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Life Insurance – Term versus Permanent

For the majority of people, the question shouldn’t be about which one to choose because both types of life insurance are designed to help meet different type of needs. A combination of the two is appropriate for many people. Let’s take a closer look at both.

Term insurance usually provides the largest amount of insurance protection at the lowest initial cost. For this reason, term is what most people start out with. Because term policies end at a specific point – the end of the term – they work best for providing protection for large needs with specific end points. For example, a parent of a young child might purchase a 20-year term policy to provide protection until their child is over 18 or out of college. Then, the child might be responsible for getting his or her own coverage. Other periods that you might consider term insurance to cover include the time:

    • you plan to continue to work and have other relying on your income
    • remaining on your mortgage
    • remaining on an outstanding business or other loan

Permanent insurance is designed to last as long as you live and typically makes a great supplement to term insurance. You may want insurance after your term coverage ends, either for life-long or unplanned needs, or for needs with an unpredictable or extended end date.

Good reasons to have permanent insurance include helping to take care of:

    • someone who becomes or may still be dependent on you (either financially or for care, or both) such as children who are not yet independent or who have special needs
    • the costs associated with your death (final expenses) such as funeral or memorial costs, outstanding medical bills, and estate taxes
    • a once-temporary need that you have extended – for example, a refinanced (and possibly extended) mortgage, a home equity loan, a delayed retirement date (meaning extended income-earning years) or a new business
    • your grandchildren
    • your “second” family from remarriage
    • someone, such as a parent, who has developed a condition and who now requires your care
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Disability Insurance 101

How would you pay your bills if you were seriously sick or injured and couldn’t go to work? If you don’t have adequate Savings in place hopefully you have disability income insurance. Disability insurance is designed to replace a portion of lost income due to ill-health. The need for this protection will depend on what benefits are already available from other sources. This type of insurance (if not offered by your employer) is available through private insurance companies as well as Social Security.

Social security disability income insurance provides benefits that help replace the lost income of eligible disabled workers. This insurance provides eligible workers and their dependents with income during a period of disability expected to last at least 12 months or result in death. There is a 5-month waiting period after which benefits begin, and the disability must be considered “total” as defined by the Social Security Administration. Simply put, recipients must not be able to engage in any substantial, gainful activity. If they can do any work for pay, they will likely be ineligible for benefits.

Insurance carriers typically use two definitions of disability:

Own occupation (“own occ”) – means a disability prevents a worker from engaging in typical duties in his/her particular field of employment. Here’s an example – assume a surgeon loses a hand in an accident and can no longer perform surgery. Under the “own occupation” definition, they would be considered disabled. Now assume the surgeon decides to become a medical professor. Even though they are working and being paid as a professor, they would still be considered “disabled” as a surgeon, and would continue to collect disability benefits.

Any occupation (“any occ”) – means the insured can only receive disability benefits if they are unable to perform work-related duties for any occupation. If we use the same surgeon example, they would not be entitled to disability benefits if they began working as a professor under an “any occ” definition policy.

From a worker’s point of view, an own occupation policy would be more advantageous should a disability occur. However, own occupation policies are more expensive than any occupation policies and typically harder to medically qualify for.

When trying to determine the amount of disability income needed you can utilize a simple formula:

Current monthly after tax income

Less: social security benefits (estimate); employer-provided disability; existing private disability insurance; retirement plan disability benefits; waived life insurance premiums

Equals: Total monthly need

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Permanent Life Insurance 101

All permanent life insurance policies are not created equally. Yes, all permanent life insurance policies provide protection for your lifetime and yes, they typically have some capacity to build cash value. How these policies build cash value and how great their potential is for the amount are key differences among them.

Let’s take a look at each type of permanent policy:

Whole life: this is the insurance policy that most people think of when they hear permanent insurance. It also happens to be the policy that will have the highest premiums. If you pay your premiums on time, your coverage will stay in force and your policy will build cash value. This type of policy works great for the individual who is going to buy a policy and stash it in their filing cabinet.

Variable life: this policy provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds or a fixed account that guarantees interest and principal. A variable policy is good for someone who is willing to assume investment risk to try and achieve greater returns.

With such a policy, you are shifting the investment risk from the insurance company to yourself. Good investment performance would provide for the potential for higher cash values and death benefits. However, if the underlying investments perform poorly, cash values and death benefits will drop accordingly.

