September is Life Insurance Awareness Month, and thus the focus of this month’s blog post. Here are some of the things you should know about life insurance:
- Life insurance is a contract.
A life insurance policy is basically a contract between you and an insurance company.
As with any contract, the terms and conditions should be examined carefully before signing. With a life insurance policy, a trusted financial advisor can help you understand the fine print and compare between different policies to help find the right coverage for the most economical premium.
- There are four parties to a policy.
The life insurance policy is a contract between a life insurance company and a person, or occasionally, something, such as a trust or corporation. But you should understand that there are actually four roles when it comes to a life insurance policy.
- The insurer or insurance carrier
The insurer or insurance company pools the premiums of all their policyholders and is responsible for paying out claims—called a death benefit—in the event of a death. The difference between the premiums taken in and the claims paid out is the insurance carrier’s profit.
A.M. Best, Moody’s, Fitch, Standard & Poor’s and other similar organizations issue ratings for insurance companies based on their financial strength. Be sure to ask your financial advisor about that.
- The policy owner
Usually the policy owner is also the insured—the family breadwinner who is trying to protect his or her loved ones in case of untimely death. But a policy owner can be anyone or any entity which has a financial interest in the life and livelihood of someone else. This comes into play most often when a company owns a policy on a key employee in a firm—a key person like an owner or executive whose passing would negatively affect the firm’s ability to do business.
The owner of the life insurance policy is responsible for premium payments to the insurance company to keep the policy in force.
- The insured
The insured is the person upon whose life the policy is based—as discussed above, this is most often the breadwinner or policy owner. But sometimes families choose to insure children or toddlers for various reasons, including establishing their insurability when they are very young and healthy, or building cash value while the cost of insurance is low.
- The beneficiary
The beneficiary is the person, trust or other entity who is designated to receive the life insurance claim—or death benefit—in the event of the insured’s passing. Life insurance can be a very tax-advantaged way to transfer wealth, and is often tax-free if beneficiaries are individuals.
- There are two major types of life insurance.
The two main types of life insurance policies are term and permanent.
Term life is the least expensive and simplest. The insurance carrier bases the policy’s premium or cost on the likelihood that the insured will die within a stated term—usually 10, 20 or 30 years. Most term policies charge a level premium amount until the policy term ends.
Permanent insurance also includes probability of death factors to calculate the cost of insurance, beyond which it also includes some type of saving mechanism, often called “cash value.” There are different types of permanent insurance which may provide growth and tax advantages, but it is very important for your financial advisor to compare and analyze various policy terms, conditions and types so that you are getting the right sorts of coverage to meet specific objectives.
In retirement, permanent life insurance is primarily used for its death benefit to protect a spouse or life partner, for high-net-worth tax strategies, or to provide other optional benefits such as long-term care coverage.
- If someone relies on you, then you probably need life insurance.
You might think you’re excluded from the need for life insurance if your kids are grown, but your spouse or partner may still be at financial risk if you die before them. Many people forget that when one spouse dies, only one Social Security check will continue, potentially placing the survivor at financial risk. Lessening their financial burden can lessen their emotional stress as they are grieving over you.
Even if you’re single, you may want to have your financial advisor look at life insurance as a strategic financial strategy.
- Alpha Beta Gamma has a whole division focused on insurance.
We recently established a whole division of our business to focus on insurance—and not just life insurance either. Risk management is an important part of the work we do to transfer risk over to insurance companies and away from your family. In order to do that, we offer a huge range of products from dozens of providers, and we research your options in terms of coverage features and premiums to help achieve the best fit. We offer life insurance, disability insurance, health insurance and annuities as part of your overarching strategy.
Visit Alpha Beta Gamma Risk Management to learn more.
Please call us at our headquarters in Palm Beach Gardens, Florida if you have any questions about life insurance or any other financial topic: 866.837.0999.