Selecting a life insurance beneficiary is important preparation

This was originally published on Monday, April 4 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I am sixty years old and a widower. I have a mortgage which I am solely responsible for and two adult children. I have a life insurance plan through my employer. If I were to pass, I want my son to inherit my house. I was wondering if it would be possible for a portion of my life insurance to go to my two children and to my mortgage bank to ensure that the payments are made?

Answer: I commend you for taking this matter into consideration before you pass. No one likes thinking about passing on but it is very important to be prepared when it happens. Unfortunately, many families go through some bitter times trying to decide how to carry out their loved one’s final wishes. Sometimes this can cause a rift that cannot be mended. A lot of these disputes can be avoided if specific instructions were left behind. It is important that you understand your insurance policy and the parameters within that policy. When choosing your beneficiary there are several things to consider.

The proper beneficiary — Selecting a beneficiary is a very personal decision. Some people want to ensure that their loved ones have enough money to cover funeral expenses or they may want to ensure that their family can survive after they pass. Yet, some view it as a financial transaction. When choosing a beneficiary ask yourself a few questions. Who will be bearing the costs of your funeral? Who counts on you financially? Take time when choosing your beneficiary. Here are some choices to consider:

  • Family – For most, this is the top of the priority list, especially for those who are financially dependent on you. Family members could include your spouse or partner, children, parents, or siblings. You can choose multiple family members as your beneficiaries. Per stripes means you can designate branches of a family or lineage and the proceeds are divided equally among the beneficiary and/or their surviving children. Let’s say that you named your son and daughter as your beneficiaries and they receive 50 percent each of the proceeds. If your son passes before you, his children will split his 50 percent equally and your daughter still receives her 50 percent. Using the same scenario, if your son had two children, then the proceeds will be divided equally between your son’s children and your daughter. The proceeds will be divided into thirds.
  • Legal guardian – If you are appointing a minor (under 18 years of age) or someone who is not mentally or physically able to care for themselves as your beneficiary, you may be required to name a legal guardian. You do not have to choose the appointed legal guardian; you can request to appoint a guardian of your choice.
  • Estate – You may choose your estate to be your beneficiary. You must have your last will and testament drawn and the executor of your will receive the proceeds from your life insurance policy. The executor will have to carry out the terms of your will. When you name your estate as the beneficiary, it will be the sole beneficiary of your life insurance policy. Talk with your accountant to discuss the taxes associated with your estate becoming your beneficiary.
  • Trust – A trust is a legal agreement that allows a third party, or trustee, to hold assets on behalf of the beneficiary or beneficiaries. You can make the trust your life insurance beneficiary. You can specify the terms of a trust controlling when and to whom distributions may be made. A trust can also protect your estate from your heir’s creditors or from beneficiaries who may not be adept at money management.
  • Charity – You can name a charity to receive some or all of your proceeds.
  • Mortgage – You can make your mortgage institution a beneficiary of your life insurance policy. Be very specific about the amount and account number etc. when doing so.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Three types of life insurance offer peace of mind

This was originally published on Monday, April 28, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I am buying life insurance for the first time and, quite frankly, I’m confused by the different types of life insurance policies. Could you clarify the policies to help me decide?

Answer: First off, I commend you for thinking about your future, and the expenses you will save your family when the time comes. Not all policies are created equally; here are the types of life insurances most companies offer:

Term life insurance

Term life insurance is typically the most affordable and simplest life insurance. It offers protection for a specific number of years. The policy is set for a limited time, usually 30 years; they are sometimes referred to as “temporary” life insurance. Premiums usually are a lot lower than other policies making it affordable for most. The annual premium remains the same throughout the life of the policy.

