Life: Whole, term, or a combination of the two? What level of coverage do you need? Who should be the beneficiary? Are there any other types of policy options you should explore?
Long Term Care: An insurance option for those who may need extra coverage in case they may have to be held in a long term care facility.
Annuities: An annuity can be an excellent choice for receiving guaranteed income, but be aware of the risks that come along with it.
Life insurance is a contract that exists between a policyholder and the insurer. The policy holder pays premiums to the insurer. In return, the insurer agrees to pay money to a beneficiary upon the death of the insured person. Often, the policy holder and the insured person are the same person, but this is not always the case. Each insurance company will have different terms and conditions to its life insurance policies.
Types of Life Insurance
There are two categories for life insurance, called term and permanent life insurance, but there are also many types beyond those two categories.
Term life insurance policies provide insurance for a term of years in exchange for pre-established premium. These policies pay out a benefit in response to a specific event (typically, the death of the insured), which is generally paid out in a lump sum.
Permanent life insurance remains in force until such a time as the policy pays out, assuming continued payment of the policy remains premiums. Permanent life insurance, unlike term insurance, actually accrues cash value. There are certain subcategories of permanent life insurance.
Whole life insurance, as opposed to term, covers the entire life of the insured person. The advantages of whole life are guaranteed death benefits, cash values, and fixed premiums. The premiums may be higher than term insurance, but over time the amounts are roughly equal, if policies are kept in force and are up to date. The cash value of a whole life insurance policy can be accessed through “loans” made from the policy, and are received non-taxable. These loans can decrease the benefits payable on death of the insured person, however.
Universal life insurance is a permanent life insurance that is based on cash value. The value of the policy can increase where the premium payments exceed the cost of the insurance. The cash value can receive monthly interest, and is also charged with a “cost of insurance” charge, as well as any other fees that can draw on the cash value of the policy if no premium payment is made.
Endowment policies are types of life insurance that pay a lump sum after a specified term or on death. Endowments can be cashed in early (or “surrendered”) and the holder then received the surrender value, which is determined by the insurance company depending on how long the policy has been running and how much has been paid into it.
Riders are additional, optional amendments to a life insurance policy. Here are some examples of available riders:
The Accelerated Death Benefit Endorsement can automatically be included on your policy at no additional premium; however, there is an administrative fee when benefits are elected. It offers you the flexibility to access a portion of your Death Benefit should you develop a qualifying illness. The Death Benefit your beneficiaries receive will be reduced by the amount accelerated.
Terminal Illness–If you become terminally ill (life expectancy of 24 months or less), this endorsement will allow you to advance a portion of your Death Benefit as a lump sum. The maximum amount available to advance at age 80 is $144,635.00, however since this benefit is paid prior to death, the payment you receive will be discounted.
Chronic Illness–If you become chronically ill (unable to perform at least two activities of daily living or suffering from severe cognitive impairment), this endorsement will allow you to advance a portion of your Death Benefit as frequently as monthly. You can use the benefit in any way that you wish, such as helping to pay for a nursing home or home health care assistance. The maximum amount available to advance at age 80 is $3,856.00 per month, however since this benefit is paid prior to death, the payment you receive will be discounted.
Long term care Insurance is a product sold by insurance companies that helps to provide for the costs of long-term care. This is a type of insurance that is intended to cover costs that are generally not covered by health insurance of Medicare.
Long term care insurance is not necessarily intended for the sick, but rather, it is designed for individuals who may need assistance with activities of daily living, such as bathing or eating. Because of this, the insurance is not restricted based on age, but is available to anyone who may suffer some type of infirmity that may require assistance. Long-term care insurance can cover home care, assisted living, respite care, hospice care, and nursing home facilities.
Types of Long Term Care Insurance
These are two different types of policies, based on classification by income tax law.
The first is the tax-qualified policy. This policy requires that an individual requires care for a minimum of 90 days, and be unable to perform an activity of daily living without assistance, or suffers a severe cognitive impairment. This requires a doctor to provide a plan of care. The tax qualified policy benefits are non-taxable.
