Small Business Week: Life Insurance Needs
Small business owners need life insurance to protect their business interest. As a business owner, you need to consider what occurs to your business should you die unexpectedly. Life insurance could provide cash needed to buy a deceased partner's or shareholder's interest from his or her estate. Life insurance can also be used to compensate for the unexpected death of a key employee.
Your life insurance needs will depend upon a variety of elements:
- Your buseinss or career
- The size of your family
- The nature of your financial obligations
- Your future goals
.For example, when you're young, you may not have a great demand for life insurance. Nonetheless, as you take on more obligations - start a business, get married and have children, your need for life insurance rises.
Here are some concerns that can help you start considering the quantity of life insurance you need:
- What instant financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
- How much of your salary is devoted to present expenses and future needs?
- How long would your dependents need assistance if you were to die tomorrow?
- How much cash would you wish to leave for special circumstances upon your death, such as funding your children's education, gifts to funds, or an inheritance for your children?
- What other assets or insurance policies do you have?
Types of life insurance policies
The two basic kinds of life insurance are term life and permanent (cash value) life. Term policies offer life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary gets the policy's death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are generally available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific time period.
Permanent insurance policies provide security for your entire life, regardless of your health, provided you pay the premium to keep the policy active. As you pay your premiums, a part of each payment is placed in the cash value account. During the early years of the policy, the cash value contribution is a large part of each premium payment. As you age, and the true cost of your insurance increases, the part of your premium payment dedicated to the cash value decreases. The cash value continues to grow-- tax deferred-- provided that the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will obtain. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges.
Many varied types of cash value life insurance are offered, including:
- Whole life: You typically make level (equal) premium payments for life. The death benefit and cash value are predetermined and ensured (based on the claims-paying ability of the issuing insurance company). Your only activity after purchase of the policy is to pay the fixed premium.
- Universal life: You may pay premiums at any time, in any amount (subject to certain limits), so long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage could be changed, and the cash value will expand at a declared rate of interest, which may vary over time.
- Index universal life: This is a form of universal life insurance with excess interest credited to cash values. But, unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
- Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value vary depending on the efficiency of investments in what are referred to as subaccounts. A subaccount is a pool of investor funds professionally handled to pursue a stated investment objective. You select the subaccounts in which the cash value should be invested.
- Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts.
With so many types of life insurance available, you're sure to find a policy that meets your needs and your budget.
Choosing and changing your beneficiaries
When you purchase life insurance, you must name a primary beneficiary to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to obtain. If you name your minor child as a beneficiary, you should also designate an adult as the child's guardian in your will.
What type of insurance is right for you?
Before choosing whether to buy term or permanent life insurance, think about policy cost and potential savings that may be offered. Also bear in mind that your insurance needs will likely change as your family, job, health, and financial picture changes, so you'll want to build some flexibility into the decision-making process. In any case, here are some common reasons for buying life insurance and which type of insurance may best fit the need.
Mortgage or long-term debt: For most people, their home is one of their most valuable assets and also the source of their largest debt. An untimely death may remove a primary source of income used to pay the mortgage. Term insurance can replace the lost income by providing life insurance for the length of the mortgage. If you die before the mortgage is paid off, the term life insurance pays your beneficiary an amount sufficient to pay the outstanding mortgage balance owed.
Family protection: Your income not only pays for day-to-day expenses, but also provides a source for future costs such as college education expenses and retirement income. Term life insurance of twenty years or longer can take care of immediate cash needs as well as provide income for your survivor's future needs. Another alternative is cash value life insurance, such as universal life or variable life insurance. The cash value accumulation of these policies can be used to fund future income needs for college or retirement, even if you don't die.
Review your coverage
Once you purchase a life insurance policy, make sure to periodically review your coverage-- over time your needs will change. An insurance agent or David Lerner Associates investment counselor may be able to help.
Your life insurance needs will depend upon a variety of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals.
A note regarding variable life and variable universal life insurance:
Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and think about this information carefully prior to purchasing a variable life or variable universal life insurance policy.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: http://www.davidlerner.com