Life Insurance Frequently Asked Questions
Below are answers to some of the most common questions about a life insurance policy:
Q: How much life insurance should I own?
A: That varies with every individual. Important factors include income sources and amounts; your marital status (and if so, your spouse's earning capacity); the number of people who are financially dependent on you; the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan; and whether you have any special life insurance needs (e.g., mortgage repayment, education fund, estate planning need, etc.)
Q: Should I buy term insurance or cash value life insurance?
A: That depends on your circumstances. Term life insurance pays out in the event of death; cash value, which is more expensive, has a cash amount you can withdraw before death. Factors to take into consideration are your income tax bracket, whether the need for life insurance is short-term or long-term, and the rate of return on alternative investments. If the amount of insurance you need is extremely large, you might have no choice but to purchase a term life insurance policy, which carries a lower premium than cash value policies.
Q: What are the tax considerations regarding life insurance cash values, dividends, and death benefits?
A: The interest build-up portion of the annual increase in the cash value of the life insurance policy is not taxed. Dividends generally are considered to be a "return of premium" and are not taxable. Consult your tax adviser regarding questions about possible income, estate, and gift tax consequences that might affect any life insurance policy you own or are contemplating buying.
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