Thursday, August 30, 2012

Life Insurance Primer

For most people seeking financial advice from an advisor or planner, death is the last thing that they probably think about.  “Why would I need to worry about money when I’m dead?”  For those who are young with dependents needing their income, the risk of death can spell failure in attaining the goals of the household.  The first question that must be answered is, “Do I need life insurance?”  If you have others whose financial futures are depending on you, the answer is likely “Yes”.  Otherwise, the answer is “No”.

 

                Life insurance does not insure your life.  Rather, life insurance is designed to provide monetary resources that are needed by the survivors of the decedent (a fancy word for a dead person). If there are no survivors who need monetary resources upon the decedent’s death, there is no need for her to purchase a life insurance policy, as the risk of loss of income does not exist. For those who have financial dependents, a second question should be asked, “How much do I need?”  This question will be taken up in a subsequent financial tip and it should be followed by, “Which kind should I purchase?”  The rest of this Tip introduces the types of life insurance.

 

There are two basic kinds of life insurance; whole life and term life.  Term insurance is pure insurance and provides the greatest amount of coverage for one’s premium dollars, particularly when one is young.  As one ages, the probability of death increases and the cost of term insurance increases.  Term life is so called, as it only lasts for a specific period of time, or term.  The advantage of term insurance is that you get a lot of coverage for a little amount of money, albeit over a short period of time.  If it is guaranteed renewable term insurance you may repurchase the policy, with higher premiums, at the expiration of each term.  One’s greater need for insurance coverage, coupled with the lower cost of term insurance, may make term insurance the most attractive.

 

                A person’s life insurance needs may extend longer than one’s working life and they may desire to have constant premiums.  Examples of a long-term need for life insurance are issues stemming from estate planning issues, like business succession or estate taxes. This second primary type of life insurance is known as whole life.  Whole life insurance is in force for one’s whole life, if premium payments are continued, and contains both insurance and savings elements.  Due to its long term nature, the constant premium will purchase less insurance, as one gets older, forcing the portion of the premium going to savings to decrease.  What is not used for insurance is saved in a tax-advantaged account.

 

A benefit of whole life insurance that is little understood is that life insurance savings (called cash values) can be accessed while the insured is alive.  The savings portion may be “borrowed” to provide retirement income with the repayment coming from the reduced death benefit upon the insured’s ultimate demise. Moreover, an older insured may have need for income protection beyond their working years, if they have special needs dependents or have young children late in life. 

 

The cash value portion of the policy grows, as long as the policy is in force.  A characteristic of whole life insurance savings is that the cash value may be used while you are alive without any tax penalty and you can use the money for any purpose.  If you decide that you are one of the minority of the public who has a need for life insurance for their whole life, it is always best to get it from a financial secure company, rated AA, and who pays the greatest dividends, everything else being the same.   

 

Beyond these two basic types of life insurance are variable and universal life insurance policies, as well as combinations.  Universal life insurance policies combine a term insurance policy with a savings element, typically invested in safe, short-term financial products.  Universal policies “unbundle” the premiums enabling the insured to know how much of the premium purchases insurance and how much to savings, unlike whole life products.  Moreover, universal products allow the insured to vary premiums and to put more, or less, into savings.  On the other hand, variable life insurance allows the insured to invest the saving portion in higher risk, potentially higher return, investments like mutual funds.  Yes, you guessed it.  There are even variable universal products which combine the ability to change premium payments with greater expected return investment vehicles.

 

                If this sounds confusing, it should. Life insurance is mixed with options other than straight term life insurance.  It is recommended that you consider the type of life insurance which best provides adequate protection for your family.  Often, there is only one type of policy a consumer can afford which delivers adequate protection.  Thus, you need to give careful consideration to your life insurance needs.  Whichever type you decide to purchase, make sure that you do not get too much, or too little.  It is not wise for a salesperson to say, “You need six times your salary in insurance coverage.  Now, sign here!”  Rather, find an insurance agent who takes the time to walk you through a risk analysis, in order to determine that best estimate of the amount that fits your needs and your budget.  When you’ve listened to her, call another agent and see what they recommend.  If they both agree, you can more easily rest assured in their answers and to then purchase a policy from the most secure company at the best price.

