Life Insurance – What Kind and How Much?
There are many reasons to buy life insurance. You will feel most comfortable with your program if you gain a more complete understanding of the benefits of the coverage.
To determine how much life insurance is appropriate, consider your needs as required for the short term and the long term, find out what resources may become available to the family, and use the income tax-free nature of life insurance proceeds to bridge the difference.
Short term financial obligations include mortgages (first, second, and/or home equity loans), loan balances (automobiles, credit cards, etc.), college education expenses for dependents, estate taxes and estate settlement costs, final medical expenses, funeral expenses, and any charitable bequests you would like to provide to your favorite organization. Be sure to include additional monies as an emergency fund to the surviving beneficiaries to get them through the initial period of adjustment.
Long term obligations include provisions for a stream of income for the surviving beneficiaries to maintain a standard of living based on the financial goals you have developed together. There may be a need for child care expenses (if the spouse will work after your death), monetary support for a disabled dependent, and elderly care expenses for family members and/or relatives.
Calculating Resources Available To The Family
At this point you may have a reasonable approximation if the monies necessary to pay expenses, and an objective of income required for the surviving beneficiaries. There are several sources available to provide assistance. A spouse may already be working and producing some level of income. Social Security benefits may offer income until the youngest child reaches age 17 (the Social Security income may stop at that time). Your employer’s pension plan may offer survivor benefits to the spouse, and you may have investments outside of your retirement plan that produce income on a regular basis.
When you compare your total needs (enough monies to pay short term and long term expenses, in addition to the monies necessary to produce income) with the resources available for the surviving beneficiaries, you may find a shortage of funds. This shortage could mean that the surviving beneficiaries must find additional resources that have yet to be identified, or try to live at a different level than the financial goals you have created.
Life insurance can provide an extremely attractive resource to meet such shortages. It is a product uniquely designed to shift the risk of financial loss from the individual to a third party (the insurance carrier), while generating income tax free proceeds to the designated beneficiary. You pay a relatively small premium to the insurance company in exchange for the promise to pay the specified death benefit.
There are many types of life insurance products on the market. By carefully considering the type and amount of coverage that best serves your needs, you can design a program specifically tailored to meet your personal objectives for you and your family.
Term Life Insurance (Vs. Permanent Life Insurance)
Term life insurance requires the payment of a premium in exchange for the promise by the insurance company to pay a death benefit while the contract is still in force. The policy provides protection for a specified maximum period of time , and is usually renewable at the end of each period at progressively higher premiums. Term insurance generally carries no cash value benefit, and, as a short term solution, the premiums are generally less expensive than permanent alternatives.
The most cost effective term insurance policies provide a level death benefit with your choice of premiums that can be fixed and guaranteed for an initial period of ten, fifteen, twenty, twenty-five, or thirty years. The longer the guarantee of the initial term period, the higher the premium.
Permanent Life Insurance (Vs. Term Life Insurance)
Permanent life insurance, like term life insurance, requires the payment of a premium in exchange for the promise by the insurance company to pay a death benefit while the contract is still in force. As the name implies, however, permanent life insurance is better suited to meet the needs where proceeds are required to be maintained over a much longer period of time. While there are several types of permanent products offered, whole life policies and universal life policies represent the two most popular choices.
Whole life policies feature premiums and death benefits guaranteed for the life of the insured. Initial premiums are generally much higher than term insurance premiums, but the policies build up cash values on a tax-deferred basis and dividends can often reduce costs by substantial amounts over time.
Universal life policies can also guarantee premiums and death benefits for the life of the insured, but often permit you to vary the premium and amount of coverage over the course of the program. The policies build up a cash value, but the cash value can be impacted by the mortality charges (cost of insurance) within the contract. Secondary guarantees within more recent universal life programs permit the coverage to be guaranteed for life, regardless of the amount of cash value accumulated in the policy.
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