Life Insurance: Costs and Benefits


Let’s take a look at the “top five” reasons people give for not owning life insurance.
Very expensive. “I just can’t afford life insurance right now.”
Confusing. “We looked at proposals from three companies – page after page of numbers. What does it all mean? I have no idea!”
Too many species. “I checked term, whole life, universal life, variable life, single premium and term life insurance. But which one is right for me?’
I do not believe. “These big insurance companies claim they have billions in reserve funds. But one of the biggest insurance companies has been on the ropes for months. Who can you trust?’
Don’t plan to die. “Someday when I plan to die, I will think about life insurance. But for now – don’t worry, be happy!”

Five reasons to own life insurance

There are several reasons to buy life insurance. If you were to die, life insurance death benefits could provide resources that are quite important to your family. The various benefits include payment of funeral and last expenses, payment of mortgages or other debts, living expenses or income for the surviving spouse, inheritance for children and payment of estate taxes.
Final and funeral expenses. There are usually medical expenses in the last weeks of life. These often range from $5,000 to $10,000. Your memorial service preparations and expenses can also easily exceed $10,000. Total final costs can often exceed $20,000.
Debt and mortgage payments. Paying debts or a mortgage is a one-time expense. Depending on the amount of your mortgage, this can cost anywhere from a few thousand dollars to many hundreds of thousands of dollars.
Spouse’s living expenses. The largest amount of insurance is usually purchased to provide both economic security and an investment that will add to the spouse’s other annual income. A reasonable method is to calculate a 5% return on investment. For example, if a spouse needs an additional $25,000 in income over and above the amount paid out from pension funds, Social Security and other income, insurance equal to $500,000 invested at 5% will produce that amount.
Inheritance for children. Permanent insurance is often used as a method of securing an inheritance for children. Many parents who make significant charitable donations plan to use life insurance as a means of providing additional inheritance for children or other family members.
Property taxes. If your estate is large, there may be a significant federal or state estate tax payment. If you own a family business or other assets that are intended to be passed down to the family, your estate may be subject to estate tax. Life insurance can be an excellent method of providing funds to pay estate taxes. Typically, for larger estates, the life insurance is owned by an irrevocable life insurance trust, so the insurance itself is not subject to estate tax.

Determination of the sum insured “Life”. A fairly easy way to determine the total amount of insurance needed is to add up your one-time expenses, then calculate the amount of invested insurance at 5% needed for the benefit of the surviving spouse, children or other family members. For example, if your one-time expenses are $200,000 and your spouse wants additional income of $25,000, the total coverage would be $700,000. This amount includes $200,000 in expenses and $500,000 invested at 5% to generate annual income.

More complex calculations are available online. Use your favorite search engine to search for “life insurance needs calculator” and choose from the free public calculators available.

How life insurance works Life insurance started because people were concerned that they might die and not provide enough resources for the family. Since young families usually need a substantial fund and do not have the ability to save enough in a short period of time, the concept of life insurance was created.

If many thousands of individuals pay premiums and these funds are invested, a pool of funds will be available to compensate the individuals. The life insurance company employs actuaries who determine the likely number of people who will die in a given year. Especially for younger people, out of a group of 100,000 only a few will die in any given year. As a result, the insurance company is able to receive all the premiums and invest them in the insurance reserve fund. Profits and a portion of the funds are distributed each year to pay claims for those who have died.

Insurance funds are primarily invested in bonds. The insurance company usually gets 1% to 1.2% to cover all of their overhead and expenses. The balance is returned through insurance proceeds to the beneficiaries.

Categories of life insurance policies

Insurance is generally divided into two categories: term insurance and permanent insurance.

Term insurance is the cheapest type of insurance and is preferred by younger people and many financial professionals. Annual renewable term (ART) or fixed payment term insurance is available for five years, 10 years, 15 years or more.

