Whether or not you choose
Term Life Insurance or Permanent Cash Value Life you must first remember that
your Life Insurance policy is quite literally A LEGALLY BINDING CONTRACT.
So you must understand that there are four (4) parties to the contract. Obviously outside of the Life
Insurance Company, on the client side there are four, The Owner of the Policy,
The Insured, the beneficiary(ies) and last
the premium payer. Let’s review
each one.
The Contract owner is the
individual (sometimes an entity such as a Trust) who controls the policy. Now don’t be alarmed if you are the Insured
and you think you have no control over your policy. Chances are you also are the owner of the
policy. You see the owner gets to decide
many important things such as who the beneficiary is/are, what material changes
are to be made to the policy such as changing the type of policy, how dividends
are to be used and what to do with cash value accumulation, just to name a few.
The Insured is a person
whose life is insured. In other words,
if something were to happen to the Insured, under the contract, the Insurance
Company is obligated to pay the BENEFICIARY the agreed amount of the policy
plus any accrued benefits.
As we just said, The
Beneficiary receives in cash the benefits of the Life Insurance policy. Please understand that these amounts are almost
always INCOME TAX-FREE. I personally
know of no other investment that offers such benefits. If there are more than one beneficiaries,
then a specific percentage amount is stated on the policy.
Lastly, you have the unfortunate
soul who has to cough up the bucks. At
times a trust is the payer of the premiums.
It is important to understand that when a premium is paid, IT IS NOT TAX-DEDUCTIBLE. You can use Life Insurance in a pension plan,
with certain restrictions. In this case, tax deductions are allowed.
Now you have clear the
four parties to the contract. Usually but
not always, there are two parties to the contract. The Insured usually owns the policy and pays
the premium. Then obviously he/she would
name a different person or trust as the beneficiary.
Next up we’ll debate the ever-important
premiums on different policies.