You may know a lot about life insurance, but our focus here is on 12 things you need to know.
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ToggleOf course it may be no surprise that both wealth and poverty are passed from generation to generation. What may surprise you is that for centuries life insurance has created generational wealth from virtually nothing and protected and passed that wealth from one generation to the next. You don’t have to be wealthy to pass on generational wealth.
Conversely, the lack or absence of life insurance has resulted in a failure to protect assets from one generation to the next. The result is generational poverty. Even without owning any tangible assets—in other words, no home, no land, no cash—only life insurance can create an instant estate for you in amounts as much as 1,000 times or more the cost of one month’s premium.
For instance, depending on the age at purchase, one monthly premium of $50 can result in an estate worth $50,000 because of the life insurance death benefit. Suppose you put $50 into a 401(k), or the stock market, or a bank savings account and died the next day. Your beneficiary would be entitled to your $50 less taxes payable to the U.S. government. On the other hand, that same $50 paid as one monthly premium in a life insurance policy can result in $50,000 payable tax-free to a beneficiary. That is an estate passed to your beneficiary as generational wealth.
Should you die with little or no tangible assets AND no life insurance, you have passed on debt to your loved ones for your burial or cremation and end-of-life expenses. This is generational poverty.
Even with tangible assets such as a home, the mortgage is still due when you die. Your property tax bill and homeowner’s insurance still has to be paid. The gas, electricity and garbage bill still have to be paid until your home is sold. Your car insurance has to be paid or the vehicle has to be stored until it is sold.
Probate of a will through the courts can take 6 months or more. Who pays for everything during this time? Only life insurance can pass to your beneficiaries without going through probate court and is payable to your beneficiaries tax-free.
Life insurance goes directly to your named beneficiaries upon your death. Although you may have many good reasons to have a will, life insurance does not require a will to pay your named beneficiaries.
There is nothing else in this country with the benefits and privileges of life insurance. And the laws in our country intend for there to be nothing else like it.
Life insurance is the only income in America that is designed to pass tax-free to your beneficiaries, regardless of amount. (Internal Revenue Code § 101.) Life insurance is designed to take care of your loved ones upon your death, so that the government doesn’t have to.1
You do not have to die to receive benefits from many life insurance policies. Life insurance can have living benefits that pay out to you in case you become terminally or chronically ill.
There are only two (2) types of insurance: term and permanent. However, there are many variations within both types. The difference between term and permanent insurance is similar to the difference between renting and buying a home. When you rent a home, you are entitled to its benefits for the term of the lease. If you buy term insurance, you are covered for a limited time. How long you are covered is defined in the contract. It could be 1 year, 5, 10, 20, 30 or more years and points in between.
When you buy permanent insurance, it is intended that you will own it for a lifetime, as long as you pay the premiums. And similar to the way a home builds equity as you pay the mortgage, permanent insurance builds cash value as you pay the premium. Whole life, variable life, universal life, indexed universal life are some of the variations of permanent life insurance.
Term insurance premiums are the amount you pay for coverage. If you stop paying the premiums, you are “evicted” from coverage, usually at the end of 31 days.
As expected, if you stop paying the mortgage on your home, eventually you will lose your home. Likewise, if you stop paying premiums on permanent insurance, eventually you will lose your insurance. Some types of permanent insurance will allow you to use the cash value in your policy to pay your premium. This is not the case with all permanent policies. Obviously, buying the right kind of insurance for your needs is crucial.
In the same way it is expected that you will eventually own your home, it is expected that you may eventually own your life insurance policy. Your premium is calculated so that at some age you will have paid for the entire amount of the death benefit. For life insurance, that age is 100, although many policies have extended the age of maturity to age 121.
For example, if you have a $50,000 permanent life insurance policy with life to age 100, at the age of 100 the policy will end and your insurance company will pay you $50,000. This policy has endowed—also known as matured—at age 100. This $50,000 payout will be less any fees or charges you may have incurred such as for policy loans.
In a similar way that a home builds equity as you pay into the mortgage, permanent life insurance policies build cash value as you pay premiums. Similar to home equity loans, you can borrow against the cash value. And as with home equity loans, you will pay interest on the money borrowed from the cash value in a life insurance policy.
Many people mistakenly believe that if you buy a permanent life insurance policy, you only pay a certain percentage of the policy death benefit. This mistaken notion may have come from the discounted policy cost for term insurance. But remember, term insurance does not build cash value. You pay less for term insurance because the coverage duration is limited and you can never surrender a term policy and get cash back.
So a $100,000 permanent life insurance policy will cost you $100,000. You will pay this $100,000 amount in premiums over time. If you should die after paying one or more premiums, your beneficiary receives $100,000. There are policies that will pay out the face amount PLUS any accumulated cash value. Basically, this is accomplished by a policy with an increasing death benefit, so that as the cash value increases, so does the death benefit.
Suppose you have paid $50,000 worth of premiums over time and no longer want the policy. You can cash out—surrender the policy—and get your $50,000 back, plus any accumulated interest and less any fees, charges, and/or loans incurred over time.
And let’s say your permanent policy endows or matures at the age of 100. At that point, you will have paid $100,000 in premiums. The insurance company will end your policy and pay you $100,000 less any fees, charges, and/or loans that you have outstanding. Many permanent policies now endow at the age of 121 years of age. The effect is a reduction in the cost of the premium by extending the length of time to pay.
It’s sort of like having a company car. It’s a great benefit with limitations that should deter you from relying exclusively on employer-provided group life insurance. For instance:
Know all the risks and limitations that will impact you and your family. You will find that having an additional policy that you own will better serve your long-term needs.
Not one more penny than you can afford! A little bit of something left to loved ones is a whole lot better than a whole lot of nothing. If you lose your policy because you cannot afford to pay the premium, you have left a whole lot of nothing and are probably passing on debt in the form of burial and other end-of-life expenses to your loved ones. If all you can afford to buy your loved ones is time to close out your affairs—perhaps downsizing the family home—it’s a significant blow against generational poverty.
Similar to a home mortgage in which you pay the bulk of your loan interest in the early years, life insurance costs are front-end loaded to the early years. This means that it can take time to build up cash value in a permanent insurance policy. Lose that policy—especially in the early years—due to non-payment and you have essentially forfeited money to the insurance carrier.
Your next consideration is how much you need. Perhaps you can afford more life insurance than you need. Do not allow yourself to be talked into exorbitant amounts of coverage simply because you can afford it. It’s smart to have life insurance as part of your wealth accumulation strategy; however, make sure your plan is realistic and will serve your long-term needs.
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