Life Insurance Advantages

The purchase of a life insurance policy will never make most peoples’ top ten list of favorite things to do. After all, there is a lot not to like in the whole process of buying life insurance. With hundreds of products from which to choose, it can be confusing. Insurance contracts can be complex and mind numbing. Some insurance agents can be annoying. And, for some people, paying premiums can be irritating. Granted, it’s not a picnic, but when given the opportunity to step back and really look at the advantages of owning life insurance, most people will agree that it ranks up there with their very best financial decision.

Anyone who owns a life insurance policy understands the reason why they bought it. For most people, it is because they want to provide for the financial security of their family in the event that they should die prematurely. The biggest advantage of life insurance is that it can accomplish just that in a way that no other financial vehicle or strategy can. As significant as that is, it is sometimes not enough to convince some people of the true value of life insurance. Some people aren’t convinced until they see life insurance in action, such as when a friend or loved one dies and the survivor receives the death benefit proceeds. Fortunately, it doesn’t take the death of loved one, to truly understand the advantages of life insurance.

The Advantages of Owning Life Insurance

It has a Triple Tax Break

If you dislike taxes as much as most people, then you should love life insurance. No other financial instrument has the host of tax incentives that life insurance has and you don’t have to wait until after you die to benefit from them although that is when the biggest tax benefit is realized via a tax free death benefit. Additionally, cash value life insurance allows you to accumulate funds without being taxed currently on the earnings. This can be significant for cash value accounts that are left to accumulate for many years. The difference in earnings can amount to thousands of dollars due to tax savings. Finally, you can enjoy your cash value accumulation while you are living through tax-free withdrawals to the extent that you withdraw just your principal. Withdrawals from cash value life insurance consist of your principal first, and then your earnings which are taxed as ordinary income. Or, you can borrow from your cash value account, and because this would be considered a loanis not currently taxable. All tax issues regarding your life insurance policy should be discussed with a financial ofessional so you understand all of these implications..

It’s a Capital Source

Life insurance can be a tremendous funding vehicle for many of your essential needs while you are alive. The ability to earn competitive rates of return without the encumbrance of taxes gives life insurance some unique advantages as an accumulation vehicle. Life insurance owners have used their cash value accounts to fund home purchases, college expense, and business start-ups. The cash value accumulation inside a life insurance policy can also be a significant source of supplemental retirement income.

It’s Cost Effective

Life events can be very expensive, especially since many of them occur sometime in the future when the cost of money inevitably increases. The cost to settle a large estate can be significant and the cost for a business to buyout surviving family members can break the business. Life insurance is the only method for paying for these very expensive future events using discounted dollars. For, literally, cents on the dollar, a college education can be paid for, a home mortgage paid off, an entire estate passed to heirs, or a business interest acquired.

Summary

It’s easy to dismiss life insurance as just one more thing on a checklist of financial obligations. But, if you are going to take the time and trouble to put the vital piece of your financial puzzle in place, you may find it very worthwhile to take a moment and consider how the advantages of life insurance can work in your favor. Perhaps the greatest advantage of life insurance is the peace of mind that it provides while you enjoy all that life brings you. That’s hard to quantify in monetary terms, but, for most people it is priceless.

When Should You Purchase Life Insurance?

Pinpointing the right age and plan will help you save money.

No one wants to admit that they could die prematurely. But the last thing you want is to not have the proper life insurance policy in place should disaster strike.

Danny Kofke, a special education teacher in Jackson County, Ga., knew he needed insurance shortly after getting married 12 years ago. He and his wife, Tracy, were planning to have children, and they wanted Tracy to be able to stay home for at least a year to raise the child. “Since we would be depending on my teacher’s salary alone to get by, we took out an insurance policy for each of us,” Danny Kofke says.

The couple’s 10-year term life insurance policy covered them for $250,000 each, which equated to a $24.50 monthly fee per person. “It gave us both peace of mind,” Danny Kofke says. “We treated it like having automobile insurance. I never want to have to use it, but it’s comforting to have it there.” The Kofkes, however, had to take out another 10-year term life insurance policy this year since the old one expired.