Whole life insurance

Whole life insurance is permanent for the entire life of the insured. Unlike a term life insurance, whole life insurance has a guaranteed premium rate and guaranteed cash value accumulation, which means you pay the same every year no matter how long you have had the policy. Your premium payments are divided among the insurance, administrative fees, death benefits and the investment or dividends that your policy incurs. Withdrawals that you make towards your policy are tax-free up to the amount of premiums you paid minus the dividends paid out and previous withdrawals. You can use the dividends and cash buildup to pay the premiums of the policy. These policies have a higher premium payment because they are permanent and provide not just death benefits but cash.

Universal life insurance

Universal life insurance also is known as the flexible life insurance. Like the whole life insurance policy, this policy is permanent and provides cash value. The premiums, level of protection, and the cash value can be adjusted as needed. The amount of cash values can be guaranteed to earn a specific minimum. The cash value also is tax-deferred just like the whole life insurance.

Life insurance is a great way to have peace of mind that your loved ones will be protected when you pass. Just like any other insurance policy it should be reviewed annually and you should take the time to understand exactly what’s covered.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Remember to review life insurance

Life changes, and our financial circumstances change along with it. To make sure that your family is protected with the proper amount of life insurance coverage year after year, and that any claims made will be processed smoothly, it’s important to periodically review and update your coverage.

Update your beneficiaries. Does your life insurance policy list the current beneficiaries in your life? You may have gotten married, had another child, or had some other similar change in your life. If you haven’t made the change already, now is the time to revise your policy.

Update contact information. If you or your beneficiaries change addresses, phone numbers, and other contact information, make sure that this information is also updated on your policy.

Keep your policy in a safe place. If your life insurance policy is sitting in a pile near your desk, now is the time to move your policy to a safe deposit box, and make a copy of the policy for your personal records. If you’ve updated your policy, make sure current records are stored in both places.

Talk to your beneficiaries about your life insurance policy. Your beneficiaries need to know that your life insurance policy exists, so that they can claim the death benefit if you pass away before the coverage period is up. If you don’t tell them, they may never discover the policy among your belongings, and use the financial protection you put in place for them. Let them know where the records are kept, and review the financial plan with them if they ever need to make a claim.

Update the amount of your coverage. If you have another child or buy a home, you will probably need additional coverage. If one of your dependents becomes financially independent, you may need less coverage. In these cases, it can help to have a list of your life insurance needs, from which you can add and subtract specific items. Review your policy with your spouse, and talk to your insurance broker or agent. You may have the option of adding coverage to your existing policy, or you may need to purchase a separate policy to bring your total life insurance coverage up to date.

Ask if your health improvements affect your premiums. Your health is a major factor in your life insurance premiums. Smokers can pay substantially more for life insurance than non-smokers, and other health conditions can affect the price of your premium. Quitting smoking can help lower the cost of your premium, but insurers often require a lengthy period of time to pass before you’re reclassified as a non-smoker. Start the clock as early as possible on your health improvements, and ask your insurer if you can revise your policy based on those improvements. You can also try shopping for a new policy based on your improved health.

Consider guaranteed level term insurance. If you renew your term life insurance every year, your premium will gradually rise as you age and develop health conditions. A guaranteed level term insurance policy gives you the same premium throughout the term you choose, such as 20 or 30 years. If you buy a guaranteed level policy when you’re young and healthy, you can continue to pay a low premium for decades.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com

Life insurance should match your needs, budget

There are many different options for life insurance, but in general there are two main categories to choose from: term life insurance and permanent life insurance. They can greatly differ in cost and in the length of time they provide coverage. You should match your life insurance as closely as possible to your needs and budget.

Term life insurance. Term life insurance is the most basic form of life insurance. You choose a specific period of time for coverage, such as 20 or 30 years, when members of your family will be financially dependent on you. If you pass away within that coverage period, your family receives a death benefit.

Premiums for term life insurance cost much less than premiums for permanent life insurance. Term life premiums can save you money and give you more buying power for life insurance coverage.

