Planning for the future involves taking into account all of life's events and putting the financial pieces in place to ensure that they happen as they are envisioned. Proper planning also involves the recognition that life happens and unforeseen events can disrupt the best laid plans. Most people don't envision themselves dying prematurely and many would prefer not to consider the possibility. The reality is that, without a sound life insurance plan in place, the family, or the business, or the estate could suffer catastrophic consequences.
Life insurance is more than planning for the security of one's loved ones. Its unique properties can provide the needed solution in many difficult financial situations.
The most important purpose of life insurance is to ensure that family survivors are able to replace lost income, meet their immediate cash needs and still achieve important financial goals such as a college education.
Careful consideration should be given to the income needs of the surviving family, including living expenses, child care needs, future education costs, and the ability of the surviving spouse to earn a meaningful income.
Other Important Uses for Life Insurance
Life insurance can play a critical role in addressing many other financial issues.
For the business owner, it can ensure that the business is protected against the loss of a key employee. It can also provide the capital needed to buy out the family members of a deceased business partner. There are also instances when a family business is passed on to active family members and life insurance can be used to equalize the inheritance for non-active members.
For the charitably inclined, life insurance proceeds can be gifted directly to a charity, or it can be used to replace the value of a gifted asset such as property.
Life insurance is also the means for paying estate taxes and settlement costs. With estate taxes as high as 50%, a large, unprotected estate could be decimated resulting in the liquidation of valuable properties or a business.
How Much Life Insurance do you Need?
For most people the difficult decision is not "if" they need life insurance, but "how much" life coverage they need. It's a much bigger decision, and one that can lead to consternation over the purchase decision if it is not made with the proper consideration. Buying too much life insurance has always been a concern for people who don't like paying for what they don't need, and buying too little insurance can lead to a lot of sleepless nights and disaster for the surviving family.
For such an important decision and with so much at stake, it would seem inconceivable that anyone would simply guess at the amount of coverage needed or rely upon some antiquated formula such as "seven to 10 times your annual salary. To do so really defeats the overriding purpose of buying life insurance which is to provide all concerned with absolute peace-of-mind as they look toward their future. Using any method other than a thorough assessment of your current financial situation in relation to your family's needs is not likely to provide the assurance of security that life insurance is supposed to provide.
Types of Life Insurance Policies
Term Life Insurance: Low cost insurance that protects needs for a specific period of time such as during the dependency years of children. Yearly renewable term has increasing premiums for a level death benefit. Level premium term provides level death benefit coverage, and decreasing term has a level premium with decreasing protection.
Whole Life Insurance: A permanent form of life insurance used for long term contingency planning where the need for life insurance will likely continue. It can be available to pay for a spouse's income for life, provide estate liquidity and even provide supplemental retirement income. Whole life policies require a fixed level premium to pay for level coverage that will not expire as long as premiums are paid.
Universal Life Insurance: Another form of permanent insurance that offers more flexibility in premium payments and death benefits. It has a separate cash value account with competitive interest rates that can be accessed through loans or withdrawals (subject to charges and possible taxes). Premiums are level and can be adjusted based on the performance of the cash value account.
The cost and availability of life insurance depend on several factors such as age, health, and the type and amount of insurance purchased. There are expenses associated with the purchase of life insurance such as mortality and expense charges that will affect the amount of premium you pay.
A _________ Bank representative can help you determine the right amount of coverage and the right kind of policy from a variety of life insurance options to meet the needs identified in your financial plan.