Protection for Life

The Value of Life Insurance
If you provide an income for yourself or your family, the value of your own life is your most important asset. Having inadequate insurance protection undermines the financial foundation of everything you do––from building your career to raising your family. This brochure explains some of the basics of how life insurance can provide both protection and a means for building cash reserves. Be sure to speak to your investment executive for more information that is specific to your needs.

How Much Life Insurance Do You Need?
Approximately 78% of U.S. households own life insurance today.¹ But the average size of an individual policy purchased in 2003 was just $81,000.² While that sounds like an adequate amount, often it is not. Consider an individual earning $50,000 a year who owns that policy. If this person’s family is totally dependent on this income, the insurance would last for less than two years. Of those who own life insurance, 40% believe they don’t have enough. Forty-four percent of these say they’d need enough to cover six years of income, but only own enough to cover less than three years. This gap represents more than three years of income, or an average need of $200,000 additional coverage.³ So how much insurance do you need? Not everyone requires the same amount. Family situations, goals, debt and income are often used to estimate life insurance amounts. The chart above can help clarify your life insurance needs in terms of the salary of a primary income earner.

Examine Your Coverage
Maybe you have life insurance. But has it been a while since you’ve thought about it? This is a good time to reexamine the protection it offers. Ask yourself:
• Have you had a change in income, financial responsibilities or goals?
• Has your family changed in make-up or size?
• Have you purchased a new home or business?
• Are you providing greater financial help to aging parents or other relatives?
• Has your current coverage kept up with the effect of inflation?
• Is your coverage the standard provided by your employer?

Take a Closer Look at the Types of Life Insurance Available
Many kinds of life insurance policies are available today, each with different features, benefits and costs. All are based on the concept of paying a premium determined by the amount of coverage desired. Insurance is priced on a “cost per $1,000” of coverage per year. Costs to each person can vary depending on a person’s sex, age, health and the type of policy purchased.

There are two broad categories of life insurance policies: term and cash value. Both include a death benefit payable to a beneficiary or beneficiaries.

Term Insurance
Term insurance pays only a death benefit. The characteristics of this type of insurance include:
• Low initial cost
• Meets specific short-term needs
• Has no cash value
• Is in force for a specified time period
• The policy’s proceeds pass to beneficiary income tax free (Note: They may be subject to estate taxes)

Term insurance may be purchased as annual renewable, level or decreasing.

Cash Value or Permanent Insurance
These policies accumulate cash values in addition to the death benefit. In a permanent life policy, cash values from the premiums you pay in the early policy years more than cover the actual cost of insurance needed.

As the cash values increase, the premium you pay may remain level in later year. Should you elect not to continue your coverage, you may have access to the cash value in the early policy years (Note: Available cash values may be subject to surrender charges). You may also access the cash value for emergencies and other needs, or it can be used as supplemental retirement income.

Cash value insurance provides:
• A death benefit.
• Protection for life or as long as needed (or until policy’s stated maturity date or age).
• Cash accumulation that grows on a tax-deferred basis.
• Competitive interest on cash values (interest sensitive policies).
• The option to borrow against the cash values (loans and withdrawals can have a negative impact on cash values and death benefits––a policyholder may receive less than his or her original invested amount).
• A provision that all policy proceeds pass to named-beneficiaries income tax free (Note: They may be subject to estate taxes).

Whole life, universal life, variable life and variable universal life policies are all designed to be permanent cash value contracts with various degrees of flexibility. Consult your financial professional to discuss which may be the most appropriate for your situation.

Select a Combination of Insurance Strategies
Many people, realizing their need for insurance may change over time, select a combination of term and cash value insurance. Here’s how this works:
1. Term insurance provides a death benefit today at an affordable cost.
2. As term insurance needs decrease (all children are out of college, etc.), the death benefit from the term insurance can cease and costs can decrease.
3. At the same time, the death benefit and cash values of the permanent life insurance may rise.
4. The insured may borrow from the cash value, as available when needed. Outstanding policy loans reduce the policy death benefit and may create an income tax liability.
5. The cash value could increase the total death benefit amount if the variable death benefit option is selected.

¹ Facts About Life 2005, LIMRA International, September 2005
² 2003 Life Insurance Fact Book
³ Trillion Dollar Baby: The Sales Potential of the Underinsured Life Market, LIMRA International, November 2005
⁴ Understanding Life Insurance, ING brochure

Life Insurance at Retirement
While your situation may change after retirement, many of the reasons you had for purchasing life insurance remain valid. Your death may result in a loss of income to your family. Your spouse’s living expenses may increase, or he or she may have to pay for help with household chores or other services that you currently perform. Finally, there are expenses and obligations that can arise at death, regardless of age:

• Final expenses (funeral)
• Income taxes
• Need for family monthly income support
• Debts and obligations
• Business continuation issues (if you own a small business)
• Estate settlement and administration costs
• Estate tax

Pension Maximization
This is a technique used by a couple to permit taxable distributions received from a pension plan as an annuity to fund life insurance.

Many people select a joint and survivor annuity payment option. This would ensure that payments would last as long as either spouse is alive. Instead, the pension beneficiary would select a single life option, which would have a higher payment amount. The difference in the two amounts would be used to fund a cash value life insurance policy. If a beneficiary’s spouse passes away, he or she will continue to receive pension payments for life and he or she can cash in or change the beneficiary on the life insurance policy. If the beneficiary passes away first, the spouse has the life insurance policy for income. The income would come in insurance proceeds or a death benefit, which can also then be used to fund an annuity for lifetime payments. That death benefit takes the place of what would have been the spouse’s continuing annuity from the pension plan (in part or in whole).

Consultation with your investment executive can show you how this works. The policy should be issued before selecting the annuity option that would exclude income for a surviving spouse.

Estate Tax Liability Considerations
Due to the unlimited marital deduction, there is typically no estate tax to pay when an estate transfers to the spouse on the death of the first spouse.

However, even after considerable planning, there is often an estate tax liability when the surviving spouse dies. A “second-to-die,” or survivorship, life insurance policy may be the most economical solution to solving the problem of paying those taxes and keeping your estate intact for your heirs. Premiums are calculated on both lives and are often less costly than purchasing a policy on each life. Additionally, a survivorship policy often allows a person to be insured even though they may be “uninsurable” for an individual policy since this policy only pays a death benefit at the second death.

Note: Consult a tax advisor experienced in estate matters to determine whether these ideas are appropriate for you. Neither PrimeVest nor its representatives may provide legal or tax advice.

Contact Us for Your Free Life Insurance Checkup
Are you adequately insured? Have you examined all of the life insurance options available to you?

We invite you to talk with your investment executive for information that can help you protect the assets you have worked hard to achieve––and the people in your life who are important to you.

Please note:
• If you are currently retired, on a fixed income, earn less than $25,000 annually or fall into the 15% tax bracket, a variable annuity insurance policy may not be a suitable product for you. Please consult your investment executive to determine if your needs are consistent with the features of these products before buying.
• Risk is inherent in variable annuity contracts and variable insurance policies. Results are not guaranteed.