Many readers will remember that for many years, I have authored an article regarding financial planning and insurance matters. Recently, I made the decision to start writing again about the topic, and I think I will start with the basics. Insurance is certainly the foundation of any financial plan, whether formal or informal. Several recent studies have shown that the bulk of middle America is grossly underinsured, so I thought I would start with the essentials of life insurance.
Insurance of any kind is based upon the idea of sharing risk. There are only three ways of dealing with the risks we look as we walk through life. We can do whatever we can to avoid the risk (the risk of an airplane accident is avoided if one does not fly). We can assume the risk, or we can share in the risk. This is where life insurance fits. The purchase of life insurance is based upon a recognition that the financial impact of a death cannot be avoided nor assumed, it needs to be shared with an insurance company.
Life insurance is available in two primary varieties, term, and permanent insurance, the latter in many varieties. Historically, many people have fallen prey to believing the verdict is either/or, either I buy term or I buy permanent. The prudent decision is to buy term when the need is temporary, such as under 15-20 years. Term is very inexpensive, especially when purchased at younger ages. A young family should buy as much term insurance as reasonable to provide for educational funding, mortgage redemption , and income should something happen to the breadwinners.
How does one determine the amount of life insurance needed ? It’s pretty easy — what would the insured have contributed over time financially to the family or business? For a family, that’s a pretty big number. Another test: How would the survivor answer the question of “did he/she have enough life insurance?” There are a number of websites that will help you determine your needs. Once the decision is made to move forward, one should really work with someone who specializes in life insurance.
Permanent insurance is designed to be in place for the rest of one’s life. It is a very valuable asset in any portfolio with performance measured by premiums invested versus death benefit provided to the survivors. One of the first questions asked at a funeral is “Did he have life insurance?” I doubt that there has ever been a beneficiary who complained about having death benefits. Permanent coverage is more expensive initially than term, but over the course of the time, the reverse is absolute. In addition, there are cash values which can be used to recover costs or as an emergency fund.
A few other little known benefits of life insurance policies: Cash values accumulate on a tax deferred basis and can be pulled out of the policy on a tax-free basis via a loan against the policy. Very tax efficient. These same cash values can be invested in a variety of ways within the policy, in equity or bond accounts, interest rate driven accounts, or accounts reflecting the performance of an index such as the S&P. Life insurance is a protected asset in most states when it comes to the reach of creditors. Finally, and most importantly, death benefits are received totally income tax free.
The purchase of a life insurance policy should not be seen as any other commodity. The process can be difficult and guidance from an experienced professional is recommended. An independent agent is probably the best. Note that there is no need to use the various shopping services you see on TV or the internet, there is no savings, rates are the same. Underwriting is the issue, it is important to know which carriers are more favorable to an problematic health histories.
Finally, do you need life insurance? Don’t ask me, ask those who will survive you. If there is a financial consequence to your passing, you have two choices, A) buy life insurance, or B) let them figure it out later. I think we know which is more expensive and difficult.
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