Understanding Life Insurance…

A Lesson in Life Insurance

© 2009 VSA, LP Valid only if used prior to January 1, 2010. The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Life insurance contracts contain exclusions, limitations, reductions Life insurance contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. All contract of benefits and terms for keeping them in force. All contract guarantees are based on the claims-paying ability of the issuing guarantees are based on the claims-paying ability of the issuing insurance company. Consult with your licensed financial insurance company. Consult with your licensed financial representative on how specific life insurance contracts may work representative on how specific life insurance contracts may work for you in your particular situation. Your licensed financial for you in your particular situation. Your licensed financial representative will also provide you with costs and complete details representative will also provide you with costs and complete details about specific life insurance contracts recommended to meet your about specific life insurance contracts recommended to meet your specific needs and financial objectives.specific needs and financial objectives.

Before purchasing a variable life insurance policy, carefully Before purchasing a variable life insurance policy, carefully consider the contract and the underlying funds' investment consider the contract and the underlying funds' investment objectives, risks, charges and expenses. Both the contract objectives, risks, charges and expenses. Both the contract prospectus and the underlying fund prospectuses contain prospectus and the underlying fund prospectuses contain information relating to investment objectives, risks, charges and information relating to investment objectives, risks, charges and expenses, as well as other important information. The prospectuses expenses, as well as other important information. The prospectuses are available from your licensed financial representative or the are available from your licensed financial representative or the insurance company. You should read them carefully before insurance company. You should read them carefully before purchasing a variable life insurance policy.purchasing a variable life insurance policy.

Your earning power Your earning power –– your ability to earn your ability to earn an income an income –– is your most valuable asset.is your most valuable asset.

Few people realize that a 30-year-old couple will earn 3.5 Few people realize that a 30-year-old couple will earn 3.5 million dollars by age 65 if their total family income million dollars by age 65 if their total family income averages $100,000 for their entire careers, without any averages $100,000 for their entire careers, without any raises.raises.

If something happens to you,If something happens to you,how will your family replace your earning power?how will your family replace your earning power?

  Only life insurance can guarantee to provide the funds Only life insurance can guarantee to provide the funds

requiredrequiredto replace your earning power exactly when needed at your to replace your earning power exactly when needed at your

death.death.

In Purchasing Life Insurance, There Are In Purchasing Life Insurance, There Are

Two Questions That People Generally Ask:Two Questions That People Generally Ask:

1.1. How Much Life Insurance Do I Need?How Much Life Insurance Do I Need?

1.1. What Type of Life Insurance Should I What Type of Life Insurance Should I Buy?Buy?

How Much Life Insurance Do I Need?How Much Life Insurance Do I Need?

How much life insurance is enough depends on your How much life insurance is enough depends on your individual needs and your financial objectives for your individual needs and your financial objectives for your family.family.

While life insurance cannot replace you, it can provide the While life insurance cannot replace you, it can provide the funds to:funds to:

pay final expensespay final expenses

replace all or a portion of your incomereplace all or a portion of your income

keep your family in their homekeep your family in their home

establish a college education fundestablish a college education fund

cover financial emergenciescover financial emergencies

provide a child and/or home care fundprovide a child and/or home care fund

How Much Life Insurance Is Enough?How Much Life Insurance Is Enough?

This question is best answered through an This question is best answered through an

analysis of your family and financial situation, as analysis of your family and financial situation, as

well as your financial goals and objectives.well as your financial goals and objectives.

What Type of Life Insurance Should I Buy?What Type of Life Insurance Should I Buy?

All life insurance falls into one of two categories of coverage. All life insurance falls into one of two categories of coverage.

Each category has certain characteristics that make it more Each category has certain characteristics that make it more

suitable for certain needs:suitable for certain needs:

1. Term Life Insurance1. Term Life Insurance

Provides temporary protection for the term of the policy.Provides temporary protection for the term of the policy.

If the insured dies within the term period, the insurance If the insured dies within the term period, the insurance

company pays the death benefit.company pays the death benefit.

If the insured survives the term period, the coverage If the insured survives the term period, the coverage

terminates.terminates.

2. Cash Value Life Insurance2. Cash Value Life Insurance

Provides lifetime protection, so long as the policy is kept in Provides lifetime protection, so long as the policy is kept in

force.force.

The insurance company pays the death benefit regardless The insurance company pays the death benefit regardless

of when death occurs, so long as the policy is kept in of when death occurs, so long as the policy is kept in

force.force.

The policy accumulates cash values that can be used The policy accumulates cash values that can be used

during the insured’s lifetime (withdrawals and loans will during the insured’s lifetime (withdrawals and loans will

reduce the policy’s death benefit and cash value available reduce the policy’s death benefit and cash value available

for use).for use).

