A plan to protect your family is about more than money. It's about peace of mind. Take the right steps to protect your family's finances -- now and in the future.
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Protecting your family
- The role of life insurance in your financial plan
- Six distinct life insurance strategies to choose from
FAMILY PROTECTION SPOTLIGHT
There are plenty of reasons to consider life insurance, especially if:
- You’re married
- You have children
- You expect to owe estate taxes
- You own a business
If you need life insurance and want it to build cash value, but feel cautious about the uncertainty of economic conditions, BrightLifeSM Grow may be a good strategy for you.
- Designed for accumulation
Have questions about protecting your family?
What you'll learn
How insurance protects you and your family
Estimating how much insurance you need
How insurance can enhance the amount of wealth you leave to your heirs
Who needs life insurance?
If you have a family or spouse who depend on you for financial support, or if you work at home providing your family with such services as childcare, cooking, and cleaning, then you should look into life insurance.
Older couples may need life insurance to protect a surviving spouse against the possibility of the couple’s retirement savings being depleted by unexpected medical expenses.
Individuals with substantial assets may need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations
Many people obtain life insurance when they first have children and then forget about it for the most part. But an effective financial plan includes reexamining your life insurance needs periodically to help ensure the assets you've accumulated are protected and potentially provide additional opportunities to transfer wealth.
How much life insurance do you need?
How much you need depends on many factors. Of course, a financial professional can help you decide how much is right for you. Or try one of these two approaches.
A relatively simple and quick estimation may be to base the amount of insurance on your current, after-tax income (since life insurance is generally paid out tax free). Multiply that by the number of years your beneficiaries will need the income. Remember to make an allowance for inflation.
For a more detailed approach, determine your personal income replacement needs. Add up your family’s regular expenses such as housing, health care, food, clothing, transportation expenses, etc. This represents the amount that your insurance will need to replace. At a minimum, you’ll want a death benefit amount that, when invested, will provide income annually to cover this amount.
To that you can add expected one-time expenses, such as your children’s college tuition or paying down mortgage or debt. And remember to account for day care, housekeeping, or nursing care as needed. Finally, estimate your own “final expenses” such as estate taxes, uninsured medical costs, and funeral costs.
What are the different types of life insurance?
There are many different variables to insurance policies. Below are some of the more common types.
- Term insurance is the most basic, and often least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. Also, the premiums will likely increase at the end of each term and can become prohibitively expensive for older individuals.
- Whole life insurance combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow a portion of your policy's cash value tax free, although loans accrue interest and reduce the policy's death benefit and cash value, and may trigger a taxable event if the policy lapses.
- Universal life insurance is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also more flexible in regard to premiums and face value. Premiums may be increased, decreased, or deferred, and cash values can be withdrawn. You may also have the option to change the amount you are insured for, known as the face amount. Universal life policies typically offer a guaranteed* return on cash value.
- Variable life generally offers fixed premiums and the ability to invest your cash value in a choice of stock, bond, or money market-based investment options offered by your insurer. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options may be volatile. On the plus side, capital gains and other investment earnings accrue tax-deferred as long as the funds remain invested in the insurance contract.**
* all guarantees are backed by the claims paying ability of the issuing company.
** Variable investment options within variable life insurance policies are subject to fluctuation in value and market risk, including the possibility of loss of principal.
Variable life insurance policies are sold by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before purchasing a variable annuity contract. For a prospectus containing this and other information, please ask your AXA Advisors Financial Professional. Read it and consider the information carefully before purchasing a policy.
For more information on insurance policies, go to Life insurance.
Other uses for life insurance
Some of the traditional uses of life insurance are more proactive in their approaches to addressing problems, including the following.
- Education: The cash value in a life insurance policy can provide funds for a college education if the need for the death benefit decreases.
- Charitable giving: Life insurance can fund a donation for a charity, church, foundation, or nonprofit organization.
- Mortgage and debt coverage: Life insurance may be used to pay off a mortgage, credit cards, student loans, and other personal debt.
Tax benefits of insurance
There are a number of tax benefits to life insurance, including the following.
- Any earnings accumulated in your insurance policy’s cash value grow free from taxes. Please note that in a variable life insurance policy, cash value growth is not guaranteed.
- The death benefit of your permanent life insurance is generally passed on to your beneficiaries free from federal income tax.
- Premium withdrawals may be tax free, depending on the type of coverage you have.
- Transfers among the underlying investment options of a variable life insurance policy are generally not subject to current income or capital gains taxes.
- Should your need for the policy's death benefit decrease, you can take loans or withdrawals from a life insurance policy prior to age 59½ without the 10% early withdrawal penalty.
Estate planning benefits of life insurance
Life insurance is typically a critical element of a family's estate plan. It may enhance the amount of wealth you can bequeath to your heirs and provide a ready source of cash for their financial obligations.
Those who own all or part of a business may also use life insurance as a tool for managing transfer of the value of that business as part of an estate. For example, an entrepreneur may need to plan an estate in which his two adult children -- one who works in his business and one who does not -- are heirs. The owner could bequeath the business to the son or daughter who works there and designate the other as beneficiary of a life insurance policy with a value approximating that of the business.
Additionally, many business owners rely on life insurance proceeds as part of a business continuation agreement, enabling their business partners to acquire the ownership interest of a deceased owner's heirs. The surviving owners could use insurance proceeds to purchase the interest of heirs who have no intention of managing the business.
AXA Advisors does not provide tax or legal advice. Please consult with your professional tax and legal advisors regarding your particular circumstances.
Selecting your beneficiaries
Your beneficiary is the person who will receive the policy death benefit. For life insurance, no matter who is designated, the beneficiaries will generally receive the death benefit proceeds income tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.
For many married individuals, a spouse is the most logical beneficiary. A trust may be a prudent beneficiary choice, however, if a surviving spouse would not have the ability to prudently manage a large sum of money. The trustees (often a legal entity rather than an individual) would then take charge of managing, investing, and disbursing the policy proceeds for the benefit of the surviving spouse.
Be sure to name contingent or secondary beneficiaries. This means that if the primary beneficiary has passed away, the insurance proceeds will go to an individual or trust. If there are no surviving beneficiaries, then your beneficiary is generally the “estate of the insured,” which means the death benefits end up being probated and ultimately distributed according to the instructions of the last will and testament. If there is no valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by that state's law.
Working with a financial professional
A financial professional can help you choose from the many different insurance products on the market, selecting the vehicles that may be most suitable to satisfy your needs.
GE 90726 (1/14)(Exp 1/16)
1Withdrawals from life insurance policies may be subject to fees, penalties, and income taxes depending on the specific life insurance policy and the policyholder’s tax situation. Withdrawals reduce the policy value and death benefit.
GE 90726 (02/2016)