A story I tell is about someone who in all seriousness asked “When is the best time to buy life insurance?”. And the answer was “About three months before you die. When would you like for me to come by and take your application?”
Therein lies the crux of the matter. And it is further complicated by the fact that even if I come by and take your application, three months before you die, there is no assurance the insurance company will accept your application and make an offer to insure your life. It only becomes a contract when the legally competent parties to the contract meet all the criteria of a legally binding agreement.
Now add in all the likely variables today, such as your health, your family health history, your age, your ability to pay premiums, the different kinds of life insurance, the tax consequences, your credit history, for how long you want or think you need coverage. All these variable conspire to make a problematical decision process.
But you have to start somewhere. I recently posted an article on Whole Life Insurance; here is another, this time about Term Life Insurance.
Sep 26, 2014 | By Stephan R. Leimberg, Robert J. Doyle Jr., Keith A. Buck
The two principal characteristics of term insurance are: the insured must die for any benefits to be paid and, by definition, the contract expires at the end of the term. Stated more specifically, a term life insurance policy promises to pay a death benefit to a beneficiary only if the insured dies during a specified term.
The contract makes no promise to pay anything if the insured lives beyond the specified term.
Generally, no cash values are payable under a term life insurance contract. If the insured survives the specified term, the contract expires and provides no payment of any kind to the policyowner.
1) When should term life be sold?
In general, some type of life insurance is indicated when a person needs or wants to provide an immediate estate upon his or her death. This need or desire typically stems from one or more of the following reasons:
A. Providing income for dependent family members until they become self-supporting after the head of household dies.
B. Liquidating consumer or business debts, or to create a fund, enabling the surviving family members to do the same when the head of household dies.
C. Providing large amounts of cash at death for children’s college expenses or other capital needs.
D. Providing cash for federal estate and state inheritance taxes, funeral expenses, and administration costs.
E. Providing funds for the continuation of a business through a buy-sell agreement.
F. Indemnifying a business for the loss of a key employee.
G. Helping recruit, retain, or retire one or more key employees through a salary continuation plan, and finance the company’s obligations to the dependents of a deceased key employee under that plan.
H. Funding bequests of capital to children, grandchildren, or others without the erosion often caused by probate costs, inheritance taxes, income taxes, federal estate taxes, transfer fees, or the generation-skipping tax.
I. Funding charitable bequests.
J. Preserving confidentiality of financial affairs. Life insurance proceeds payable to someone other than the deceased’s estate are not part of the probate estate and are not a matter of public record. It is not unusual for a beneficiary to be a lover, illegitimate child, faithful domestic servant, or have some other type of relationship with the insured that he or she may not want to be publicly acknowledged.
K. Assuring nearly instant access to cash for surviving dependents. Life insurance proceeds are generally paid to beneficiaries within days of the claim. There is no delay, as might be the case with other types of assets, because of the intervention of state or other governmental bodies due to settlement of tax issues, or because of claims by the decedent’s creditors.
L. Directing family assets to family members in a way that minimizes state, local, and federal taxes.
Generally, term insurance is not the most effective type of life insurance for all of these death benefit needs. However, term insurance may serve the insured’s needs in many circumstances. Because term insurance is not just one product, but rather many variations on a general theme different types of term insurance are indicated for different types of needs.
Keep in mind, term insurance, more than any other type of insurance, is pure death protection with little or no ancillary or lifetime benefits. Therefore, the two overriding considerations in the use of term insurance, regardless of the specific application, are:
• Will death protection alone meet the need?
• Will the coverage last as long as the need?