Types of Term Insurance:Types of Term Insurance:

Renewable Term Insurance FeaturesRenewable Term Insurance Features

Level death benefitLevel death benefit

Increasing premiums, if Increasing premiums, if renewedrenewed

No cash valuesNo cash values

May have policy May have policy dividendsdividends

Renewable, subject to Renewable, subject to medical qualificationsmedical qualifications

Best suited for level Best suited for level temporary needstemporary needs

PremiumPremium

Death BenefitDeath Benefit

Term PeriodTerm Period

Decreasing Term Insurance FeaturesDecreasing Term Insurance Features

Types of Term Insurance:Types of Term Insurance:

Decreasing death Decreasing death benefitbenefit

Level premiumLevel premium

No cash valuesNo cash values

May have policy May have policy dividendsdividends

Best suited for Best suited for decreasing needs that decreasing needs that ultimately disappearultimately disappear

Death Death BenefitBenefit

Term PeriodTerm Period

PremiumPremium

Term Insurance AdvantagesTerm Insurance Advantages

Low initial premiumLow initial premium

Well suited to shorter-term, temporary needsWell suited to shorter-term, temporary needs

Most plans can be renewed, if you are Most plans can be renewed, if you are medically qualifiedmedically qualified

Term Insurance DisadvantagesTerm Insurance Disadvantages

Premiums in future years may become Premiums in future years may become prohibitively expensiveprohibitively expensive

Insurance protection may cease before deathInsurance protection may cease before death

Does not build any cash valuesDoes not build any cash values

Types of Cash Value Life Insurance:Types of Cash Value Life Insurance:

There are There are four typesfour types of cash value life insurance from which of cash value life insurance from which

you can select a policy that best satisfies your needs and you can select a policy that best satisfies your needs and

objectives. The primary differences in the types of cash value objectives. The primary differences in the types of cash value

life insurance fall into three categories:life insurance fall into three categories:

fixed or flexible premiums;fixed or flexible premiums;

responsibility for investment decisions; andresponsibility for investment decisions; and

benefit guarantees or benefits based on actual investment benefit guarantees or benefits based on actual investment returns.returns.

Whole Life InsuranceThe policyowner pays a fixed, level premium and cash values accumulate at a guaranteed* rate of return. The insurance company promises to pay a guaranteed* death benefit.

1.

* Guarantees are subject to the claims-paying ability of the issuing insurance company.

Universal Life InsuranceThe policyowner can increase or decrease premium payments and select from a level or increasing death benefit. Cash value accumulations reflect current interest rates.

2.

Whole Life Insurance:Whole Life Insurance:

FeaturesFeatures

Guaranteed* level death Guaranteed* level death benefit, so long as benefit, so long as premiums are paidpremiums are paid

Fixed, level premiumsFixed, level premiums

Guaranteed* cash valuesGuaranteed* cash values

May have policy May have policy dividendsdividends

Best suited to satisfy the Best suited to satisfy the longer-term needs of longer-term needs of policyowners who desire policyowners who desire guarantees*guarantees*

PremiumPremium

Death BenefitDeath Benefit

LifetimeLifetime

Insurance Insurance ProtectionProtection

Cash Cash ValueValue

* Guarantees are subject to the claims-paying ability of the issuing insurance * Guarantees are subject to the claims-paying ability of the issuing insurance company.company.

Whole Life Insurance:Whole Life Insurance:

AdvantagesAdvantages

Guaranteed* lifetime insurance protection, so long as the policy is Guaranteed* lifetime insurance protection, so long as the policy is kept in force.kept in force.

Fixed premiums can help create the “savings habit.”Fixed premiums can help create the “savings habit.”

Cash values are guaranteed*, so long as the policy is kept in force.Cash values are guaranteed*, so long as the policy is kept in force.

May have policy dividends that can be used to reduce premiums or May have policy dividends that can be used to reduce premiums or increase cash values and death benefits.increase cash values and death benefits.

DisadvantagesDisadvantages

No premium flexibility.No premium flexibility.

Guaranteed* cash value growth may be less than could be achieved Guaranteed* cash value growth may be less than could be achieved through one of the other types of permanent life insurance.through one of the other types of permanent life insurance.

Death benefit may not keep pace with inflation.Death benefit may not keep pace with inflation.

* Guarantees are subject to the claims-paying ability of the issuing insurance * Guarantees are subject to the claims-paying ability of the issuing insurance company.company.

