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Federal Employees News Digest : Sep 9, 2013
September has been designated "Life Insurance Awareness Month" by the Life and Health Insurance Foundation for Education. It is during September that many insurance professionals and organizations will promote a nationwide education campaign to encour- age individuals to evaluate their life insurance needs. Since most federal employees have a need for life insur- ance at some point during their lives, this week's column and three other September columns will discuss life insurance. This column presents 12 of the most important ques- tions employees should ask with respect to their life insurance coverage and needs. 1. Why buy life insurance? Most financial plan- ners consider life insurance to be the cornerstone of a sound financial plan. That being said, there should be a purpose for buying life insurance. Among the reasons for buying life insurance are: (1) to provide income protection for dependents in case of premature death of the primary wage earner; (2) to pay off a large debt such as a mortgage at the debtor's death; and (3) to pay the insured's estate-related and funeral expenses. 2. How much life insurance should the insured have? To answer this question, the insured needs to examine the purpose for purchas- ing life insurance. For example, if the purpose for purchasing life insurance is for family income protection at the death of the insured, then how much income will be needed to pay the expenses of the sur- viving dependent family members, and for how long will loved ones be dependent on this income? 3. Who will be the owner of the life insurance policy? While the gross proceeds of a life insurance policy are not subject to federal and state income taxes, the gross proceeds of the policy are included in the insured's gross estate and possibly subject to federal and state estate taxes. But assigning ownership of the policy can avoid having the proceeds included in the insured's gross estate. 4. Who will be the beneficiary of the life insurance policy? If the insured is married, then a spouse need not necessarily be named as beneficiary of the life insurance policy. For example, for those married employees who are giving their spouses a full CSRS or FERS survivor annuity, then naming someone other than a spouse as beneficiary of their life insurance policy may make sense. 5. What types of life insurance policies are available? Life insur- ance comes in two types---term and permanent. Term life insurance expires at some predetermined date. Permanent life insurance stays with the insured until the insured dies, as long as the insured pays the premiums. 6. When is term life insurance appropriate and what is the most appropriate form of term insurance? Te r m life insurance is appropriate for individuals who have a temporary need for life insurance such as paying off the remainder of their mortgage at their death. Term insur- ance comes in different types -- group term, level term, annual renewable and return of premium. A subsequent column will address in detail the different types of term life insurance. 7. When is permanent (cash value) life insur- ance appropriate and what other purpose besides a death benefit does permanent life insurance provide? Permanent life insurance comes in different types--- whole life, universal life, variable life and variable univer- sal life. These policies have one thing in common---the premiums are more expensive than term life premiums for the same amount of death benefit. The additional premiums are used by the insurance company to "invest." The question one must ask is: Should life insurance be used as an investment in addition to being used as a death benefit? 8. How should federal employees who are interested in purchas- ing individual life insurance from a private insurance company go about purchasing it? Employees can purchase life insurance from a private insurance company through an agent or broker. It is important for potential buyers to check the licenses of agents and brokers, and to check whether a particular company is allowed to sell in a potential buyer's state. 9. Why is an insurance company's overall rating important? A life insurance company's overall rating should be reviewed. This is because a life insurance policy will have a term from anywhere of 10 years to a lifetime and the company needs to be financially sound. 10. When is a group term life insurance policy, such as the Federal Employees Group Life Insurance (FEGLI) program, more appropri- ate than an individual life policy purchased from a private company? There are some employees for whom a group term insurance policy is more appropriate compared to an individual term life insurance policy. As will be discussed in a subsequent column, employees should be aware of FEGLI's limits and costs, especially those employees who are nearing retirement. 11. What is an "accelerated death benefit" (ACD) and why is it important? Life insurance policies sold today all have the ACD rider. The importance of the ACD will be discussed in a subsequent column. 12. What is a "life settlement"? Several financial firms are offer- ing money to buy life insurance policies through a life settlement. The potential hazards of life settlements will be discussed in a subsequent column. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Evaluating life insurance coverage and needs, Part I: General considerations September 9, 2013 Vol. 63, No. 8 7 Visit us on the Internet at www.FederalDaily.com
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