Creating Customized Life Insurance: Taking Control Of Your Coverage

Life insurance is a legally binding contract between an insurance company and a policy owner. The insurer guarantees to pay a sum of money to the policy's named beneficiaries when the insured person dies. In exchange, the policyholder pays premiums to the insurer during their lifetime. The policyholder must pay a single premium upfront or regular premiums over time for the life insurance policy to remain in force.

There are two main types of life insurance: term life and whole life insurance. Term life insurance is generally the cheapest kind of life insurance. It provides coverage over a specific term, usually between 10 and 30 years. Whole life insurance, on the other hand, provides lifetime coverage as long as the policyholder continues to pay the premium and has a fixed premium and cash value component.

When buying life insurance, it is important to consider your needs and goals. For example, if you are looking to provide financial security for your dependents or ease the financial burden on your family in the event of your death, term life insurance may be a good option. On the other hand, if you want lifelong coverage and the ability to take out loans against your policy, whole life insurance might be a better choice. Additionally, you should research different insurance companies and their financial stability, customer service, and reviews before purchasing a policy.

Understanding the different types of life insurance

Life insurance is a legally binding contract that promises a death benefit to the policy owner when the insured person dies. The policyholder must pay a single premium upfront or regular premiums over time for the life insurance policy to remain in force.

There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is designed to last a certain number of years, then end. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. Permanent life insurance is more expensive than term life insurance, but it stays in force throughout the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy.

Term Life Insurance

Term life insurance is generally the cheapest kind of life insurance. It provides coverage over a specific term period, usually between 10 and 30 years. If you pass away during the term, your beneficiaries will receive a payout from the insurance company. Once the term is over, the benefits end unless the policy is renewable or convertible, which is offered by many insurers. It is important to note that your premium will likely increase if you choose to renew or convert.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides lifetime protection as long as you continue to pay the premium, with fixed premiums and cash value. With some whole life policies, policyholders have to pay their premium until they die, and other policies only require a premium for a certain number of years (although these premiums are much higher compared to the lifelong premiums). The cash value of your policy won't affect the death benefit paid out upon your passing. However, if it grows to equal your death benefit amount by the time you're a set age (usually 100 or 120), your insurer will terminate your policy and pay out the coverage amount.

Universal Life Insurance

Universal life is another type of permanent coverage. It also accumulates cash value, but the policy is flexible to allow you to change your death benefit and premium to fit your changing needs. There are several forms of universal life insurance, including variable universal life insurance and indexed universal life insurance.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance with a savings component in which cash value can be invested. This type of cash value life insurance is tied to investment accounts, such as bonds and mutual funds. Variable life insurance premiums are typically fixed, and the death benefit is guaranteed, regardless of how the market fares.

Final Expense Life Insurance

Also known as burial or funeral insurance, final expense insurance is a type of permanent life insurance that has a small death benefit. Beneficiaries can use the death benefit as they wish. A medical exam is usually not required, making it more accessible to seniors with pre-existing health conditions.

Pros and cons of term and permanent life insurance

Term life insurance is a type of insurance that covers you for a fixed period, such as 10, 20, or 30 years. It tends to be the cheapest option and is ideal for those who want substantial coverage at a low cost. It is also a good option for those who cannot afford the higher premiums of whole life insurance. However, term life insurance does not build cash value, and if the policyholder outlives the policy, they receive nothing in return.

On the other hand, permanent life insurance provides coverage for the entirety of the policyholder's life, as long as premiums are paid. It tends to be significantly more expensive than term life insurance due to the lifelong coverage and the addition of a cash value component. The cash value of permanent life insurance policies grows over time and can be used to pay premiums or take out loans. Permanent life insurance is a good option for those who require lifetime coverage and want to build cash value.

When deciding between term and permanent life insurance, it is important to consider your financial situation, the length of coverage needed, and the desired level of benefits. Term life insurance is sufficient for most people, especially those who are young and healthy, as it provides substantial coverage at a low cost. Permanent life insurance, on the other hand, is ideal for those who require lifetime coverage, want to build cash value, or have significant financial obligations that are not time-sensitive.

How to buy life insurance

Decide if You Need Life Insurance

Ask yourself if your family or beneficiaries would face financial hardship if they lost your income, or if your dependents would be left with a large amount of debt after your death. You may also want to consider whether you want to cover end-of-life expenses, including funeral, burial, or medical costs, or if you want to pay for a dependent's tuition, day-care, or retirement costs.

Determine How Much Life Insurance You Need

The amount of life insurance you need depends on various factors, including your personal and household income, the needs of your dependents or prospective beneficiaries, and your financial goals. Ask yourself:

• How will the loss of my income affect my dependents?
• How long would I like my income to provide financial support for my beneficiary?
• How much will my dependents or spouse need to cover the mortgage or rent?
• What day-to-day expenses, if any, do I want to cover for my beneficiaries?
• How will my loved ones cover end-of-life expenses, like funeral costs, estate taxes, etc.?
• Do I want my life insurance policy to be used as an inheritance?
• Do I want part of my life insurance policy to go to a charitable organization?

Determine Which Type of Life Insurance Is Right for You

There are two primary types of life insurance to choose from: term life and permanent life. Term life insurance is generally the cheapest kind of life insurance, but it only provides coverage over a specific term period, usually between 10 and 30 years. Permanent life insurance is typically more expensive as it offers more benefits, including lifetime protection as long as you continue to pay the premium, and a cash value component that grows on a tax-deferred basis.

