Risk management involves minimizing potential for financial disruption (or tragedy). Most people don’t understand insurance, and pay too much for it. Intelligent insurance planning evaluates your actual need for transferring risk, and then determines the most cost-effective strategy. The four most common risks protections are:
One important obstacle to financial success is unforeseen, life-changing, financially devastating events. One of these events is the premature death of a loved one. Proper financial planning should include risk management which often involves purchasing life insurance protection. Unfortunately, most people do not understand insurance because it can be complex with the multitude of insurance products and the terminologies that can be extremely difficult to understand. Add to it that insurance agents are motivated to sell policies that pay them the highest commissions and the consumer winds up purchasing the wrong type of insurance and paying too much for it.
Why Buy Life Insurance?
Most people think of life insurance as a means to replace lost income in the event of the main income earner’s death. So in this instance, life insurance would be used to provide financial security to the surviving spouse and family. In other instances life insurance can be utilized in business planning to keep a business operating in the event of the death of a business owner or key employee. Since life insurance proceeds are not taxable to beneficiaries, it can be a means of paying estate taxes, protecting a surviving spouse during retirement, leaving a legacy to charitable organizations, or provide financial help to children or grandchildren.
Types of Life Insurance
There are basically two main types of life insurance, term and permanent.
- Term insurance provides life insurance protection for a specific period of time or term. If you die during the coverage period, the beneficiary named in your policy receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. At the end of the coverage period, you must either renew your coverage or apply for a new policy. Because of this, premiums are relatively inexpensive compared to permanent insurance.
Insurance agents are not exactly thrilled about selling term insurance. That’s because commissions are usually paid once, and are meager compared to ongoing commissions earned for selling permanent insurance. Additionally, permanent insurance policies can be costly; many are subject to surrender charges and high internal expenses. Depending on the type of permanent insurance, the cash value will grow by different methods. It is critical that you fully understand how the policies’ cash value will grow. We see far too many unrealistic high rate assumptions for cash accumulation. The ending result can be devastating, with the owner having to dramatically increase premiums to prevent the policy from lapsing. As sales practices and disclosures can be misleading, understanding the true cost of permanent insurance is extremely difficult.
- Permanent insurance is intended to provide insurance protection for your entire life, if the policy remains in force (premiums have been paid and the policy hasn’t lapsed or been canceled). In addition to the insurance protection provided by permanent life insurance, this type of policy also builds internal cash values. When you own cash value life insurance, your premium payments are allocated three ways. First, a portion of each premium pays for the actual insurance costs. Second, a portion pays for the insurance company’s operating costs and profits. Third the remainder goes toward the policy’s cash value. As the insured ages, the amount added to the cash value decreases as the cost of insurance increases each year. There are three different forms of permanent insurance: whole life, variable life and universal life.
How Much Coverage Is Enough?
To answer this question, you must first answer several related questions. How big a financial burden would your death leave for others? How much of your current income is devoted to current expenses and future needs? How long would your dependents need support if you were to die tomorrow? How much would it cost to pay all of your final expenses?
When determining your life insurance need, consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, value of your estate, career stage, and your intentions to pass on your property are all important factors to think about.
In our experience, we find many people have the wrong type of insurance and an inadequate level of death benefit. A capital needs analysis should be completed by an independent advisor,who will coordinate your life insurance needs with your overall financial goals and objectives.
Contact us today. Life insurance should be an integrated part of your overall financial plan, not purchased piecemeal.