Life is full of uncertainties, and no one has control over life and death. This is why a life insurance policy is essential for personal and family financial planning. It is one of the best ways to meet both immediate and long-term financial needs.
Traditionally, life insurance is designed to pay a lump sum of money known as death benefit after the death of an insured person. The death benefit helps cushion the financial hardship on the family members in various ways.
Beyond this traditional setting, however, there are several other ways life insurance can provide financial security both during the lifetime and after the death of an insured person.
Some of them are as follows:
A Foundation for Retirement Planning
According to the Urban Institute, the number of Americans ages 65 and older will more than double, and the number of adults ages 85 and older would nearly quadruple over the next 20 years. This indicates the importance of adequate retirement planning.
In the words of James J. Meehan of 1847 Financial, “Life insurance needs to be the foundation of any solid retirement plan if your family is depending upon your retirement income.” Being insured with suitable life insurance coverage will help in many ways in retirement. It can give your peace of mind, provide tax-free cash flow, and protect your income.
Life insurance bought for retirement purpose usually has two phases: the accumulation phase and the annuity phase.
During the accumulation phase (typically during active service age), the policyholder pays a premium on their policy. A certain part of the premium will be invested in securities by the insurance company. This means an increase in revenue as the investment grows.
The annuity phase is when the policyholder starts getting regular returns on their investment, usually during their retirement. This will be paid in the form of regular pension to meet their financial needs in retirement.
Can be Tailored for Business Purpose
For entrepreneurs, a life insurance policy can also be tailored to meet business needs during and after the death of the owner.
For example, if you own a policy that allows a cash value growth, the cash value can come to the rescue in case of an emergency business need. This can save you from looking around for an urgent loan somewhere else. The good news about this is that the withdrawals made from a life insurance policy’s cash value are typically tax-exempted.
Another great way of protecting a business legacy with life insurance is through a product called key man or key person life insurance policy. The policy is designed to ease the financial burden on the business in the event that the “key person” (usually the owner or the most important person in running the business) passes on. The policy pays a certain sum of money as the death benefit, which can be used as working capital for the business, settling loans, or other business needs. With that, the business would be less affected by the death of the key person.
Integral Part of Estate Planning
It is no longer a secret that estate planning is one of the best means of protecting and transferring wealth to generations. What many people don't know, however, is that life insurance can be made an integral part of their estate planning strategy.
In the United States, for instance, the average estate tax rate is 18% while the top rate is up to 40% for assets worth more than $1 million. This is where an element of life insurance known as irrevocable life insurance trust (ILIT) can be of help. ILIT is a special trust which acts as both the owner and beneficiary of an insurance policy. It helps protects assets from being subject to estate taxes.
The Best Life Insurance Policy for Financial Security
There are two major types of life insurance – term and permanent. Both term and permanent life insurance provide financial security in their own way as they have various subcategories under them, thereby giving people multiple options to choose from.
The appropriateness of a life insurance type or product will depend on each person's needs, budget, and preferences:
Term Life Insurance
Term life insurance is the most conventional and simplest type of life insurance. It is set up for a specified period of time, typically in lengths of 5, 10, 15, 20, 25 and 30 years.
The primary purpose is to pay a death benefit only if the insured passes on during the term of the policy. Depending on the T&C of the policy, a term life insurance policy could be renewed after expiration if the insured is still alive.
Term life insurance has two basic products known as level term and decreasing term. The level term has a fixed death benefit which stays the same throughout the term of the policy while death benefit for decreasing term drops over the course of the policy’s term.
Permanent Life Insurance
As its name suggests, permanent or whole life insurance covers an insured person throughout their lifetime even if they live up to 100.
Unlike term, a whole life insurance policy doesn’t expire as long as the insured keeps paying the premiums. It is also more flexible in that it could be customized to meet the financial needs of an insured person during their lifetime. For instance, the premium and death benefit could be designed to stay the same all through the course of the policy.
In some cases, however, the premium could be set to increase with a certain percentage every year. Permanent life insurance has various products, which include universal life, indexed universal life, and universal variable life. Though closely related, each variation of permanent life insurance has its own unique way of providing coverage.
In some of these products, premiums paid could be set to serve two purposes – a part of it keeps the policy in force while the other part goes into a choice investment subaccount to potentially grow cash value.
The cash value can be said to be the living benefits of a permanent life insurance policy as policyholders are allowed to make use of it while they are still alive. This is another feature that distinguishes permanent life insurance from term life insurance.
How to Make the Most of a Life Insurance Policy
Just like every financial decision, buying a life insurance policy requires due diligence. While all life insurance products are great in their own way, people’s buying decisions will determine just how much they would enjoy their policy.
The first thing is knowing your life insurance needs. Your personal and/or family immediate and long-term needs should be considered. In other words, in what areas would you want the life insurance coverage to come in and at what time? Is it for immediate or long-term purpose? These and many more should be considered and then discussed with a trusted financial advisor.
The importance of being guided by an expert cannot be overemphasized. A prospective insurance policyholder can leverage the experience of a financial advisor to get the best deal in the market. This is because they have the expertise to assess each person’s financial needs and suggest the most suitable life insurance product for them. They also know the insurance companies with the best offers on various products.
It is also very important to compare quotes from different insurers based on the values they offer and not solely on prices. Some policies may come at a lower price but may not give you the needed value. This could lead to being underinsured.
In conclusion, life insurance has proven to be a reliable personal and debt management tool. Life insurance started in the 18th century as a traditional way of providing support to family members of a deceased person. It has, however, metamorphized to fit into various financial demands of different eras. It doesn't matter what your needs are; there are several life insurance products that can help you meet them.