Life insurance is one financial tool individuals can use to accomplish many financial goals. The most common use is to provide dependent family members a source of income upon premature death. However, individuals can also use life insurance to save money. For example, policies’ cash values can fund college expenses or provide a downpayment on a home. Life insurance is also used for estate planning, as it can help pay federal and state death taxes and settlement costs.
Individuals have many options for life insurance in Austin, TX.
What Is Life Insurance
Life insurance is a legally binding contract between an individual and an insurance company. The insured (the person whose life is insured by the policy) pays a premium for the policy. In return, the insurance company pays a set amount (the death benefit) to beneficiaries when the insured dies. Beneficiaries are usually the insured’s spouse, children, or other dependent individuals.
The death benefit is not a source of taxable income, and the beneficiaries can use the money in whatever capacity they choose.
Types of Life Insurance in Texas
There are two types of life insurance policies in regards to the length of coverage: temporary (term) and permanent (whole). Within those two categories are even more types of policies.
Term Life Insurance
Term life insurance is temporary. It covers an individual for a set number of years or a specific time period. Term life insurance offers the most coverage for the lowest premium compared to other types of life insurance. Most term life insurance plans have a maximum age above which a policy will not be offered or cannot be renewed.
Term life insurance offers pure death protection. If the insured dies during the policy’s term, the plan will pay the full death benefit to the beneficiary. There are no payable benefits if the policy is canceled or terminates while the insured is still living. Term policies do not have any cash value.
Thy types of term insurance are based on how the death benefit (also called the face amount) changes during the policy’s term. There are three types of term life insurance policies: level, increasing and decreasing. No matter which of the three types you choose, the premium will remain the same throughout the term.
Level Term Insurance
Level Term is the most commonly purchased life insurance in Austin, TX. In this type of policy, the amount of the death benefit remains the same for the entire term. Therefore, both the premium and the death benefit remain “level.”
For example, if an insured purchases a $100,000 10-year level term policy, the death benefit will be $100,000 if the insured dies during the first year or the tenth year of the term.
Another type of term insurance is annually renewable term (ART). The death benefit remains the same year after year, but the premium increases each year based on the insured’s attained age. These policies are guaranteed renewable.
Increasing Term Insurance
An increasing term insurance policy increases the death benefit over the life of the policy. Depending on how the policy is written, it could increase each year or in set increments. These policies are beneficial for individuals who want some protection now but know they will want more in the future.
For example, an insured might have only a spouse as a dependent now but plans to start a family in the near future. The increasing term policy may start with a $100,000 death benefit but increase to $500,000 by the end of the term. Some increasing term policies have level premiums, while others increase the premium over time.
Another type of increasing term insurance is the return of premium (ROP) life insurance. These policies will pay an additional death benefit equal to the premiums paid. The premiums will be returned if the insured dies within the policy’s term or if the insured outlives the life of the policy.
ROP policies require a higher premium than other types of term insurance. If the premiums are returned to a living insured member, the returned premiums are not considered taxable income.
Decreasing Term Insurance
Decreasing term policies have a level premium but a decreasing death benefit. The amount of the death benefit decreases each year and ends at $0 at the end of the term period. These policies are often purchased when protection decreases over time or is time-sensitive.
For example, an individual may purchase decreasing term insurance to help pay for the cost of a mortgage if the insured dies. As the mortgage debt decreases, so does the need for the death benefit.
Term Insurance with Critical Illness
Many term policies also include critical illness coverage that will help pay for medical expenses in the event you experience a critical health event. There are eight critical health events that will qualify: heart attacks, heart valve replacement, cancer, major organ transplant, kidney failure, stroke, paralysis, and sudden cardiac arrest.
You can expect a critical illness payout to be 10% of the death benefit or $25,000, whichever amount is less. You do not have to pay back this amount; it will be subtracted from the death benefit. In general, though a critical illness payout is dependent on the type of policy and carrier, as it differs from each one as every company has different policy language.
Features of Term Insurance
Most term insurance policies have provisions that make them renewable, convertible, or both.
Renewable policies allow the policyowner the right to renew the plan upon the expiration date without evidence of insurability. For example, if the insured develops a terminal illness such as cancer, the insurance company must still renew the policy. The only change that will occur upon renewal is an increase in premium. The new premium will be based on the insured’s attained age at renewal.
A decreasing term life policy is not typically renewable since the death benefit is $0 at the end of the term.