Although the length of the original policy wasn’t right for their needs, the Kofkes wisely opted for a term life insurance policy over whole life insurance. The difference between whole and term—the two basic types of life insurance—is that whole is a lifelong policy with an added investment component to it, wherein you can build up cash tax-free. However, the built-in fees, commissions, and surrender charges (in the event you cancel the policy) take such a significant chunk out of your investment that most personal-finance experts agree there are better places to invest your money. Whole life insurance plans also typically carry premiums that are up to 10 times that of term insurance. Meanwhile, with term life insurance, in exchange for fixed premiums that you pay monthly, quarterly, or annually, you are covered for a set number of years and only receive death benefits.

While some life insurance agents aim to guide you toward whole life insurance over term life insurance (whole means more commission for them), term makes more sense for most people, says Tony Steuer, a life insurance consultant and author of Questions and Answers on Life Insurance: The Life Insurance Toolbox. “Term coverage is the appropriate coverage for most individuals, as their needs are for a certain term of years while their other assets accumulate, such as retirement savings,” he says.

Robert Miller, president of the National Association of Insurance and Financial Advisors, agrees with Steuer that term insurance is usually the best route. “I’ve always believed in insuring up to the point that you need insurance,” he says. “You can do that with term insurance and it comes out to be far cheaper.”

Steuer recommends guaranteed level premium term insurance, where the premium is set at a fixed rate for a specific period of time. “I match the length of the term period to the anticipated period of need,” he says. “For example, with a 2-year-old child and a client purchasing a 20-year guaranteed-level premium term to take care of the child that would provide coverage until the child is 22.”

There are a few select circumstances where you might be better off with whole life insurance. For example, if you have children who are handicapped and will be financially dependent on you their whole lives, you may want to consider the permanent coverage.

Americans struggling with their finances in today’s downtrodden economy may think they can save money by skimping on life insurance. Approximately 30 percent of U.S. households have no life insurance coverage, according to a 2010 study conducted by LIMRA, an insurance industry research outfit. And among households with children under 18, 11 million have no coverage.

But for parents who still have children living at home, not having a life insurance policy could put their kids at risk if something were to happen to them. In the event the parents die, a life insurance policy can provide a safety net for the children to live off of.

However, if you’re young, single, and don’t have any dependents, Steuer advises you hold off on purchasing life insurance. “You can’t predict the future. You don’t necessarily know how many kids you’re going to end up with, or even if you are going to get married,” he says. Nonetheless, some experts recommend buying life insurance as a young single person, due to low costs and the ability to get a 30-year term that you’d have in place for when you have kids.

So you purchase a term insurance policy to cover your spouse or your kids, but then what? Once the kids grow up, most people can let the policy expire, advises Bill Wixon, a certified financial planner with Wixon Advisors in Maple Grove, Minn. “After your kids are through college, your other assets should be built up enough that you no longer need the life insurance,” Wixon says.

In terms of how much life insurance you need, there are varying schools of thought. Some financial advisers say you should insure five to seven times your salary, while others will say you need more. Wixon believes a good rule of thumb is three times your income plus debt. “A lot of the life insurance salesmen use these huge factors of 15 to 20 times your income, where almost everyone needs more than $1 million,” he says. “They’re just doing that to sell more insurance, in my opinion.”

It’s hard to come up with a magic number because your needs can change from year to year. As Steuer says, “Financial planning is always a moving target.”

Top 10 Life Insurance Myths

Life insurance is not a simple product. Even term life policies have many elements that must be considered carefully in order to arrive at the proper type and amount of coverage. But the technical aspects of life insurance are far less difficult for most people to deal with than trying to get a handle on how much coverage they need and why. This article will briefly examine the top 10 misconceptions surrounding life insurance and the realities that they distort.

Myth #1: I’m Single and Don’t Have Dependents, so I Don’t Need Coverage
Even single persons need at least enough life insurance to cover the costs of personal debts, medical and funeral bills. If you are uninsured, you may leave a legacy of unpaid expenses for your family or executor to deal with. Plus, this can be a good way for low-income singles to leave.