The second is the non-tax qualified, or “traditional” policy. These types of policies often require a triggering event, referred to as a medical necessity. What this means is that, when something triggers, and the patient’s doctor repots that the patient needs care for any medical reason, the policy will pay. Individuals who receive benefits under a non-tax qualified policy may risk facing a tax liability received.
Benefits of Long term Care Insurance
As the population ages, many individuals find themselves incapable of caring for themselves as they once did. Long-term care insurance assists in covering out of pocket cots. Without the insurance, the cost of long-term care could prove to be prohibitive.
Additionally, premiums paid for long-term care may be eligible for an income tax deduction, depending on the age of the individual covered. The benefits paid out under a long-term care insurance plan may also be excluded from taxable income.
“WHAT IS AN ANNUITY?”
An annuity is a contract in the form of an insurance product, in which the seller makes future payments to a buyer in exchange for a single lump sum payment (single-payment annuity) before the annuity begins. The payments continue until the death of the annuity purchaser. There are two possible phases for an annuity: the accumulation phase, in which the customer deposits and accumulates money, and the distribution phase, in which the income payments are made. An annuity has been described by some as “buying your own person.”
There are both benefits and disadvantages to an annuity. The annuity guarantees regular payments for the rest of a person’s life. The disadvantages can be fees, the inability to bequeath money to heirs, and the potential for low return on investment. For example, there is always the risk that a person could meet an untimely end shortly after purchasing an annuity, therefore spoiling the investment. Effective returns are described as being “just a shade above certificates of deposit,” and do not take inflation or cost of living increases into account. An annuity becomes more and more worthwhile based on longevity. However, if the goal is to ensure steady, reliable cash flow, no matter how long you continue to live, and annuity may prove to be an excellent choice.
While once disfavored in estate planning, annuities are now considered a reliable part of retirement planning. Certain financial planners say that an annuity should consist of 1/3 of the capital an individual holds for retirement. With the baby boomer generation aging, social security having an uncertain future, and fewer corporate pensions, annuities can be an excellent way to ensure reliable income to retied persons.
WHAT TYPES OF ANNUITIES ARE AVAILABLE?
There are many different groups and types of annuity available.
An annuity contract that only has distribution phase is called an immediate annuity.”
“FIXED AND VARIABLE ANNUITIES”
Annuities that make payments in fixed amounts, or that increase at a fixed annuities. An example is the Immediate Fixed Lifetime annuity, which guarantees regular payments for life, starting immediately, in exchange for a lump sum payment upfront. In contrast, a variable annuity will pay amounts that vary, based on investment. These are typically based on bonds and mutual funds. Variable annuities allow for deferral of recognition of taxable gains. Money that is deposited into a variable annuity grows on a tax-deferred basis, so that taxes on investments are not due until a withdrawal is made.
Guaranteed annuities offer a “period certain” feature, meaning that if an individual passes away before a certain cutoff date, then the person’s heirs will receive the remaining annuity payments until the cutoff date at the end of the period. This protects against the chance that the holder of an annuity may die before recovering the value of the original investment. If the annuity holder outlasts this period, the annuity payments will continue as normal. But, in the unfortunate event where the annuity holder passed before the cutoff date of the period, the holder’s estate of beneficiaries are entitled to collect the remaining payments up to the end of the period. An example is the Immediate Fixed 10-year Certain Annuity. This annuity is similar to the Immediate Fixed Lifetime Annuity, but includes a guaranteed ten year period in which payments are guaranteed, regardless of death of the annuity holder.
An annuity can be structured in such a way to make payments to a married couple, with such payments ceasing on the death of the second spouse.
“IMPAIRED LIFE ANNUITIES”
These annuities involved improving the terms offered, due to a medical diagnosis, which is, sever enough to reduce the life expectancy. This involves medical underwriting and has a range of qualifying conditions.
Annuities that involve both, an accumulation and a distribution phase, are called deferred annuities. Some examples of deferred annuities:
Deferred Fixed Annuity with Five-Year Guarantee: annuity begins paying out in the future at a fixed interest rate for five years. After five years, the rate fluctuates with investments.
Capped S&P 500 Indexed Annuity: allows participation in the stick market, with guaranteed downside protection. Payments begin at a later time.
Deferred Variable Annuity: assets grow tax-deferred based on underlying stocks and bonds. Payouts are based on value at a certain future date.