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Q: Neither my husband nor I are covered by life insurance at work. I’d like to buy some, so that my kids will have some security and money for college, in case anything should happen to us. Where do I begin? 

A: Life insurance has long been considered a vital building block of financial security, because it protects those most important to you in the event of a death. Although it comes in many forms, it has one core benefit; it pays an income-tax-free death benefit directly to your beneficiaries when you die. But that’s not all that today’s life-insurance policies offer. You can also use life insurance to reduce taxes immediately, build tax-advantaged income for retirement, or provide assets to offset estate taxes.

Deciding what type of insurance best fits your needs may be simpler than you think. Some of the factors that will influence your decision are your age, number of dependents, and overall financial goals. A basic understanding of your life-insurance choices will enable you to narrow your scope. To help you begin your research, here is some basic information about the two categories of life insurance—term insurance and cash-value insurance.

Term Has Its Limits: Term insurance provides protection for a specific time period. If you die during that period, a death benefit is paid to the policy’s beneficiary. Generally less expensive than cash-value insurance, term insurance can be likened to renting a property. You pay for it during the policy’s “term” (one, five, 10 or 15 years, for example), and when the term expires, your coverage expires, without building equity (cash value). Term insurance is generally purchased to cover specific needs: children until they are adults, as in your case; a mortgage until it is paid off; or other short-term obligations.

Cashing In on Cash Value: Unlike term insurance, cash-value insurance can provide protection for your lifetime and—not unlike owning property—it enables you to build up cash value. This is money that you can access for emergencies and other needs, such as college tuition or supplemental retirement income in later years. And like term insurance, cash-value insurance also pays an income-tax-free death benefit at the time of your death.

The most common types of cash-value insurance are:

·         Variable universal life: Typically designed for people who have longer investment time horizons, this insurance offers flexibility and control. When building cash values, you get to choose which of the variable investment options you want to invest in. Because variable investment options are similar in nature to mutual funds and fluctuate in value with the market, this type of insurance is better suited to couples with a higher risk tolerance.

·         Variable second-to-die: Typically used for estate-planning purposes, such as passing a family business or other significant assets from one generation to the next, this type of coverage insures two lives and pays a death benefit at the death of the second insured. The fact that one policy covers two lives provides some premium savings over two separate policies.

·         Whole life: Generally viewed as less flexible but more secure, this insurance offers a guaranteed death benefit and guaranteed cash values.

·         Universal life: This type of insurance offers the flexibility of variable universal life, but with a secured fixed rate of return for consumers who prefer less risk.

          To help you determine how much and which type of life insurance best fits your financial situation, consider consulting with a qualified financial adviser who can help determine how your family-security needs fit into your overall financial picture and can make recommendations for helping you achieve your long-term financial goals.

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Ken Segal, who is an American Express Financial Advisor, based in Philadelphia, with 13 years’ experience in compensation and benefits analysis and financial planning, prepared this answer. For further information, contact him via phone (215-940-0123) or e-mail: kenneth.m.segal@aexp.com.

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American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. This communication was published in April 2003 in the United States for residents of New Jersey and Pennsylvania only, and this advisor is licensed only in the states of New Jersey and Pennsylvania. This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation. 

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