Myth #2: My Life Insurance Coverage Needs Only Be Twice My Annual Salary
The amount of life insurance each person needs depends on each person’s specific situation. There. In addition to medical and funeral bills, you may need to pay off debts such as your mortgage and provide for your family for several years. A flow analysis is usually necessary in order to determine the true amount of insurance that must be purchased – the days of computing life coverage based only on one’s income-earning ability are long gone.

Myth #3: My Term Life Insurance Coverage at Work Is Sufficient
Maybe, maybe not. For a single person of modest means, employer-paid or provided term coverage may actually be enough. But if you have a spouse or other dependents, or know that you will need coverage upon your death to pay estate taxes, then additional coverage may be necessary if the term policy does not meet the needs of the policyholder.

Myth #4: The Cost of My Premiums Will Be Deductible
Afraid not, at least in most cases. The cost of personal life insurance is never deductible unless the policyholder is self-employed and the coverage is used as asset protection for the business owner. Then the premiums are deductible on the Schedule C of the Form 1040.

Myth #5: I Absolutely MUST Have Life Insurance at Any Cost
In many cases, this is probably true. However, people with sizable assets and no debt or dependents may be better off self-insuring. If you have medical and funeral costs covered, then life insurance coverage may be optional.

Myth #6: I Should ALWAYS Buy Term and Invest the Difference
Not necessarily. There are distinct differences between term and permanent life insurance, and the cost of term life coverage can become prohibitively high in later years. Therefore, those who know for certain that they must be covered at death should consider permanent coverage. The total premium outlay for a more expensive permanent policy may be less than the ongoing premiums that could last for years longer with a less expensive term policy.

There is also the risk of non-insurability to consider, which could be disastrous for those who may have estate tax issues and need life insurance to pay them. But this risk can be avoided with permanent coverage, which becomes paid up after a certain amount of premium has been paid and then remains in force until death.

Myth #7: Variable Universal Life Policies Are Always Superior to Straight Universal Life Policies Over the Long Run
Many universal policies pay competitive interest rates, and variable universal life (VUL) policies contain several layers of fees relating to both the insurance and securities elements present in the policy. Therefore, if the variable subaccounts within the policy do not perform well, then the variable policyholder may well see a lower cash value than someone with a straight universal life policy.

Poor market performance can even generate substantial cash calls inside variable policies that require additional premiums to be paid in order to keep the policy in force.

Myth #8: Only Breadwinners Need Life Insurance Coverage
Nonsense. The cost of replacing the services formerly provided by a deceased homemaker can be higher than you think, and insuring against the loss of a homemaker may make more sense than one might think, especially when it comes to cleaning and daycare costs.

Myth #9: I Should Always Purchase the Return-of-Premium (ROP) Rider on Any Term Policy
There are usually different levels of ROP riders available for policies that offer this feature. Many financial planners will tell you that this rider is not cost-effective and should be avoided. Whether you include this rider will depend on your risk tolerance and other possible investment objectives.

A cash flow analysis will reveal whether you could come out ahead by investing the additional amount of the rider elsewhere versus including it in the policy.

Myth #10: I’m better off Investing My Money than Buying Life Insurance of Any Kind
Hogwash. Until you reach the breakeven point of asset accumulation, you need life coverage of some sort (barring the exception discussed in Myth No.5.) Once you amass $1 million of liquid, you can consider whether to discontinue (or at least reduce) your million-dollar policy. But you take a big chance when you depend solely on your investments in the early years of your life, especially if you have dependents. If you die without coverage for them, there may be no other means of provision after the depletion of your current assets.

The Bottom Line
these are just some of the more prevalent misunderstandings concerning life insurance that the public faces today. Therefore, there are many life insurance questions you should ask yourself. The key concept to understand is that you shouldn’t leave life insurance out of your budget unless you have enough assets to cover expenses after you’re gone. For more information, consult your life insurance agent or financial advisor.