Individual needs dictate choice of life insurance

September 12, 2013

The starting point in any life insurance planning exercise is deciding on the amount and type of coverage needed.

What is the most appropriate type of life insurance for someone who only needs it for the next 10 years?

The starting point in any life insurance planning exercise is deciding on the amount and type of coverage needed. Is your specific life insurance need temporary or permanent? Temporary would imply that your needs are relatively short term. A good example would be if you are trying to provide survivor income in the event you die prior to becoming self-insured. Permanent insurance, on the other hand, is generally purchased with the understanding that the policy proceeds will be paid out at the time of your death, regardless of when that occurs, even if you live beyond your expected mortality age.

If your life insurance needs are temporary, then term insurance may be the most appropriate vehicle. Term insurance has no cash value or savings component attached to it. Quite simply, you pay your premium, and if you die during that policy year, the death benefit is paid to your beneficiary. Decreasing term insurance has a level premium, but a decreasing death benefit. It is generally used in conjunction with financial obligations that decrease over time, such as mortgages or other types of amortized loans.

There are two types of term insurance that offer a level death benefit, but a differing premium payment structure. Annual renewable term insurance has a yearly increasing premium, which increases with the higher mortality cost associated with being a year older and a year closer to your expected mortality age. It is primarily used for financial obligations that remain constant for a relatively short period of time.

Level premium term insurance offers a level premium payment amount over a fixed number of years; typically 5, 10, 15, or 20 years. This would be appropriate for needs that are finite in length, such as ensuring coverage until a young child has completed college, becoming self-insured through an increased net worth, or reaching retirement age with sufficient retirement income to meet your needs.

There are other differences that will become apparent when comparing term policies. The major areas impacting premium rates are policy provisions dealing with renewability and convertibility. Typically, renewable policies allow the policyholder the option of continuing term coverage after the stated period of time has expired. While the renewal will be at a higher premium rate than during the defined time period, new medical underwriting is not required. If, during the term period, you become ill in a manner that would deem you to be either uninsurable or insurable but with an added-on rating that would substantially increase premiums, you would at least have the option of continuing coverage with your current term carrier.

A convertible policy, on the other hand, provides the insured with the option to convert the term policy to a permanent policy at some time in the future. Once again, this may be accomplished without proof of insurability or medical underwriting. Some term carriers will provide both renewable as well as convertible policy provisions with their contracts.

Other provisions, known as riders, can be added to certain policies for an additional cost. The waiver of premium rider allows you to stop making premium payments if you become disabled and are unable to work and earn an income. The accidental death rider obligates the insurance company to pay out to your beneficiary double or, in some cases, triple the stated death benefit if the insured dies in an accident.

A newer rider that is starting to get a lot of attention is the accelerated death benefit. You may be able to receive a portion of your own death benefit while you are alive in the event that you have a major medical condition that is expected to lead to death within a short period of time. This rider will provide needed funds immediately to help with medical bills or other support issues during a terminal illness.

 

If you sell a government bond before it matures, are you still guaranteed the repayment of your principal?

If an investor buys a marketable government bond and holds it to maturity, the issuer is obligated to repay the full face amount. If such a bond is sold before it matures, the investor may receive more or less than the amount originally invested. Bond prices can move up and down, most often in response to changes in the general level of interest rates. If rates rise, the price of existing bonds usually falls. If interest rates decline, the market value of existing bonds generally increases. Marketable government bond prices may also be affected by general business and economic factors.UT

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