Because term insurance does not involve any investment or cash value, it allows the largest potential policy to be purchased at the lowest cost. Due to the intense competition in the insurance industry, the prices of term and level-paying term policies have decreased in recent years.

Some types of term policies also include the option to convert to whole life or universal life at some point in time. If the conversion is chosen, there will be a significant premium increase.

Permanent insurance includes several species. The traditional favorite is whole life insurance, but there are also universal life insurance, variable life insurance and survivorship life insurance.

All life. A traditional whole life policy includes both insurance and cash value. Premiums are significantly higher than term insurance because the policy will create a savings element or cash value. In the first year, much of the cash value may be used by the insurance company to cover the commission payment to the sales representative, but over time the cash value may increase. The policy owner has the right to borrow against the cash value at favorable interest rates.

Whole life is often fixed in terms of premiums paid and death benefits. The insurance company determines the probable return of its reserve fund and based on the age and health of the insured person calculates and commits a fixed profit in exchange for a certain premium.

Universal life. Universal life was created to provide an option for people who would consider buying term insurance and invest an additional amount in mutual funds. With universal life, the policy is invested and a cash reserve is built. The increase in the insurance reserve covers the value of the insurance policy. Universal life policies may include flexible options to increase or decrease premium payments. Of course, the cash value of the policy will change as the premium schedule changes.

Variable universal life. If the insured wishes to own life insurance but also potentially profit from investments in stocks and bonds, a variable policy may be suitable. With a variable policy, the insured is usually allowed to invest in various mutual funds managed by the financial services company. If the value of mutual funds increases, the cash value of the policy will increase.

A life for survival. For a couple, purchasing a survivorship policy is an attractive option. This policy pays a death benefit after both spouses die. Since two people are insured, it is often possible to get insurance even if one spouse is in poor health. Quite often this insurance can be purchased at a more reasonable premium as two people must pass away before the death benefit is paid out. This is particularly useful for providing funds to pay taxes if a business is to be passed from parents to children after both pass away.

Life Insurance Beneficiaries In most estates, life insurance does not go through the probate process. An insurance policy is a contract between the insured and the insurance company. The person purchasing the insurance has the right to name the beneficiaries. A primary and secondary beneficiary are usually specified. It is also possible to split the insurance policy between several children or other beneficiaries.

The usual beneficiary designation is for the spouse to be the primary beneficiary and the children to be contingent beneficiaries with equal shares. If the spouse predeceased the insured or they died in a simple accident, the children will receive the insurance proceeds.

Minor children generally should not be beneficiaries of a policy. In many states, if a minor child receives a substantial inheritance, a guardian must be appointed to manage the assets. This is quite expensive and also has the disadvantage of transferring the assets to the minor child when he becomes of age. A much better arrangement is to transfer the policy to a living trust for the benefit of the minor children, or create a trust and will for the benefit of the minor children and transfer the policy to the estate to fund that trust.

Buying insurance wisely Life insurance is an important decision and it is helpful to learn more about the different types of insurance. Most people will also visit with a Chartered Life Underwriter (CLU) or other representative of a financial services company.

The representative can analyze the insurance needs and suggest the appropriate type of insurance. It pays to do enough research to understand the reasons why many people choose term or permanent insurance. In addition, using online insurance funding calculators will also give you a better understanding of the appropriate amount of insurance. The amount of insurance recommended by online calculators can vary widely, so understanding your likely needs is very important.

Ratings of insurance companies Insurance companies are rated from several sources. AM Best, Weiss, Moody’s and other rating services available. You should be sure to ask for each company’s ratings if a representative offers to purchase a policy from them. It’s also easy to go online and search for “insurance company ratings” and get the actual ratings for most financial services companies.

The American Legion’s Planned Giving Program is a way to establish your legacy of support for the organization while providing for your current financial needs. Learn more about the process and the variety of charitable programs you can benefit from Clicking “Learn More” will display an “E-Newsletter” button where you can sign up for regular information from Planned Giving.

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