Do I Need Life Insurance?
In the thick of an economic slump, many consumers aren’t likely to have “buy life insurance” at the top of their to-do lists.
Yet life insurance is indispensable. Parents and business owners—indeed, anyone who has people dependent on them financially either at home or at work—can benefit from the unique advantages of life insurance.
In the United States, consumers and businesses owned more than $19 trillion of life insurance as of year-end 2007, reported the American Council of Life Insurers.
Yet a myth persists that life insurance is too costly, falsely contributing to the perception that life insurance is not a necessity. But life insurance has actually declined or flattened in price in the past several years, according to a recent report by the Insurance Information Institute.
A 2008 survey by the Life and Health Insurance Foundation for Education noted other obstacles for consumers: 23 percent of consumers just had not gotten around to buying it, and 22 percent confessed they did not know enough about it.
What is life insurance? Life insurance is a financial contract in which a life insurance company agrees to pay an amount of money to a person upon the death of another person, in exchange for regular payments (known as premiums).
Life insurance serves two key financial functions. First, it’s a tool for prepaying for immediate expenses needed soon after the time of a person’s death. Second, it’s a way to generate substantial investment capital to produce future income (to replace income that an insured person would have been providing if they had not died).
Because a deceased breadwinner no longer is providing an income stream from salary, commissions or wages, a family needs to have invested funds that can generate replacement income. Likewise, a business owner who passes away leaves behind co-owners and employees who need funds to replace the person’s expertise and revenue-generating capabilities, or to restructure the business.
Life insurance provides that large sum of capital, at a time (death) that cannot be predicted.
To determine if and how much life insurance is appropriate, a Kirkwood Insurance broker can help answer two important questions:
1) How much cash will be needed upon the death of a parent, business owner, or other individual? These immediate costs often include uninsured medical expenses and funeral expenses. Additionally, many consumers and business owners have financial obligations that do not go away upon death: a mortgage loan, auto loans, business loan or line of credit, credit card debt and college costs, to name the most common.
2) How much annual income would sustain a household? An estimate of income for a family starts with the amount of income earned in the year prior to a breadwinner’s passing. From there, additional expenses (child care, for example) should be added; while living expenses for the deceased person can be subtracted.
Kirkwood Insurance can help calculate the amount needed today that would provide an annual income for a certain number of years in the future. That’s the starting point in a decision of how much life insurance you need for your family or business.
Kirkwood Insurance can help sort out other potential sources of funds, such as Social Security benefits, pension income, group life insurance benefits, and investment income from other assets. These amounts typically reduce a person’s need for life insurance, but don’t eliminate the need.
Life insurance comes in two broad types: term (or temporary) and permanent (or lifetime). Term life insurance pay benefits if the death of the insured person happens during the “term” of the policy (anywhere from one year to as much as 20 years). Permanent life insurance pays benefits no matter when the insured person dies. (It is known as “whole life” since it is in force the whole lifetime of the insured person.) There are varieties of permanent life insurance, such as universal life, variable life and traditional whole life.
More than 1,000 licensed life insurance companies in the United States make for a competitive marketplace for consumers. That competition has driven down costs for term life insurance, reported the Insurance Information Institute, while keeping permanent life insurance costs stable.
Premiums are calculated for each person who applies for life insurance, based on cost tables. Age (the older, the higher the cost) and health status are two key factors life insurers use to set premiums. One lesser-known discount: per-unit cost for life insurance goes down with larger amounts purchased.
Life insurance is distinct from other financial products because of two key tax advantages: the money paid into a permanent life insurance policy can accumulate free of income taxation; and the benefits paid from a life insurance contract are free of income taxation.
