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Everyone Needs A Little Protection: The 411 On Life Insurance

January 6, 2008

FOR THE LOVE OF MONEY: Life Insurance

By Shannon King Nash, Esq., CPA

*In continuing with my focus on insurance, up to bat this week is life insurance.   Choosing what type of coverage is right for you may leave you feeling like Flavor Flav on Flavor of Love – you’ve got some beautiful choices and some real dogs.   Life Insurance: The Basics

      Typically, life insurance will provide money to your beneficiary (spouse, child, close relative or friend) when you pass or even after you pass ( i.e., your child is still a minor and you want them to receive the money when they are adults).  “Life insurance allows you to leave a legacy for those behind you, enhancing the wealth for generations to come,” says Derek Butler, Certified Financial Strategist, of Agoura, California-based National Life Insurance Company.  

      Life insurance can also cover costs related to your funeral; such as, burial costs, the funeral ceremony, dinner for the wake, etc.  

      “Finally, the money from the life insurance is tax-free to your beneficiaries,” adds Butler. 

Life Insurance: Who Needs It?

      “Everybody, Everybody,” (Black Box 1990) needs life insurance; with Butler estimating that 98% of us can benefit from it.   He explains, “Some people think that they don’t need life insurance mainly because they’re young, single, and have no dependents.” The fact is, almost everyone has someone who depends on them financially; it could be a parent, sibling, aunt, uncle or even your place of worship.  ” Life insurance can answer the question, ‘What would happen if tomorrow came and you weren’t here?’ Make sure your kids will still be able to go to college; or if you’re the primary breadwinner, that your family won’t lose their home!”

Life Insurance: When Do You Need It?

      As with many things in life, the earlier you can get a life insurance policy, the better.   Why?  Because your premiums (i.e., the monthly, bi-monthly payments) will be lower. However, it’s never too late. You’ve

      Got Til Its Gone (Janet Jackson 1997, Jonie Mitchell Big Yellow Taxi 1970). If you don’t get it in your 20s and 30s, life insurance is still a must even in your 40s, 50s and even 60s; as the basic point is to have money to cover your death ( i.e., funeral costs) and leave a little “Sumthin Sumthin” (Maxwell,1996) for your beneficiaries.  

Life Insurance: What Type?

      There are three basic types of life insurance policies: Whole Life, Term Life, and Universal Life.   

§          Term Life

      Perhaps the most common insurance policy is term life.   Butler explains that, “A term life insurance policy is like renting an apartment.  You don’t own anything but as long as you pay, you have the right to receive all the benefits.”   With a term life insurance policy you pay a premium and it usually lasts for a number of years (i.e.,5, 10, 20 years, etc.)  If you die while the policy is still in effect and you’ve been making your payments, your beneficiaries will get the value of your policy.   If the policy expires while you are still alive, you can get a new policy, but your premiums will be higher because you are older.  You can also convert the policy into a whole life policy.  

      Profile for needing a Term Life Insurance policy – A person between the ages of 20-28 years old, with an income between $30-$50K 

§          Whole life 

      A whole life policy covers just what it sounds like — your “whole life”.   Butler explains, “With this type of policy, you’re in it for the long-haul.”  You pay a premium but now your payments are going to a savings account, known as the guaranteed cash surrender value in the policy.   “It’s like building equity in a home,” Butler explains.  This means that you get a portion of your premium payments back when the policy ends.   Also, because the money is in a sort of savings account, you can use it or borrow from it in cases of emergency.  But beware:   Whole life insurance premiums are significantly higher and have hefty fees when you miss a payment.

      Profile for needing a Whole Life Insurance policy – A person age 38+ with an income of 100k and above.

§          Universal Life

      With universal life insurance, you get a combination of whole life insurance and term life insurance. Like whole life, your premiums accumulate a guaranteed cash surrender value. However, like with term life the premiums are a bit lower.    

      Profile for needing a Universal Life Insurance policy – A person between 28-38 years old with an income between $50k-$100k

Life Insurance: How Much?

      Yes, you too can afford life insurance.  The average monthly payment can be between $100-$300. “That’s less than some people pay for their monthly cell phone bills,” Butler adds.  Of course, the younger you are the cheaper the insurance premium will be. You will be offered a lower cost, which will stick with you as they see you as being young and in reasonable health as opposed to waiting until you’re older and getting a higher premium.  

Life Insurance: How Do You Get It?

      You see the commercials 24/7 advertising insurance policies, but Butler suggests sitting down with a “reputable insurance provider,” to review your options.   For most policy’s you will need to fill out an application and undergo a physical exam, including: a blood test, urine test, and an EKG.  There are cases where a health exam isn’t required; for instance, the company you work for may have a group plan with an insurance company. 

Life Insurance: More Resources

      The bottom line:  It’s a sad reality that one day we will all pass away.   Butler surmises that, “With this in mind, the goal is to address this reality, prepare for it financially, and continue enjoying life; knowing that your loved ones will be able to celebrate the memory of your life appropriately without financial strain and hardship due to the loss.” For more information on life insurance, see the following websites: 

www.derekbutler.net www.ins.state.pa.us/ins/lib/ins/consumer/brochures/2003_Life.pdf 
www.statefarm.com 
www.personal.fidelity.com/products/insurance/content/expect.html

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