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Insurance

2002-02-01 16:35:00

Life insurance isn’t ‘old hat’

Question:  I have here questions: 1. Why should I own life insurance?2. What kind of life insurance is best for me?3. How much do I need?

Answer:  Why should I own a life insurance policy?   Although one can literally develop lists with hundreds of reasons to own an insurance policy on your life, they can all be boiled down to essentially three reasons: (1) you love some one, (2) you owe someone, and/or (3) you want to create value for yourself in the future.  Let's explore these three reasons in greater depth: You love someone.  A properly structured life insurance plan replaces your human life value when you die.  Making sure your loved ones are not faced with a financial crisis in an emotionally difficult time is a sure sign that you love them.  All of the hopes and dreams you and your family have that take money can be provided for. You've given them the gift of financial stability.  Life insurance is the only financial product that can guarantee that the right amount of dollars is available at exactly the right time [unless, of course, you already have that amount in a guaranteed account]. You owe someone.  Since life insurance is the only financial product that can guarantee the right amount of money is available at the right time, many creditors require life insurance as collateral for loans.  You can also make sure your mortgage doesn't out live you.  In business, you can ensure your partner has enough money to continue to own the business after you die and your family has the value of your hard work.  In addition, life insurance enables you to fulfill promises made to key employees for post retirement benefits.  You want to create value for yourself.   Most of us want to live as long as we can.  With that mindset, it is easy to view life insurance premiums as a "necessary evil".  However, cash value life insurance can also provide many living benefits as well as death benefits.  As an accumulation and distribution vehicle, cash value life insurance is unique.  It is the only financial instrument that allows you to accumulate money on a tax deferred basis, use the money while you're living in a very tax favored manner, and then pass money to heirs tax free.  Properly designed and funded, a cash value life insurance policy can become a great source of supplemental retirement funds, help fund a child's college education or many other opportunities for which you need additional money.  Question:  What kind of life insurance is best for me?Answer:  There are essentially four types of life insurance available: term insurance, whole life, universal life, and variable universal life. Which type is best for you depends on your answer to question one, your budget, and your time horizon [i.e. how long do you need the protection or how long till you need to begin receiving retirement benefits].  If you want to create value for yourself or key employee, a cash value policy is the only way, either traditional whole life, a fixed universal life, or variable universal life.  If you are using the policy as collateral on a relatively short-term loan, then term insurance is the best.  In general, the longer time horizon you have, the less cost-effective term insurance becomes.  Keep in mind that term insurance pays a miniscule portion of death claims (less than 1% in some studies).  If you really want and need the life insurance to be there when you die (why else own it), then cash value insurance is the best way to go.  If your budget is tight, a mixture of cash value and term may be appropriate.  Permanent cash-value life insurance is a business or family decision.  How much is needed, when is it needed, and how to we pay for it.  A lottery ticket it is not.  You pay a life insurance premium and you do not want to win.  Low term insurance premiums are advertised on every media, and for a good reason.  Very few buyers win [or lose, depending on your attitude].  If the need for cash is real at the time of one's death, then its best to plan for the cash to be there, regardless of the time of death.Question:  How much do I need? Answer:  Most life insurance companies will issue a death benefit equal to no more than fifteen (15) times your earned income if you are under age 50.  If you wish to replace your income for your spouse and children, then 10 to 15 times income makes sense.  After age 50, companies will look at different needs such as estate planning and payment of taxes to determine maximums.  If you are using the policy primarily as collateral for a loan, clearly the amount of the loan will determine the amount of insurance.  Other factors to look at include how much consumer debt you have, the amount and term of your mortgage, and final expenses. A "human life value" calculation that takes into account not only your potential earning power but also your spouse's earnings, and the age of your children is an effective way of arriving at an appropriate amount. You should also consider the hopes and dreams you would like to assure for your family if you were not here.  If you're really questioning the amount of life insurance you should provide to your family, ask yourself this question. "If you just finished visiting with your doctor and was told that you had less than 48 hours to live, but you still could purchase whatever amount of life insurance you desired for your family [and money was not a consideration], how much would you then buy?"Life insurance is an important financial decision, the foundation of solid financial planning.  All aspects of what you need and want to accomplish financially should be considered in your selection of life insurance. Some may feel life insurance is ‘old hat’.  Many of these people come from the ‘Baby Boomer’ generation.  The truth of the matter is that with the rise in incomes and personal net worth, life insurance has probably never made as much sense at it does today.