cost. Term life insurance policies, which provide coverage for a specific period, generally have lower premiums than permanent policies, like whole or universal life insurance, that provide lifelong coverage and have a cash value component.

A Note About Inheritance Tax Planning

Inheritance tax planning is a crucial aspect of financial management for many individuals, especially those who wish to pass their wealth and assets to their loved ones. One effective way to minimize inheritance tax liability is through the use of life insurance trusts.

A life insurance trust can be established for the purpose of holding life insurance policies on the life of an individual. By doing so, the trust becomes the legal owner of the policy and the death benefit is payable to the trust. Since the trust is not considered part of the individual's estate, the death benefit is not subject to inheritance tax. This effectively reduces the amount of inheritance tax that would have been payable on the proceeds of the policy if it were owned by the individual.

A life insurance trust can be a valuable tool in inheritance tax planning. It allows the individual to pass wealth to their beneficiaries while minimizing the tax liability associated with the proceeds of a life insurance policy. However, it is important to seek professional advice and guidance when considering the establishment of a life insurance trust, to ensure that it is the most suitable solution for the individual's financial needs and goals.

Frequently Asked Questions

What is the main purpose of life insurance?
Life insurance is primarily designed to provide financial security to your dependents after your death. It ensures that in the event of your demise, your beneficiaries receive a lump sum payment, known as a death benefit. This can help cover funeral costs, pay off debts or mortgages, replace lost income, or fund future expenses like children's education. Essentially, it acts as a financial safety net, helping your loved ones maintain their standard of living.

Who needs life insurance?
Anyone who has financial dependents can benefit from having life insurance. This includes parents with young children, homeowners with a mortgage, spouses, and business owners. Life insurance can also be beneficial for individuals who want to leave a financial legacy, cover potential estate taxes, or ensure their funeral costs won't burden their loved ones.

Does life insurance cover deaths due to accidents or illnesses?
Yes, life insurance generally covers deaths due to both accidents and illnesses. However, the specifics depend on the policy terms and conditions. Certain policies may exclude coverage for deaths caused by high-risk activities or pre-existing medical conditions. It's essential to read and understand your policy's terms and conditions before purchasing.

Can I buy life insurance for family members?
Yes, you can buy life insurance for family members, but you'll need their consent and must be able to demonstrate “insurable interest,” meaning you would suffer a financial loss or hardship if that person were to die. The insured individual will also typically need to participate in the application process, such as completing a health questionnaire or undergoing a medical exam.

How much life insurance do I need?
The amount of life insurance you need depends on your specific financial circumstances and goals. A common rule of thumb is to have coverage that's 5 to 10 times your annual income. However, you should also consider your dependents' future needs, such as education costs, your outstanding debts, and your desired standard of living for your dependents. Consult with us at ONCE Wills & Trusts to help determine an appropriate coverage amount.

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