The convertible provision of term insurance allows the policyowner to convert the term policy to a permanent life insurance policy without evidence of insurability. Like the renewable provision, the new premium will be based on the insured’s attained age at the time of conversion.
Permanent Life Insurance
Permanent life insurance policies build cash value and remain in effect for the life of the insured, up to age 100. The cash value of permanent life insurance policies can be used as a savings account and borrowed against in times of need. There are many types of permanent life insurance in Texas.
Traditional Whole Life Insurance
Whole life insurance is the most common type of life insurance in Austin, TX. Premiums are higher than premiums for term insurance since the policy will be in effect for life. These policies will endow when the insured reaches 100 years of age, which means the cash value will equal the face amount.
There are four basic types of whole life insurance policies: straight, limited-pay, single premium, and adjustable.
Straight Whole Life
Straight whole life policies are also called ordinary life or continuous premium whole life. Insureds pay a level premium from the time the policy is issued until death or age 100, whichever occurs first, and the cash value steadily increases over time. As a result, straight life policies have the lowest annual premiums compared to the other common whole life policies.
Limited-Pay and Single Premium Whole Life
Limited-pay whole life policies do not require the insured to make payments until age 100. The coverage will be paid up well in advance. Insureds can choose a limited-pay policy based on a set number of years, like a 20-pay life, or based on the age they’d like to stop making premium payments, like a limited-pay 65, where the policy would be paid up by age 65.
Since the policy will be paid up in less time, the premiums will be higher than with a straight whole life policy, and the cash value will increase faster. Limited-pay policies are beneficial to those who do not want to pay a premium beyond a certain point in time. For example, many individuals do not want to pay a premium after age 65, when they will likely be retired and on a fixed income.
Single premium whole life policies are similar. As the name implies, one single lump-sum premium payment is all that is required. After the payment, the policy has an immediate cash value.
Adjustable Whole Life
Adjustable whole life policies can assume the form of either term life or whole life policy, based on the insured’s needs. The insured can increase or decrease the premiums or premium-paying period, increase or decrease the face amount, or change the protection period.
A policyowner may also covert the policy from a term policy to a whole life policy or vice versa. If the insured wishes to increase the death benefit or change to a lower premium policy, they will usually be required to provide proof of insurability.
The cash value of an adjustable whole life policy is only available when the premiums paid are more than the cost of the policy. Adjustable life policies are a great option for individuals who have unstable incomes, like those associated with commissions.
Guaranteed Issue Whole Life Insurance
Some individuals will not qualify for life insurance policies due to their current health conditions. A guaranteed issue policy might be the only option for these individuals
Guaranteed issue policies are issued without the required medical underwriting or a medical exam associated with other policies. However, since these policies are available to individuals with health conditions that may result in premature death, the death benefit is usually lower and the premiums higher than with non-guaranteed policies.
Interest-Sensitive and Market-Sensitive Whole Life Insurance
Interest- and market-sensitive whole life policies have the same characteristics as other whole life policies but with unique features based on how premiums are paid and invested.
The types of interest- and market-sensitive life insurance plans in Texas are universal life, variable life, variable universal life, interest-sensitive life, and indexed life.
Universal life policies allow for an adjustable premium. Policyowners can increase or decrease the premium or even skip a premium payment altogether if there is enough cash value to cover the monthly deductions for the cost of insurance.
The insurance company will suggest paying either a minimum or target premium. A minimum premium is a minimum amount it will take to keep the policy in effect for the current year. The target premium is a higher amount recommended to cover the cost of insurance and keep the policy in effect throughout its lifetime.
A universal life policy has two components: a cash account and an insurance component. The insurance component will always be structured as annually renewable term insurance.
Policyholders can make a partial withdrawal (partial surrender) of the policy’s cash value, though there may be a charge to withdraw, and the amount may be limited. Depending on the policy, any interest earned on the withdrawn amount can be taxed. If the withdrawn money is not paid back to the policy, the death benefit will be decreased upon payout.
There are two death benefit options in a universal life policy: Option A and Option B.
Option A provides a level death benefit. The death benefit stays the same, but the cash value gradually increases.
Option B provides an increasing death benefit. The death benefit will increase along with the cash value of the policy. The total death benefit will always equal the face amount plus the cash value.
Variable life insurance is a level, fixed premium, market-sensitive product. They offer a guaranteed minimum death benefit but a fluctuating cash value based on the portfolio’s performance.
The underlying assets of the contract are kept in a separate account. The insurer uses those funds to invest in stocks, bonds, and other securities and investment options. While the insured is guaranteed a minimum death benefit, they bear investment risk.
