Long Term Commitment Need Insurance For Estate example essay topic

Why buy life insurance? Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways: Income replacement For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a life insurance policy can help supplement retirement income.

This can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death. Pay outstanding debts and long-term obligations Consider life insurance so that your loved ones have the money to offset burial costs, credit card debts and medical expenses not covered by health insurance. In addition, life insurance can be used to pay off the mortgage, supplement retirement savings and help pay college tuition. Estate planning The proceeds of a life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets. Term Life Insurance Term life insurance provides a death benefit only if death occurs during the 'term' or coverage period of the policy. If you outlive your term or quit paying premiums, your policy lapses and is of no value.

Term life insurance plays a vital role in proper financial planning. People who buy term may do so for several reasons such as: Temporary need - They have a temporary need, which lends itself to a temporary solution, i. e., raising children, education, paying off a mortgage, a business buy / sell agreement. Affordability - Term premiums are very affordable. If you " re in excellent health, you can get a lot of coverage for very little cost. The Gamble 95% of all term policies go unpaid. In other words, if you took a random sample of 100 people who purchased term insurance, 95 of them would outlive their terms.

The insurance companies know this. That is how they can afford to offer a 45 year-old male $250,000 worth of coverage for a 20-year term for only $375 per year. They " ve crunched the numbers and are willing to bet that you and a whole lot of other people are going to outlive your policies. Because term is inexpensive, there is much less commitment. When you want out, you simply stop paying the premium; no surrender or tax hits to worry about. Permanent Life Insurance There are numerous types of permanent life insurance, but the most common are: whole life insurance, universal life insurance and variable life insurance.

Permanent life insurance provides lifelong protection. As long as you pay the premiums, the death benefit will always be there. Furthermore, you never have to medically re-qualify for permanent insurance like you do when you renew term insurance. Most permanent policies have a feature known as 'cash value' or 'cash surrender value. ' There are a number of advantages to having this cash value build up.

For example: The cash value can be taken out either by withdrawing or borrowing. You may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or the borrowed amount will be deducted from the death benefit, which goes to your beneficiaries.

Because this method of withdrawal is considered a loan, it is an income tax-free transaction. The cash value accumulates on a tax-deferred basis. The cash value is a personal asset and is reflected on your balance sheet. You may cancel or 'surrender' the policy -- in total or in part -- and receive the cash value as a lump sum of money. If you surrender your policy in the early years, however, there may be little or no cash value. If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified period of time or to provide a lesser amount of protection to cover you for as long as you live.

Term Advantages: Cheap - 'Buy a lot for a little' - Term can cost up to 5 times less than permanent insurance depending on your age and term length. Low commitment - when you want out of term, you just simply stop paying the premium. Whereas with permanent you might incur surrender and tax penalties for withdrawing. Disclosure - What you see is what you get. There are no hard to understand charges or expenses, you don't have to worry about your interest rate or market returns.

With term, you simply pay the premiums and get the coverage. Lots of options - you could take the savings from term and invest into any investment vehicle of your choice. Term Disadvantages: Outliving it - Hopefully you " ll live a long prosperous life and never see a dime from your term policy. No equity - With term you " re just paying for coverage. Other than the coverage it provides, it really has no value. Costly to renew - You should plan on not needing any insurance at age 70 plus, because term prices increase dramatically with age and deteriorating health status.

Clients seeking life insurance protection longer than 30 years then they should choose the permanent route. There is no telling what your health condition will be like when it comes time to renew your term policy. Permanent Advantages Tax Advantages - The cash value in permanent insurance accumulates tax deferred. Unlike a mutual fund, there are no distribution, dividend or capital gains tax due each year. To earn a net return on investments that do not share the tax advantage enjoyed by life insurance, the gross rate of return on the alternative investment must be higher than that available under the life contract. Tax Free Withdrawal - As long as the policy remains in force, you can withdraw the money from a permanent policy without being taxed.

The only other vehicle that both accumulates tax-deferred and allows tax-free withdrawals is a Roth IRA. As of 2002, an individual can only contribute $3,000 per year into a Roth IRA, and their Aggregate Gross Income must be less than $110,000 if single and less than $160,000 if married filing jointly. Often permanent insurance is the perfect choice for high net-worth individuals who are seeking tax-sheltered investments and income levels are too high for other tax-advantaged vehicles. Unlike contributions to IRA's, permanent insurance has no restrictions for income or contribution amount as long as the MEC corridor is not exceeded.

Liquidity - There are also no restrictions or tax-penalties for withdrawing the money early. You don't have to wait until 59 1/2. You could take out money after the first year without any penalty, as long as you left enough cash to keep the contract in force. Convertibility - You can convert the cash in the policy into another permanent policy or into an annuity. Forced Savings - Many people lack the self-discipline to save. Once a policy is taken out, people usually pay the premiums rather than deprive their family of the protection the policy provides.

Paying the premiums means making regular contributions to the savings element of the contract. Permanent Disadvantages Commitment - 'Until death do you part. ' Like marriage, permanent insurance is designed to be a life long commitment. You can always cancel or surrender the policy, but most contracts have hefty surrender penalties if you decide get out before the surrender period expires, which is usually more than 10 years and less than 20.

In addition, at the time the policy is surrendered, the excess of the cash surrender value over the premiums paid is taxable as ordinary income. Charges & Fees - Since you are also buying life insurance, it is reasonable to assume a good chunk of the cash deposited in a permanent plan will go towards the cost of the insurance. Limited Investment Choices - Term life is pure insurance and is initially much less expensive than permanent insurance. You could take the savings provided by purchasing term and invest it in any vehicle you like. Permanent plans, on the other hand, require you invest in the investment vehicles provided in the contract. Tracking and Disclosure - While the unbundled features of universal and variable life have helped disclose the breakdown of where the money is going, it is still can still be very difficult, to track investment performance, especially with variable life.

Unlike stocks or mutual funds, tracking sub-account and overall investment performance is quite complicated because one must consider all of the charges, which are changing constantly. The following are some guidelines we use to help determine what type of insurance you should buy: You Should Buy Term If You: only need coverage for a specific period of time, - like a house mortgage or until your children are independent. need a lot of coverage and can't afford permanent have low cash flow - if you " re living paycheck to paycheck and don't think you can keep up with the permanent payments, triggering surrender charges. have other investments and are committed and self-disciplined to make regular deposits. don't want the commitment required from permanent insurance You Should Buy Permanent Insurance If You: have a high net worth and are seeking a tax-advantaged investment don't want to risk outliving your term and having nothing to show for it understand that permanent insurance is a long-term commitment need insurance for estate planning purposes want forced savings want guaranteed life insurance for life.