Decide if You Need Life Insurance Riders

Riders are additional benefits or options that you can add to your policy to create customized coverage that meets your specific needs. Some common riders include:

• Children's Term Rider: This rider allows parents to cover their children under the policy, and the insurer will pay out a death benefit if the child dies before reaching a specified age.
• Accelerated Death Benefit Rider: This rider allows you to access your death benefits before you die if you've been diagnosed with a terminal illness or disease.
• Accidental Death Benefit Rider: This rider increases the death benefit paid out if you die from injuries sustained in a covered accident.
• Waiver of Premium Rider: This rider protects you if you can't pay the required premium due to an injury or illness that leaves you disabled.

Choose a Life Insurance Company

You can work with an insurance agent, insurance broker, or directly with an insurance company to purchase your policy. An insurance agent can be captive (representing a single company) or independent (representing multiple companies). An insurance broker acts as a middleman between the client and the insurance market and can help you find, review, and compare policies from multiple companies.

Purchase Your Policy

To purchase your policy, you'll need to complete a life insurance application and provide basic contact information, as well as your Social Security number, driver's license number, financial information, health and medical information, and nicotine or tobacco usage information. You'll also need to select a beneficiary or beneficiaries to receive the policy's death benefit.

Undergo a Medical Exam

Depending on the type of policy you choose, you may need to undergo a medical exam or screening. During the exam, a medical professional will record important information about your health, such as your weight, height, and blood pressure, and may also take blood and urine samples.

Wait for Approval

Once you've submitted your application and completed any required medical exams, the insurance company will review your information and determine if you're eligible for coverage. If approved, they will send you the policy documents to sign and approve.

Selling a life insurance policy

Selling your life insurance policy is an option if you can no longer afford the premiums, have other expenses that have increased, or need cash to cover unexpected costs. The process of selling your life insurance policy involves several steps, including finding a buyer, completing the necessary documentation, and negotiating a price. Here is a detailed and instructive guide on selling a life insurance policy.

Understanding the process

Before selling your life insurance policy, it is important to understand the process. Selling your life insurance policy is a life settlement transaction, which involves selling your policy to a third party, known as a life settlement provider. The owner of the policy receives an immediate payment in return, while the provider becomes the new owner and is responsible for paying future premiums. It is important to consult a financial advisor or attorney to fully understand the implications of selling your policy.

Considering your options

Before selling your policy, it is worth considering other options that may allow you to keep your policy in force. For example, you may be able to take out a policy loan or reduce the amount of the death benefit to lower your premium payments. If the insured is terminally or chronically ill, you may also be able to access an accelerated death benefit while the insured is still alive.

Finding a buyer

To sell your life insurance policy, you will need to find a life settlement provider or broker interested in purchasing it. You can compare quotes from several providers to ensure you get a competitive offer. A broker can assist you in this process by pulling quotes and handling negotiations, but their services will incur a fee.

Completing the transaction

Once you have found a potential buyer, you will need to complete an application and grant the settlement company access to your policy and medical information. The settlement company will then review the relevant information and determine the market value of your policy. If your policy is deemed suitable for purchase, the settlement company will make an offer, which you can choose to accept or decline. If you accept the offer, you will need to review and sign the closing package, and the transaction will be finalised.

Understanding the financial implications

Selling your life insurance policy has several financial implications that you should consider. The proceeds from the sale may be subject to taxes and debt collection, and they may affect your eligibility for certain public assistance programs. Additionally, you will lose access to the cash value of your policy, and your family will not receive the death benefit upon your death. It is important to consult a financial advisor or accountant to fully understand the financial implications of selling your policy.

Life insurance for high-net-worth individuals

High-net-worth individuals (HNWIs) are those with at least $1 million in liquid or investable assets. While they may not need life insurance to provide a financial payout for their beneficiaries after they pass, life insurance is still a crucial financial tool for HNWIs.

Life insurance plays a pivotal role in estate planning for HNWIs, offering a tax-free death benefit that can cover estate taxes and ensure beneficiaries receive their full inheritance. It also acts as a financial safety net, providing stability and protecting the long-term financial security of loved ones, especially in times of market volatility.

Life Insurance Strategies for High-Net-Worth Individuals

• Life insurance for business owners: Life insurance can be used to secure key person insurance, which provides coverage in the event of the death of a crucial employee or executive. It can also facilitate the transfer of business ownership upon the death of a partner through buy-sell agreements, preventing disputes and ensuring business continuity.
• Life insurance for estate planning: The death benefit from life insurance policies can be used to cover estate taxes, preserving the value of the estate for beneficiaries. It can also equalize inheritance among beneficiaries by providing additional funds to those who may receive less from other assets in the estate.
• Life insurance for retirement planning: Permanent life insurance can supplement retirement income by providing a source of tax-deferred growth through policy loans or withdrawals.
• Life insurance for charitable giving: High-net-worth individuals can name a charitable organization as the beneficiary of a life insurance policy, making a donation upon their death while potentially reducing their taxable income.

Types of Life Insurance for High-Net-Worth Individuals

There are two main types of life insurance: term and permanent.

• Term life insurance: Offers coverage for a designated period, typically 10 to 30 years. If the insured passes away during the term, beneficiaries receive the death benefit. If the insured outlives the term, the policy expires, and no benefit is paid out unless it is renewed.
• Permanent life insurance: Provides coverage for the entire lifetime of the insured as long as premiums are paid. It includes a cash value component, which functions similarly to a savings account, allowing the policyholder to take out loans or pay premiums.

Applying for Life Insurance as a High-Net-Worth Individual

When applying for life insurance as an HNWI, it is essential to obtain and compare quotes tailored to your desired policy type. A life insurance calculator can help determine the appropriate coverage amount. The financial and medical underwriting process may be more extensive for larger policies. Other steps in the application process include considering your medical history, choosing between term or permanent life insurance, and designating primary and secondary beneficiaries.

Frequently asked questions