LIFE INSURANCE: The Basis Of A Good Financial Plan

by Team IWP! on 05. May, 2009 in Personal Finance Investing

By Donna V. Werner

Life insurance, with its own vocabulary, typically fits into the category of things most people don’t like to talk about or, quite frankly, understand. And yet, this product can be vitally important to a family’s or a business owner’s financial well-being.

The following is a brief introduction to life insurance and will hopefully answer some questions that may be on your mind about this valuable financial tool. We will cover four basic questions:

1. What is life insurance?

2. Who needs it?

3. Which type is best?

4. How much is enough?

What is Life Insurance?

Life insurance is a financial contract, usually between an insurance company and an individual. In exchange for premium payments, the company promises to pay life insurance proceeds (i.e., the death benefit) at the death of the insured to a designated beneficiary.

Life insurance proceeds can provide a lump sum benefit to survivors and help them maintain a certain standard of living. Proceeds can also be used for funeral expenses or planned expenses like college tuition.

There are two basic types of life insurance:

1. Permanent (or cash value)

2. Term

Permanent insurance (e.g., whole life and universal) provides lifetime death benefit protection at a guaranteed premium rate that will not change. Since cash value may be non-existent or build slowly in the early years, this type of policy should only be purchased if it is intended to be kept for an extended period of time. As cash values accumulate, they can be borrowed against for a variety of needs, including business and personal.

Term insurance also provides death benefit protection. Although premiums may be lower than premiums for permanent insurance in the early years, they are generally greater in the later years of the policy and may become un-affordable. Over time, portions of term insurance can usually be converted to permanent insurance.

You can also purchase a com-bination of permanent and term insurance.

Who Needs Life Insurance?

Perhaps the best way to answer the question is to look at some traditional needs for life insurance. Generally speaking, if your death will cause a financial hardship to someone else, there’s a need for life insurance. It can also be used in situations where the need is not quite as obvious, such as solving estate tax problems or making a gift to a favorite charity.

The categories listed below generally illustrate how the need for life insurance varies throughout one’s lifetime.

Children:

Children have a minimal need for life insurance. Parents may want to apply their life insurance premium dollars to purchase more coverage on their own lives. Grandparents, however, may be interested in providing a gift of permanent insurance to a grandchild. This will “lock in” a relatively low premium rate and protect the child’s future insurability.

Single Adults:

Single adults usually need life insurance to cover final expenses and out-standing loans. A more pressing concern, however, may be for disability income in-surance rather than life insurance to protect financial independence and lifestyle in the event of disability.

Married Couple With No Children:

Even if both spouses work and have amassed significant assets, life insurance proceeds can still help pay final medical bills, funeral expenses, the mortgage and provide a source of funds to supplement the survivor’s income.

Married Couple With Children:

Statistics show that the birth of a child signals an immediate need for life insurance on the parents. The parent/child relationship, of course, is one of dependency and often lasts 20 to 25 years until a child has completed college. Parents will want to be sure that they have adequate life insurance on their lives during this period.

Retired Couple:

With successful careers behind them, adult children and the mortgage paid off, retirees should be financially well off. Their situation may trigger financial concerns of a different nature, such as estate tax problems. Or, they may finally want to do something for a favorite charity. Life insurance could be the product of choice in either situation.

Business Partners/Owners:

Life insurance can be part of a business continuation strategy for business partners in the form of a Buy-Sell Agreement. This contract between business owners or the business, is a way to plan for contingencies. At the death or (total disability) of an owner, his/her business interest is transferred according to the contract terms. The other owner(s) or the business is obligated to purchase the deceased’s business interest and the deceased’s estate is obligated to sell. Life insurance can provide the funding to purchase the deceased business owner’s interest.

What Type Of Life Insurance Is Best and How Much Is Enough?

Since everyone’s needs and goals are unique, a specific discussion about the amount and type of life insurance to purchase is best left to an individual review and analysis of your financial and personal situation with your personal insurance agent.

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For more information, contact Donna V. Werner, Creative Financial Solutions at 312-329-6186 or creativefinancials@hotmail.com.

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