Permanent life insurance, such as whole or universal life, costs more in part because the insurance itself is combined with a savings or investment plan. However, it may be more beneficial to you to keep insurance and savings/investments separate in your financial plan.

A permanent life insurance policy’s investments may come with higher fees or lower returns than other investment options available to you, and you should always compare fees and returns in any investment decision. Insurance policies offer tax benefits for investments, but so do IRA’s and 401k’s, and retirement accounts give you much more control over your investments.

If you cancel your permanent life insurance policy, you may be faced with a surrender charge, which would decrease the cash value you receive from the policy. Instead of taking a loan from the cash value in your permanent life insurance policy, and paying interest and fees on that loan, you could put that money into a Roth IRA instead, and withdraw your contributions penalty free if you need them in an emergency.

Term life insurance doesn’t pay out a benefit if you survive beyond the policy end date, whereas a permanent life insurance policy doesn’t expire. But if no one will be financially dependent on you after your policy expires, life insurance will no longer be a need in your financial plan. If you chose to combine term life insurance and retirement account savings in lieu of permanent life insurance premiums, your designated beneficiaries will inherit your retirement account after your passing.

Permanent life insurance. If you have family members who will be financially dependent throughout your life and after your passing—such as children with disabilities—permanent life insurance, which does not expire, is something to consider.

In this situation, you should carefully consider all of the options available to you. You can buy term life insurance that is convertible to permanent life insurance down the line, so that you can save on premiums until you have room in your budget for a conversion to permanent life insurance. You can also start building assets in a special needs trust, as you would a retirement fund, and use life insurance as another component of the trust for your special needs child. Financial and legal professionals can help you compare your options and plan effectively for your family’s specific circumstances.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.

Life insurance helps dependents

When you have a family that depends on your income, life insurance becomes an important part of your financial plan. This insurance gives your family a way to replace the income that you would have earned over several years, if you were to suddenly pass away.

The simplest form of life insurance, term life insurance, gives you a fixed monthly or yearly premium for a set “term” of your choosing, such as 10, 20, or 30 years. If you were to pass away during that term, your beneficiaries would receive the death benefit from your life insurance policy.

This benefit would allow your family to continue paying off the mortgage and car loans, take care of childcare expenses, settle funeral expenses, care for elderly parents, and take care of any other obligations that you had planned to fulfill with earned income. In all, life insurance can protect your family from financial hardship during a very difficult time.

Do you need life insurance? You should only buy life insurance coverage when you need it. If you’re not married, don’t have children, and don’t expect to provide financially for your elderly parents, then you probably don’t need life insurance at this point in time.

Also ask yourself if it would cause financial hardship for the people close to you if you were to pass away. For example, do you have enough in assets to cover funeral expenses, and if you don’t, would it cause financial hardship for your family members to cover those costs?

How long will you need life insurance? As a form of income replacement for your family, you only need life insurance for as long as your family is financially dependent on you. Your children will grow into adults, and will start financial lives of their own, separate from you. While they’re growing, you and your spouse will pay off your mortgage, and build up your own assets and retirement savings.

Think carefully about the point at which your children, and others, will be financially independent from you. You should also consider the amount of time that remains to pay off your mortgage in full.

How much life insurance do you need? You should only buy the amount of life insurance you need. To calculate this amount, work together with your spouse to come up with a list of basic financial needs, over the period of time that you wish to be insured.

Consider your contributions to the mortgage payments, and if you share a vehicle, your part in the car payments. How much do you spend annually on each child’s food, clothing, and entertainment? If one spouse stays home to look after the children, will you need to pay new caregiver expenses or can a relative care for the children? Do you and your spouse have any shared debts or expenses that you need life insurance to cover? Will you have educational expenses for the children, and have you included funeral costs? Do you have any assets that will help with these expenses, aside from life insurance?

Having the conversation with your family about life insurance, and thinking through your needs, is a good start. Next week, we’ll continue the conversation on life insurance in your personal finances.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.