Universal Life Insurance:Universal Life Insurance:

Premiums can be adjusted upward or downwardPremiums can be adjusted upward or downward

Choice of level or increasing death benefitChoice of level or increasing death benefit

Cash value growth based on current interest ratesCash value growth based on current interest rates

Best suited to satisfy the longer-term needs of policyowners who Best suited to satisfy the longer-term needs of policyowners who want premium flexibility and cash value accumulations that want premium flexibility and cash value accumulations that reflect current fixed interest rate returnsreflect current fixed interest rate returns

FeaturesFeatures

Level Death Benefit Level Death Benefit OptionOption

Increasing Death Benefit Increasing Death Benefit OptionOption

MinimuMinimum m

Premium Premium SchedulSchedul

ee

Insurance Insurance ProtectionProtection

Cash Cash ValueValue

LifetimeLifetime LifetimeLifetime

MinimuMinimum m

Premium Premium SchedulSchedul

ee

Cash Cash ValueValue

Insurance Insurance ProtectionProtection

Increasing Death BenefitIncreasing Death Benefit (not guaranteed)(not guaranteed)

Universal Life Insurance:Universal Life Insurance:

AdvantagesAdvantages

Lifetime insurance protection.Lifetime insurance protection.

Premium and death benefit flexibility.Premium and death benefit flexibility.

Cash value growth reflects current interest rates, with a minimum Cash value growth reflects current interest rates, with a minimum guarantee.guarantee.

DisadvantagesDisadvantages

Required premiums may increase as the insured gets older in order to Required premiums may increase as the insured gets older in order to maintain needed insurance protection.maintain needed insurance protection.

If current interest rates are low, cash value growth may be If current interest rates are low, cash value growth may be disappointing.disappointing.

How Is Life Insurance Taxed?How Is Life Insurance Taxed?

Because of the unique role life insurance plays in protecting Because of the unique role life insurance plays in protecting people against the risk of economic loss, the federal government people against the risk of economic loss, the federal government has extended favorable tax treatment to life insurance.has extended favorable tax treatment to life insurance.

If a policy pays dividends, those dividends are considered a return of premium and are not taxable. Any interest on accumulated dividends, however, is taxable in the year credited.

Policy Dividends

The cash value accumulations in cash value life insurance grow on a tax-free basis until the policy is surrendered. If the policy is surrendered and the proceeds exceed the total premiums paid, the difference is taxable in the year received.

Cash Value

Living BenefitsLiving Benefits

How Is Life Insurance Taxed?How Is Life Insurance Taxed?

If the insured held any incidents of ownership in the policy, the death benefit is included in the insured’s estate for federal estate tax purposes.

Estate Taxes

Life insurance death benefits paid in a lump sum are received income tax free – a unique and important benefit. If the death benefit is taken as income under a settlement option, there is an interest element in each payment received. The portion of each payment representing principal (the death benefit) is received income tax free and the portion representing interest is taxable.

Income Taxes

Death BenefitsDeath Benefits

PremiumsPremiums

Generally, premiums paid for life insurance, whether paid by an Generally, premiums paid for life insurance, whether paid by an individual or a corporation, are not tax deductible.individual or a corporation, are not tax deductible.

What Additional Life Insurance Benefits What Additional Life Insurance Benefits Are Available?Are Available?

The value and flexibility of life insurance frequently can be The value and flexibility of life insurance frequently can be enhanced by the addition of other benefits, such as:enhanced by the addition of other benefits, such as:

Many life insurance companies make it possible for policyholders to collect all or a portion of a policy’s death benefits early, if the policyholder is terminally ill, stricken with a specified catastrophic illness or requires long-term care.

Accelerated Death Benefits

Often referred to as a “self-completing” feature, the waiver of premium benefit allows premiums on a life insurance policy to be waived if the insured becomes disabled, as defined in the policy. The waiver of premium benefit generally is available for a small extra premium.

Waiver of Premium Benefit

What Additional Life Insurance Benefits What Additional Life Insurance Benefits Are Available?Are Available?

In return for a small extra premium, the option to purchase additional insurance guarantees* the right to purchase additional insurance on the insured’s life at specified future dates, regardless of the insured’s health or occupation at that time.

Option to Purchase Additional Insurance

For a small additional premium, the insurance company will pay an additional death benefit in the event of the insured’s accidental death.

Accidental Death Benefit

* Guarantees are subject to the claims-paying ability of the issuing insurance * Guarantees are subject to the claims-paying ability of the issuing insurance company.company.

You Can Manage Your Finances…You Can Manage Your Finances…

It’s by managing your finances that you It’s by managing your finances that you

write the story of your life. You are both write the story of your life. You are both

the author and the story’s principal the author and the story’s principal

character. Resolve to perform what you character. Resolve to perform what you

ought.ought.

BenjaminBenjamin FranklinFranklin