Personal Life Insurance Essay
Simply, we can call them as “human-life needs” and “financial needs”. ”Human-life needs” is easy to understand that to protect survivors basic life costs, like mortgage, children’s college funds, taxes and funeral expense, if insured pass away. “Financial needs”, or retirement needs means clients anticipate using life insurance with other sources income, such as Social Security, pensions, to help supplement retirement income. There is 89% of middle-market households list adequate life insurance coverage as a financial goal. (Bruce A. Tannahill) 99% of middle market households set up a financial goal as expect to have enough money for retirement. (Bruce A. Tannahill) However, only 55% of them met their life insurance goal and 7% have met their retirement goal.
Two typical life insurance
Term life insurance
Term life insurance provides protection for a limited period of time, and a fixed rate of payment. When the insurance period expires, the coverage is no more guaranteed for the insured, so insured should consider to renew same policy or to purchase another policy with different payment or coverage. Usually, nothing will be paid to the beneficiaries listed on the policy if the insured live longer than the time restrictions on the policy that was selected. Otherwise, the face or total amount of policy will pay to the selected beneficiaries. Moreover, term life insurance dose not accumulate cash values. Term life insurance fit on the clients having restricted income to achieve basic insurance protection for their family members.
Permanent life insurance
Unlike term life insurance, permanent life insurance has not specified term of coverage for insured. It is good choice for people to achieve both goals of “Human needs” and “Financial needs”. Firstly, it provides protection against financial strains from the early death of a breadwinner due to the family could receive the death benefit. (Linda L. Neims)The cash can help survivors to afford daily expense, such as pay off the mortgage or debit, rent payment, education fund of children. Also, it can cover the expense for funeral. It is enhance family move to next stage without financial hardship. Secondly, permanent life insurance provides accumulated cash value that can supplement other sources of retirement income. (Bruce A. Tannahill)
Since permanent life insurance policy requires insured to pay premiums monthly or other fixed payment term, so if insured paid sufficient premium on the policy, the policy can accumulates a set cash value that can be withdrawals or loans during the covered period.
Life insurance as investment
When clients think of life insurance as an investment of retirement planning, there are some rules we should consider (especially permanent life insurance). First, withdrawals up to cost basis or loan are tax-deferred. If the policy is designed and funded appropriately, the cash value will not be subject to income tax as it accumulates or when received from a loan or withdrawal. (Bruce A. Tannahill) Unless the policy is a MEC (modified endowment contract), a cash withdrawal through policy is generally tax-free income for the policy-owner. Hence, for people treat life insurance as an investment, according to Ben (2010) , “they have ability to manage the capital within a life insurance policy without incurring extra transaction fees or income tax” (p.8). Second, minimize the death benefit. (Bruce A. Tannahill) Since clients expect achieve financial goal through life insurance, so the policy is provided to them should be designed with minimize death benefit and maximize the cash accumulation. As we know, the smaller death benefit, the bigger cash accumulation for clients. But we must choose the appropriate level of death benefit on the policy in order to meet the family’s need. (Peter C. Katt)
Life insurance is one of the most important decisions in personal financial planning. There are two typical life insurances for clients depending on different purpose. If clients anticipate using life insurance as investment, we should consider in the policy design and funding that tax-free income and minimize the death benefit.
Bruce A. Tannahill (2012). Life insurance’s role in retirement planning. Journal of financial service professionals. January 2012: 33-35
Peter C. Katt (2011). When life insurance is an investment. Journal of financial planning. Jul 2011,24,7:32-33
Ben Baldwin, Jr. (2010). Life insurance in retirement planning. Journal of retirement planning. May-June 2010:7-12
Linda L. Neims (2012). The interface between continuing-care retirement communities and long-term-care insurance. Journal of financial planning. May 2012, 25,5:54-60
Kiplinger. When should you buy life insurance.