 

-          Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

29 comments:

jennet brown said...

Personal financial planning is important because it provides you with a method of organising your financial tomorrows and financial climate which suggests skepticism wherever you go.
retirement plan consultants

Audrina Jackson said...

I agree with Jennet Brown. Planning provides you with a method to organize your finances and keep you updated on your policies. It’ll be good to also ask help from your agent on what moves to take and why.

Audrina Jackson

Maylene Vidler said...

Great info. Its a need of today's generation, but I think it need more information about this topic, really not a bad but I wish it looks more complete. Life insurance comparison quotes

Amelia said...

Some people find that life insurance is purely a waste of money as who needs money after the death. But they are mistaken and by sharing all these points you have tried to highlight the need of this policy.
company insurance

Sue Ming said...

Congratulations Robert O! Thank you so much for taking the time to share this exciting information.

Term Life Insurance Quotes

Hershel Duffey said...

It is important that you determine what your family’s needs are first before purchasing life insurance. If you are not aware of your choices or what term fits your needs, you should seek assistance from a reliable insurance agent. Do consider your financial status too.

Elnora Cowger said...

We’ve heard lots of stories from those who denied needing life insurance only to realize its importance after their breadwinner passed away. We must bear in mind that the insurance policy is not for the dead person, but for those that they’ll be leaving behind. Talk to an insurance provider and know more about the policy that fits you and your family.

-^ Elnora Cowger ^-

Albert einstien said...

congratulations guys, quality information you have given!!!
cheap health insurance in maryland

Albert einstien said...

I Never ever found such edifying blogs.
no win no fee claims

Albert einstien said...

Congratulations guys, quality information you have given!!!
life insurance rates

Albert einstien said...

Thank you so much for such a great blog.
best credit repair services

Mohammad Junaid said...

Whether you are looking for health, commercial, home, or auto insurance, it is best that you choose for the right insurance company. When you do so, you are rest assured that you are treated rightfully as a customer. In times of claim filing the insurance company would be there to help you out causing you less hassle and trouble.Independent Insurance Agent for Home Insurance

Albert einstien said...

If somebody wants expert take on the main topic of blogging next I advise him/her to go to this site, continue the fussy job.
live incurance

Albert einstien said...

Great blog post! I don’t understand how long it will require me to obtain through all of them!
best life insurance for seniors

Albert einstien said...

This is really pretty cool place I like it because it has everything I want more on this blog soon.
This is really pretty cool place I like it because it has everything I want more on this blog soon.

Henry Jon said...

car insurance quotesHi Dear, have you been certainly visiting this site daily, if that's the case you then will certainly get good knowledge.

stay slender said...

Awesome! Immense information there.
geriatric life insurance

Albert einstien said...

It's been good to see your blog when I always look for such type of blogs. It’s great to discover the post here.
life insuarance

ashlie jon said...

I want to say thank to you people for this great and helpful info. Thanks!!!
best whole life insurance

grady williams said...

term life insuranceWaooow!!! Really very cool site of blogs. You can imagine what you have done for me.

grady williams said...

congratulations guys, quality information you have given!!! www.credit-insure.co.uk

grady williams said...

Keep it up!! You have done the nice job having provided the latest information. life insurance prices

rickhock said...

Thanks for sharing such a nice knowledge with us. A must read blog. life insurance

mark bill said...

Remarkable stuff in the blog I love the topic as well thanks.
maryland health insurance brokers

Jones Henry said...

I want to give my special thanks to you; very first time I have got such type of blog that has described everything perfectly. public adjuster

Jones Henry said...

I have visited multiple sites to get this discussion, but whatever I have taken from here is superb. http://www.propertytoinsure.co.uk

Jennifer Anderson said...

I have spent a good time here at your blog reading. Must Keep the ball rolling buddies! cheapfleet

Jennifer Anderson said...

I am very contented to get this blog! I will bookmark this webpage and share this with my friends too. whole life insurance quotes

Rooster said...

Insurance is so important and so often overlooked, It would good if it was cheap but I guess wishful thinking, compareminibusinsurance does help find the best deal for minibus cover annual or monthly