Individuals work hard to accumulate property and develop a comfortable lifestyle that must be protected through appropriate life insurance coverage. Discussions about the potential loss of a primary wage earner are uncomfortable. These difficult talks will enable the life insurance shopper to find the right types of life insurance for each life phase. Preparation will prevent financial hardship for survivors. The life insurance shopper should spend sufficient time making key decisions that could determine how well the family, or business, survives the loss of an important person. Neglecting this important series of decisions could cause unimaginable financial difficulties for those who are left behind.
Who Needs Life Insurance
Anyone who has responsibility for providing monetary support, or supportive care, for others must consider the long-term effects of the loss of that person. Postponing the decision can be devastating for dependents if the unthinkable happens prematurely. Lack of life insurance coverage can cause the death of life-long dreams for anyone associated with the provider.
• Wage earners – In a family, one or more persons will provide a steady income that pays monthly bills, provides housing and transportation and builds a foundation for the fulfillment of future dreams. Loss of income places the family at risk of losing the financial security provided through the individual’s work income. Two wage earners will require separate life insurance policies to compensate for the loss of income if either earner loses his or her life.
• Homemakers – The mother, or father, who stays home to raise children provides care throughout the work hours when the wage earner is away from home. The loss of the life of a homemaker will require that the wage earner pay someone to care for the children. Additional childcare expense can cause financial hardship without sufficient life insurance coverage on the homemaker. Home chores must be performed with assistance from someone, and sufficient funds can make this affordable.
• Business owners – Only 20 percent of all businesses will survive the loss of an owner, or principal. Even with a succession plan, most businesses do not have sufficient funds to pay for the legal services required to make the transition. All leaders of a company must be insured to provide sufficient working capital for the company until proper replacement personnel can be hired.
• Caregivers – Aging parents require ongoing care that could be disrupted if the caregiver passes away unexpectedly. Sufficient life insurance coverage would allow the family to hire professional assistance for an elder, or a special needs child.
Which Type of Life Insurance
All life insurance products have definite advantages that should be considered prior to purchasing a life insurance policy. Age, lifestyle, financial goals and family composition are important factors when selecting the appropriate life insurance product. Every life insurance company offers specific insurance products that offer advantages to the insured person. Comparison between the types can be performed when the face value, term length and features are evaluated.
• Whole life – This two-part life insurance product separates the investment component from the life insurance component. The monthly premium will include additional funds that are invested to build the cash value in the policy. Each whole life insurance product has different rules that dictate the policyholder’s options.
• Term life – As the least expensive life insurance option, the term life insurance policy pays a pre-agreed death benefit amount to the beneficiary in the event of the insured person’s death. A set premium amount is paid throughout the policy term. At the end of the term, the policyholder has the option to renew the coverage at a new annual premium rate. The age of the policyholder is the primary factor in the calculation of the annual premium.
• Annuity – Certain annuity products offer a death benefit, which is paid to the beneficiary upon the death of the policyholder. A lump sum, or series of payments, is deposited into the annuity. At the agreed point in time, the insurance company will begin to issue checks for the amount of money stated in the policy documentation. Many different annuity products have been developed as investment tools.
How to Devise a Life Insurance Strategy
Life insurance decisions seem overwhelming because of the number of years that the policy will be in force. A life insurance strategy should include sufficient insurance for each phase of life. The policyholder can make changes to the coverage at any point in time. Some important points must be considered in the quest to purchase sufficient life insurance for various points in life.
• One large policy will be more expensive than multiple smaller life insurance policies. One-million dollar life insurance policies are expensive because one insurer will be required to make a large payment if the insured dies. The cost of insurance can be reduced through smaller policies with multiple insurance companies.
• Multiple term insurance policies can overlap during the years when the children will be in college and the house has a mortgage. These years are critical for the financial security of the entire family. One term policy that spans 20 years for $100,000 can be combined with a 10 year, $250,000 policy that will expire at the end of the college years. This combination is less expensive than a 20 year, $350,000 policy.
• Business owners must consider the life insurance benefit for his family and a separate benefit for the company. The business should pay the annual premium for each owner and principal while the business is the beneficiary on the policy.
• A life insurance policy can be purchased to repay the mortgage and ensure that the family has a place to live as the children continue to grow if the wage earner passes away.
Cost of Life Insurance
The life insurance shopper must remember that annual premiums are not the only consideration in the quest to acquire sufficient life insurance coverage for each phase of life. Annuity policies offer security and a steady income stream, but the cash is no longer available to the policyholder without surrender charges. Whole life policies will be more expensive because of the cash value. Every potential insurance customer must understand the nuances of each type of insurance to avoid surprises.
Insurance companies are required to provide written policy documentation during the underwriting process. Most states have enacted legislation that will ensure the documents are not packed with legal-ease. The policyholder should ask questions about the information in the pages of documentation because the terms of the policy are legally binding. The insurance company will write exclusions into the policy, which the buyer must review.
Multiple discussions about life insurance needs will allow the life insurance shopper to learn the important points about each type of life insurance. Many people choose to begin with a term life insurance policy because this type of insurance is inexpensive and easy to acquire. More complex types of insurance will offer benefits over the long-term. Multiple types of insurance in the insurance portfolio will be economical and flexible as each life stage passes. Older people will not need as much insurance as a middle-aged wage earner with children headed for college. Family and business needs require careful consideration because of the reliance on important people. Risk of loss is mitigated through proper management of the life insurance coverage.