Variable Universal Life
Variable universal life policies combine features of whole life policies with flexible premiums of universal life policies and the investment aspect of variable life policies. Simply put, they are the securities version of universal life.
These plans have a flexible premium that can be increased, decreased, or skipped if there is enough cash value. Policyowners can increase or decrease the insurance amount and make cash withdrawals or policy loans. The policyholder can also invest the cash amount in a separate account.
Interest-sensitive life is also referred to as current assumption life insurance because the initial premium is based on current assumptions about risk. As a result, the premiums will change if the actual values change.
These policies credit the policy’s cash value with an interest rate that is comparable to money market rates. The rates can be higher than the ones that were guaranteed, allowing for a greater cash value accumulation over a shorter period of time.
In an indexed life policy, the cash value depends on the performance of an equity index, such as the S&P 500. However, the insured does have a guaranteed interest rate, and the face amount increases annually to compensate for inflation.
Either the policyholder or the insurer can assume the investment risk, depending on how the policy is structured. If the policyholder assumes the risk, the premiums increase when the face amount increases. If the insurer assumes the risk, the premiums stay level.
Combination Life Insurance
Life insurance in Texas can cover more than just one life. Two types of plans that can cover more than one individual are joint life and survivorship life.
A joint life policy ensures two or more lives and can take the form of either term or permanent insurance. Premiums for a joint life policy are calculated based on the average age of the insured. The death benefit is paid at the time of the first insured’s death.
Joint life policies are beneficial to spouses who will no longer need insurance after the first spouse dies. They can also be used as a buy-sell agreement between business partners. The joint life policy for business partners would determine what happens to the business if one partner becomes disabled or dies.
Survivorship life is very similar to joint life. The biggest difference is that a survivorship policy pays upon the death of the last remaining insured. The premium is based on the joint age of the insured and is often lower than joint life policies since the life expectancy is extended.
Survivorship plans are used to offset the liability of estate taxes.
Final Expense Insurance in Texas
Individuals looking for a small death benefit to provide financial assistance when they die often purchase final expense insurance. These policies are affordable and give the policyowner peace of mind that they will not burden their family when they pass.
What Is Final Expense Insurance
Final expense insurance is a whole life policy with a small death benefit. It’s also referred to as burial insurance, funeral insurance, modified whole life insurance, and simplified issue whole life insurance. All of these terms refer to the same type of policy. Final expense policies have death benefits that range in value from $2000 to $50,000.
There is no difference between final expense and whole life insurance. The term is used more to explain what it is often used for. The death benefit from a final expense insurance policy can help pay for the funeral and memorial services, a casket, embalming, or cremation. However, beneficiaries can use the death benefit for anything, not just for funeral costs.
Funeral expense life insurance in Austin, TX, is beneficial for individuals who do not have another type of life insurance policy and would like to provide some financial assistance to their spouse or children when they die.
These policies are also helpful to those who cannot obtain other life insurance because of their poor health. Most insurance companies will still issue a final expense policy, even if the insured has serious health conditions. This might be the only way some adults can secure any form of life insurance.
Mortgage Protection Insurance in Texas
Buying a home is a major financial commitment. It’s a decision that should not be made without considering all of the implications – now and in the future. Most homeowners choose a 30-year mortgage, which requires much of a family’s income. What happens if one spouse dies?
Thinking about your spouse passing away is uncomfortable for many people, but it’s important to consider how you would continue the mortgage payments with a decreased income. That’s where mortgage protection insurance can help.
What Is Mortgage Protection Insurance
Mortgage protection insurance (MPI) is a policy that will help pay a mortgage if the policyholder/mortgage borrower dies before the mortgage is paid off. Some policies extend through the life of the loan, while others offer coverage for a limited time, such as when the insured becomes disabled or loses their job.
How Is Mortgage Protection Insurance Different than Life Insurance
Mortgage protection insurance is similar to decreasing term life insurance since the benefit amount decreases as your loan decreases. However, the beneficiary is the lender, not a person of your choosing. The other most noticeable difference is that MPIs do not typically require proof of insurability on the life of the loan holder. This means that individuals with chronic or terminal illnesses or hazardous occupations can obtain one of these policies. However, that also means that insurance premiums are usually higher than those for life insurance policies.
As you can see, you’ve got lots of options when it comes to life insurance in Texas. Each type of plan has pros and cons and many aspects to consider. A financial planner can educate you on your choices and then help you choose a plan that’s right for you.