Personal Finance – Unraveling the Mystery of Life Insurance

By Norman A. Pappas
June 1, 2007

There are many needs for life insurance, both personally and for the business. There are also many types of life insurance available in the marketplace. This can make buying insurance confusing; nonetheless, it is important to work through the process. We all know of tragic stories of people who haven’t planned well. Conversely, there are many success stories for families that have been well cared for. The cost of preventing tragedies is small, yet this important subject is not well addressed. Fortunately, there are some basic fundamentals that will help you in making decisions.

Buying insurance is a crucial activity that makes a huge difference in the lives of people you care about.

On a personal basis, the need for insurance would include family income, debt payments (such as mortgages and bank loans), educational trust funds, special needs trusts, estate tax funding and charitable giving.

For business purposes, insurance has many applications, including funding buy-sell agreements, key person insurance, securing bank debts and funding retirement plans and employee stock ownership plans.

There are two broad categories of insurance: term and permanent. Term insurance has varying rate guarantee periods (10, 15, 20, 30 years). It is temporary in nature and builds no cash value, but offers the advantages of low initial cost. Permanent insurance plans include whole life and various types of universal life; including no lapse guarantee, fixed interest rate and variable. The universal plans can be designed to be “paid up” in a limited number of years, or paid over a lifetime. These policies are designed to last a lifetime, not just for term of years, and can even be designed to be guaranteed to age 120.

In addition to policies insuring a single life, there are policies that insure two lives, usually a husband and wife, with the death benefit payable at the second death. Called joint life second-to-die plans, these are ideal for paying estate taxes or guaranteeing an inheritance to children, charities or special bequests.

So where do you begin? Here are some key questions to ask yourself:

How much insurance should you have? Everyone is different. It will depend on outstanding debt, family income needs, estate tax liabilities, charitable goals and business needs.

What type of insurance is appropriate (term or permanent)? It depends on affordability and duration of need. If the need is short term (for example, securing a loan), term insurance is appropriate. If the need is long term (10 to 15 years or longer), permanent would be appropriate. Examples of long term needs include funding estate tax liabilities, charitable trusts, special needs trusts for dependent children, and buy-sell agreements.

What plan of insurance should be you have (variable, stock market based or guaranteed)? This will depend on many factors, including cash flow, budget constraints, risk tolerance, the purpose for the insurance, and your overall estate and business planning goals.

Which insurance company should be used? The insurance company should be highly rated, offer competitive products, and be dedicated to high standards of customer service.

Which insurance professional should you work with? This could be the most important decision. An experienced, knowledgeable, independent agent can guide you through all of the decisions. Work with an expert so you don’t have to become one.

Buying insurance is not as much fun as taking a vacation, however, it is a crucial activity that makes a huge difference in the lives of people you care about.