Life insurance is a safeguard for family members if the major supplier of income were to die and it were to grievously upset the common means for providing the basics of life. This does not include the burdens of financial expenses for burial, taxes, unplanned or emergency expenses, and furthered educational expenses for children or to have the spouse go back to school to become the primary breadwinner of the family. Life insurance is also not affordable when you are young and just starting out with a family and not always a main concern for the young. Most young people to do not think about death or their mortality, and hence, they do not see a necessity for life insurance. As we grow older, our needs and wants to secure a financial future for our loved ones necessitate the need to evaluate all options for achieving this goal. The cost and availability of features such as these could be a key issue in deciding which policy to accept. (Leaders, 5)
There are really five types of life insurance available for people to purchase, which are Term life insurance, Whole life insurance, Universal life insurance, Variable life insurance, and Variable universal life insurance. People have to decide for themselves what is going to best for them and for their future. Understanding which life insurance policy will be right for you entails setting one primary objective for yourself and your family by answering two basic questions. (Solomon, 236) First, do I simply need death protection in the event of my death? Second, do I want both death protection and a savings element for my family and I to cover retirement costs if I do not pass away before retirement?
There are three fundamental approaches to make this decision for most individuals:
1. The “Human Life Value” approach.
2. The “Human Needs” approach.
3. The “Retirement Needs” approach.
Since a person does not know whether they will live to retirement or pass away earlier, a good life insurance policy will help provide for both the “human” and the “retirement” needs for survivors and themselves.
The Human Life approach
When evaluating from this approach you should base your decision on the thought that a person has an earning capacity that can be approximately calculated by estimating annual net income (earnings minus all taxes), estimating the remaining years of wage earning, and subtracting the interest that would be earned if all the income were received in a lump sum. This procedure allows a person to pin down how much money will be needed in the event of their death to continue providing an equitable life for their survivors. Estimating your earning capacity is a valuable asset in determining what kind of insurance you will need for when you pass away or retire.
The “Human Needs” approach
Using this approach will take into account the settlement costs of a funeral, taxes, mortgages, and or car payments. It will also provide the income the family needs to readjust to a new lifestyle, income for the family until the children leave the home, life income for the surviving spouse, special needs of the family such as college education for the children, and other needs that may arise from unforeseen circumstances. In adopting this approach to your evaluation, income from all avenues of income such as social security, veteran s benefits, or trust funds will be subtracted from the total needs of the family once a person has passed away.
The “Retirement Needs” approach
Utilizing this approach will require coordinating life insurance and/or annuity purchases with other sources of income such as Social Security, pensions, or personal investments to be able to attain prearranged retirement revenue.
Once a person has decided what approach would best fit what he attends to accomplish, he then must choose a type of life insurance. You can buy an individual policy through a licensed life insurance information company, which evaluate insurance companies in general. Individuals must keep in mind a life insurance information policy is only as good as the company that wrote it. For this reason, choosing a good insurance company is at least as important as selecting the right policy. (Life-Insurance-Information, 3) There are five types of insurance available to individuals for different goals. The Term life insurance coverage will provide protection for a limited, specific period of time depending on the link of coverage selected. If the person covered by the policy should pass away within the time restrictions on the policy, the face or total amount of the policy is payable to the designated beneficiaries. Normally nothing will be paid to the beneficiaries if the individual insured lives longer than the length of the term policy that was selected. Unlike other types of policies, term insurance does not generate cash values. Term life insurance is usually the least expensive course of protection for people interested in life insurance. Some individuals on restricted incomes purchase term life insurance for the basic insurance protection for their families and, as their salaries rise, they convert the term life insurance policy to different forms of life insurance policies.
Another type of whole life insurance is a permanent insurance or a universal life insurance policy. Unlike term insurance policies, permanent life insurance has no specified term of coverage for individuals. Flexible premium or Universal Life Insurance is a life insurance policy designed as a permanent policy for the covered individual(s), but it is different from traditional term life insurance policies because it allows the policy owner to vary the amount and timing of premium payments. The policy also allows the policy owner to increase or decrease the death benefit. Monetary values will accumulate based on premium payments that are selected during the selection of the policy. Usually monthly deductions are subtracted from this fund for the expenses and cost of insurance. The interest is added to this fund afterwards. In some cases the interest rates are stated by the company and vary from time to time depending on the policy. Under federal law, guidelines are defined for policies to maintain status as life insurance under the Internal Revenue Code. This law puts a cap on total payments to the contract and provides a minimum relationship of death benefit to cash value.
Permanent life insurance is subject to a different set of policy conditions normally. A permanent life policy requires for premiums to be paid for as long as the insured individual lives and a permanent life policy accumulates a set cash value during the covered period. If the individual insured were to pass away then the death benefit is payable to the beneficiaries listed on the policy. But the policy can be turned in before the insured individual were to pass away, then the net worth is payable to the insured individual. Another aspect of this policy allows for loans to be made from the insurance company against the monetary value of the policy at a rate of return promised in the policy as security. The maximum loan rate guaranteed in the insurance policy may be much lower than that available from a bank or other financial institution. Regardless of where the loan is secured from, if the insured individual where to pass away prior to the loan being repaid, the amount of the loan and any interest due must be repaid from the death-benefit amount before the beneficiaries will receive any compensation.
Variable life insurance is also a type of permanent insurance but you decide how the premiums are invested instead of the insurer. Variable universal is a combination of variable and whole life insurance policies. These plans allow for variable premiums and the ability to choose your own investments of premiums. Variable/Adjustable: much like universal insurance except it links your death benefits and premiums directly to your investment’s performance. You’ll also have more control over how the premiums are invested. (4 Insurance, 6)
Life insurance is a good bet but you must know what you need and what you hope to achieve by it. Good research and proper planning can accomplish several different options and goals, it is your choice to want to secure a better financial future incase of death or just to have a partial cash saving and investment plan.
4 Life Insurance.com. http://www.4insurance.com/Life/basics.asp (01 December 2000)
Life Insurance, From The Leaders Of The Industry. 2000 http://www.life-insurance-company.org/page5.htm (02 Dec 2000)
Life Insurance Information. http://www.life-insurance-information.com/ (28 November 2000)