Wednesday, November 6, 2013

The Importance of Life Insurance Within Your Financial Plan?

 So you know you should have life insurance. Right?
Is it something that you should only have for emergencies?
You know for your family in the event that something was to happen to you.
What can life insurance possibly have to do with your financial plan?
Even if it did, which life insurance would be of benefit to you financially long term?
Where do you even begin with so many types of life insurance out there?

What is the difference between the life insurance options?
Well let’s start with term life insurance this is like the beginning basic life insurance, it is the most affordable type of life insurance that someone can get, it is one of those insurance policies that someone owns but hope they are never going to need to use.  As the name suggests people usually have it for a term or period of time in their life when they feel it would be needed by their family if something were to happen to them.  In other words it is like having death insurance, in the period of time that it is owned and premiums are paid towards it if someone were to die in that term or time frame it would pay out a death benefit to their beneficiary.  If they live longer than the term insurance policy they will no longer have the coverage and even though typically it can be renewed the premium will have increased significantly by then.  Having this type of life insurance of course means that there is a chance that the life insurance will expire before the owner of the insurance, kind of like renting a house you have it for a period of time, never owning it as such and never getting anything out of it in the end ‘no return on money when payment’s stop’.
On the other hand with permanent life insurance it will always pay out to the beneficiaries when the owner dies as long as the premiums are paid, providing them with life insurance coverage throughout their lifetime.  With permanent life insurance premiums can be as much as 5 to 10 times higher than term life insurance, but this starts to build cash value into the life insurance policy.  To begin with this cash value is not much but throughout the years depending on the interest this can grow significantly.  There are several different types of permanent life insurance for example variable life insurance and universal life insurance.  So unlike term life insurance this is like owning a home and there will be a return on the money with this type of insurance no matter what.  

The benefits to owning permanent life insurance.
Well in addition to the death benefit that permanent life insurance provides, it can be beneficial to have because it has additional investment features within it.  As it combines having a term life insurance with a tax deferred savings account somewhat like having an additional IRA account that someone can put money into tax deferred, but the difference is that when they take the cash out of the life insurance the money is tax free.
So some of the great benefits to having a permanent life insurance policy within a financial plan is that firstly when they pass away it allows them to leave a legacy either to their loved ones or maybe a charity that is close to their heart, and of course remember this can be done with a term life insurance when someone passes away if it still within the term of the policy.  A second thing is it can help pay estate taxes and protect some of the assets when someone dies.  This is possible because life insurance death benefits are typically excluded from income tax when inherited by the beneficiary.  Another advantage to permanent life insurance is if someone is a business owner this type of insurance is valuable as a business continuation plan, it allows them to make sure their family will be compensated for their share of the business upon death.  Also often with multiple owners of a business this is done by setting up a buy-sell agreement and then having them funded with permanent life insurance so if one of the business owners were to die the life insurance proceeds are used to buy out the interest of the deceased business owner at a price agreed upon in the buy sell agreement.  Liquidity or the cash value in the life insurance is another great advantage to having a permanent life insurance policy, the cash within the savings plan can be used within someone’s lifetime for things like maybe helping to pay for college or maybe helping with their retirement and keep in mind that the money taken out of this type of investment is tax free.  One last great feature on some of the newer types of permanent life insurance is that they even offer long-term care coverage within them, so in the event of an illness or in later years it gives more choices and allows the choice of care in the event of these circumstance, while still offering financial protection of someone’s assets.

Pre-qualifications to having life insurance.
Life insurance is not a one size fits all and that is certainly the case with permanent life insurance, it can be very beneficial in someone’s financial plan who earns $250,000 a year or more and this is because of the high cost in premiums. 
If life insurance is something that you feel might fit within your overall financial plan, it is important to seek the help of a professional so that they can take a look at your overall financial needs, how much insurance is needed, if you were to die and also determine how much you can spend on life insurance.  Another thing to remember is that there are also health pre-qualification’s to getting life insurance depending on age and health. 

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