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♦ Cash value is the amount of money available to a whole life insurance policy owner in the form of a loan or partial withdrawal.

Note: a loan must be paid back with interest, and the policy benefit remains the same. Typically, a partial withdrawal does not have to be paid back and, therefore, will reduce the insurance benefit received.

Term

Term insurance is a pure insurance wherein the owner pays an annual premium for the policy and no cash value accrues. If the insured dies during that year, his designated beneficiaries receive the face amount, also called the “stated value,” of the policy. (This is similar to car and homeowner’s insurance.) The older you are, the more expensive term insurance is to buy; however, some companies offer what is called level term insurance, where the premiums remain the same for a stated number of years—5, 10, 15, or 30—so you know how much you’ll have to pay in the future.

Whole Life

The other type of life insurance policy is a whole life contract. This is paid for over a specified number of years and covers the insured for his entire life. A portion of the annual premium is invested by the insurance company, and the policy owner receives a modest portion of any interest, which builds cash value in the policy over time. This cash value can often be used—either in the form of a loan or withdrawal—by the insured during his lifetime, should the need arise.

Since all life insurance policies are based on age, health, and similar factors, the younger and healthier the insured at the beginning of the contract, the cheaper the insurance premiums. Annual premiums for whole life cost more than term insurance. For this reason, term insurance is popular with young couples starting out.

The dollar amount of life insurance you need to carry depends on a variety of factors. If your goal is debt coverage, all borrowings, including your mortgage, car loan, and any unsecured debt owed, need to be considered. The appropriate policy value for estate-planning purposes, on the other hand, depends on the size of the estate and the tax laws in effect at the time of your death—if your estate is sizeable, your heirs could use the life insurance proceeds to pay federal estate taxes. Speak to a life and health agent licensed in your state about what might be best for your particular situation.

Disability Insurance

Disability coverage—often offered by your employer’s benefits package—pays you a monthly amount in the event you become disabled. The benefits are based on a percentage of your income and are usually paid to age 65, when you receive Social Security and retirement benefits. In order to compare policies, some clauses you should be aware of include, but are not limited to:

 Elimination period—the time you have to wait for coverage to begin after becoming disabled.

 Definition of disabled—you need the policy to consider you are disabled when you can no longer perform your own occupation, i.e. the work you normally do. If the policy has a much broader definition of disability, this reduces your benefits.

 Maximum benefit allowed under the life of the policy—the dollar limit of coverage.

 Tax consequences of paying premiums with before-tax or after-tax income—the general rule is if you pay with after-tax income, the benefits are income-tax free, and if you pay premiums with before-tax dollars, the benefits are taxable when paid.

Health Insurance

Health insurance is also frequently part of your employer’s benefits package. If you are self-employed or do not have health insurance coverage, you should consult an agent to help you locate the best policy for an affordable price, as uninsured medical expenses can be financially devastating.

There are two basic types of health care coverage, traditional and managed care. Traditional insurance plans allow you to go to a provider (i.e., hospital or physician) of your choice, but you are required to pay up front for the services and file claims for reimbursement (though some plans allow the hospital or doctor to file for compensation directly from the insurer). Managed care health insurance uses a network of selected doctors and other providers with whom the insurance company has arranged the amounts to be charged for certain services. You usually pay more for a traditional than a managed care health insurance policy.