Universal life (UL): this policy can be great if you would like to earn interest within the policy while getting more flexibility than a traditional whole life policy allows. You can choose your premium payment schedule and you might have the potential to earn more cash value. Most UL policies will earn a minimum interest rate, giving you a level of security about the earnings. You can also borrow or take withdrawals from the cash value that accumulates in your policy.

Indexed Universal life (IUL): IUL’s can credit interest based on the performance of independent financial indices, unlike other universal products, which credit interest based on rates declared in advance by the insurance company. The most popular indices used for IUL’s are stock indices calculated without dividends. Please note, the money in an IUL policy is not directly invested in any of the indices.

IUL policyowners may decide how much of the policy cash value is allocated to the index feature and how much is allocated to a fixed-interest option. Cash value allocated to the index is usually credited with interest based on the change in the index value from one year to the next (Annual point-to-point). Each index option includes a maximum (cap) and minimum (floor) rate that protect consumers from loss but limits upside growth. Generally, these are subject to change by the insurance company, though they will never be reduced below a contractual minimum.

Variable Universal life (VUL): a VUL can give you the flexibility of a universal policy but adds an investment element. You oversee how the parts of your premium payments not needed for your actual cost and charges (net premium) are invested. You have a choice of investment options (called subaccounts), and you decide how much of your net premiums should be allocated to each of the options you select. The subaccounts can invest in stocks, bonds and other funds.

Since the cash value of your policy may be tied to the financial market, this policy provides the potential for returns higher than a universal policy, but it can also lose value if the investment results are poor. A VUL is good from people who like the investment element, can fund the policy properly and have adequate time to allow it to potentially build cash value.

Survivorship or Second-to-Die: this policy is designed to cover two people. It will pay a death benefit once both insured people have died and is often less expensive than two separate policies.

These types of policies are often used in estate conservation strategies, especially in conjunction with an Irrevocable Life Insurance Trust (ILIT), to pay estate taxes; this can be used to preserve a wealthy couple’s estate so it can be passed on to the next generation or to a charitable organization. Survivorship policies are often recommended if one person would otherwise not be able to qualify for life insurance.

Whole, variable, universal and variable universal life policies come in survivorship versions.

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10 Money Tips For Women

There has been a ton of research around women and finances. One study, conducted by the National Center for Women and Retirement Research, showed a direct correlation between a woman’s personality characteristics and her financial habits. The study also revealed that there are some unique qualities that tend to lead to smarter money choices: assertiveness, openness to change, and an optimistic outlook.

Money, in general, is an emotionally charged subject. Some experts say the beliefs that women have about money and their emotional attachments to it strongly influence the way they spend and handle money. And, if you’re not where you want to be financially, do a quick assessment on what drives you emotionally when it comes to money and try to figure out the road blocks that are keeping you from becoming financially independent.

With that, here are 10 tips (not in order of importance) that can aid you on your journey to becoming a financial rock star:

  1. Be involved in the day-to-day of your family’s finances. Talk about money with your spouse or significant other
  2. Don’t rely on someone else (spouse or significant other) for your future financial security
  3. Set some financial goals and track your progress along the way; Goals can be broken down as such: (a) Quick Win – a goals you can accomplish today, tomorrow, or within the next 1 or 2 weeks (b) Big Win – goals you can accomplish within 1-month, 3-months, 6-months or 1 year
  4. Don’t let the fear of (1) losing money, (2) of failure or (3) of the unknown stop you from investing. The stock market (in the long run) is your friend
  5. Consider taking on some DIY (do-it-yourself) projects around your home. Try fixing minor issues yourself. YouTube has a TON of DIY videos that can assist you and if you’re still not comfortable, ask a friend or family member to help out
  6. Build a solid emergency fund; 3-months is good but 6-months is even better
  7. Focus some attention on your retirement savings; rule of thumb – put away 10% of your earnings each year
  8. Pay yourself first! Since you pay your bills every month, you should be one of those “bills” that gets paid
  9. Having a day job is great but think of other creative ways to earn additional income
  10. Get your debt in check. Don’t spend money that you don’t have (that one was for the credit card abusers). And, if you have student loans, just know that you may have them for a while unless you’re working in a position that receives bonuses or commissions OR you receive a windfall of money.
  11. BONUS tip: Marry well! (Believe it or not, this is a strategy for some women)