Life Insurance Strategies: Safeguarding Your Future Your Way

How Life Insurance Works  

Life Insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder. The policyholder only has the right of refusal and cannot counter the offer or create any new contract terms. Life Insurance is also a contract of adhesion, meaning the exact terms and conditions are not negotiable. Insurance is an agreement where, for a stipulated payment (the premium), the insurer agrees to pay to the policyholder or designated beneficiary a defined amount (benefit) upon the occurrence of a specific loss. Examples are:  

• • Life Insurance – Death benefit paid to the beneficiary upon death of the named insured  

• • Long-Term Care – Benefits paid to the policyholder upon diagnosis of a covered condition (i.e., dementia or confinement to assisted living or nursing home). The premium is determined by the insurer, who considers the losses expected for a group of insureds and the potential for variation to charge premiums that, in total, will be sufficient to cover all the projected claim payments for that group. The premium charged to each insured is the insured’s share of the total premium for the group/pool.  

Who Is Involved in a Life Insurance Contract?  

• • Carrier (Insurer) – The company that issues the policy receives the premium payment(s) and pays out the contractual benefits.  

• • Agent – A sales and service representative licensed by the state to solicit the sale of insurance and contracted with the insurance companies they represent  

• • Insured – The person whose life is protected by the policy; the death of the insured will trigger the payment of the death benefit  

• • Owner – The person who has purchased the policy on the insured’s life and who is entitled to exercise the policy’s rights and privileges  

• • Payor – The person who pays for the coverage (is often also the Owner)  

• • Beneficiary – The person(s) or entity(s) named in the policy as the death benefit recipient(s)  

Types of Life Insurance  

Temporary coverage, often referred to as “Term Life Insurance,” is a type of life insurance policy, typically ranging from five to thirty years. Unlike permanent coverage, temporary coverage does not accumulate cash value or offer investment features. Common examples of term insurance are annual renewal term and level term.    

Permanent coverage, or “Whole Life Insurance,” is a life insurance policy that provides lifelong coverage. Permanent life insurance remains in force as long as the policyholder pays premiums. One key feature of permanent life insurance is its cash value component. Policyholders can often access this cash value through loans or withdrawals, although doing so may affect the death benefit. Common examples of permanent insurance are universal life, indexed universal life, and variable universal life.   

Rider Insurance is an optional add-on or modification to a primary life insurance policy. These riders provide additional benefits or coverage options beyond the standard provisions of the base life insurance policy. Common examples of riders include chronic illness or long-term care.   

Temporary Life Insurance Coverage

 This insurance policy is well-suited for attaining short-term objectives, such as:

• • Coverage for your mortgage, such as a 10- or 20-year mortgage  

• • Income protection for the years you are paying for a child’s education  

• • To pay off a business loan  

• • To provide a more affordable way to cover your life insurance needs than permanent coverage, with a range of coverage terms (5 – 30 years)  

• • Keyperson Insurance needs  

• • To Fund Buy-Sell Agreements for Businesses  

• • Coverage as per a Divorce Decree  

It is more than just the least expensive coverage. It is also the simplest life insurance option, easy to sell (agent) and buy (consumer); however, coverage expires at the end of the term, regardless of whether coverage needs to persist. If coverage is required at the end of the specified term, requalification (with new underwriting requirements) may be required. Also, the coverage needed at older ages (60+) can be expensive.    

Permanent Life Insurance Coverage

Permanent coverage provides lifetime insurance protection while incorporating a cash value element. Some examples would be:   

• • Estate Tax Planning  

• • Estate Equalization  

• • Building Up Cash Value on a Tax-Favored Basis  

• • Income Planning for Retirement on a Tax-Favored Basis (LIRP)  

• • College Funding on a Tax-Favored Basis  

• • Business Succession Plans (Buy-Sell)  

• • Key Man Insurance  

• • IRA Maximization  

• • Philanthropy  

Three Monetary Components  

• • Death Benefit – The amount of money the insurance company guarantees to the beneficiaries identified in the policy when the insured dies.  

• • Premiums – The money the policyholder pays for insurance. The policyholder pays money for insurance. This money covers the cost of the insurance policy.  

• • Cash Value – The excess premium earns interest and may be available to withdraw or borrow against in an emergency; the cash accumulates on a tax-deferred basis. If structured properly, the cash value can be distributed on a tax-free basis.  

Life Insurance is a crucial safeguard, providing financial security and peace of mind to individuals and their loved ones. It is a testament to responsible planning and protection, ensuring that even in the face of life’s uncertainties, our families can find solace in knowing they will be cared for. As one of the 50 largest independent insurance agencies in the country, Shepherd Insurance represents the top financially secure carriers, so you don’t have to do research. We work for you and present the top option(s) based on your needs. Contact your Shepherd Insurance representative to get started securing your future your way.   

If you found this information helpful and are interested in how Shepherd Insurance can help with your insurance needs, contact us or visit our webinar series channel for additional recordings and upcoming events.