Life Insurance
Life insurance can be an effective planning tool for a variety of purposes, but its primary purpose can be summarized as being protection against financial loss due to a person's death. Many times this means replacing the future earnings of a family's bread winner. While there are many opinions about how to decide the amount of life insurance protection an individual should have, our clients come to see that full protection is optimal. When possible it is best to plan for the replacement of all future earnings at risk for a family. "Human life value" is the term used to describe all of an individual's future earned income during working years. Because their income is crucial to creating the future they envision for their families, we use "human life value" as a starting point in helping our clients plan against the enormous risk of the death of a wage earner.
The most important consideration in life insurance planning is the amount of death benefit protection in place on a person's life. However, many people are confused by what type of life insurance may be right for their situation. The answer to this question largely depends on a client's stage in life and their specific goals and objectives. There are three basic types of life insurance policies, each having advantages and disadvantages depending on an individual's situation.
- Term life insurance - Designed to allow a large amount of death benefit protection for temporary protection needs. Term lengths for the protection can typically be chosen between 10 and 30 years. Premiums are typically level over a chosen term period, with premiums being higher the longer the term period an individual chooses. At the end of a term period these policies (and their protection) typically either expire or increase exponentially in cost if protection is able to be continued contractually.
- Whole life insurance - Designed to provide for permanent death benefit protection at a level premium cost. Builds cash value at a rate guaranteed by contract, with some carriers paying an additional non-guaranteed dividend that is declared annually. This cash value may be accessed on a tax-advantaged basis, allowing it to be used as a possible savings vehicle for education funding, retirement, and other possible goals. Because of these features, whole life can be an effective tool for planning objectives such as retirement income maximization and wealth transfer.
- Universal life insurance - Designed to provide potential permanent death benefit protection but lacks many of the guarantees present in whole life insurance. Depending on the type of universal life contract chosen, cash value grows according to a fixed interest rate that may adjust up or down (current assumption universal life), the performance of underlying market based sub accounts (variable universal life), a market based index with capped growth (indexed universal life), or may have little liquid cash value available at all if designed to simply provide death benefit (guaranteed universal life). Most universal life contracts limit access to cash value over the first 10 - 15 years by imposing surrender charges for withdrawals. The cost of insurance protection within universal life contracts rises each year and can negatively impact cash value accumulation and possibly even the policy's continued existence if the contact is not carefully evaluated and maintained on a regular basis.
If You Die from The Living Balance Sheet® on Vimeo.