Insure? Be Sure!
Insure? Be Sure!
- John Henry Smith
- Beloved Husband and Father
Thats what it would have said if it had been there, but John could not afford a gravestone. Because, even though John worked hard and provided enough to meet his familys needs, he never got around to saving anything for a rainy day. All his family could afford when he died was a small marker with his name on it.
His wife, Mary, had to reenter the job market after 10 years of caring for the couples 10-year-old son and 7-year-old daughter. The children used to play with their neighborhood friends after school. Now, they spend most of their time doing chores on Granny Abels farm. Mary and the children moved in with her when the bank foreclosed on their house.
Its really a shame because John had a great job and plenty of chances to buy insurance to help the family if he died, but he never did. In his opinion, insurance agents and the companies they represented were crooks that just wanted his money. Besides, he planned on living to be at least 100 years old.
Thats too bad, because insurance is not a dirty word, though many people think it is. It has more than 4 letters and if used as part of a well thought out plan, it can be your familys best protection in the event you die unexpectedly. And while our little scenario may seem exaggerated, it, sadly, is often not far from the reality.
Just as with health, auto and homeowners insurance, life insurance is meant to protect against the unforeseen. However, with life insurance we are not valuing nuts and bolts and fair market value. We are valuing human life - your life - and thus must face a perplexing subject: death. Who wants to think about their own death? Well, if you havent, its time you do. (Nice way to put it.)
If you are married, look at you spouse and children, or their pictures as we discuss this subject. They are probably the most compelling reason to have life insurance. If you die, who will feed and clothe your children? How will the income you earn be replaced? Your spouse is going to have a lot of extra expenses for childcare and other general household needs. What about funeral expenses, or the house note and car note? Many creditors will work with your spouse, but eventually they will have to be paid.
Perhaps the children are grown and gone and it is just you and your spouse at home now. Life has treated you well and your estate is worth millions. Did you know that the IRS has this quaint little tax known as the death tax? It can be a whopping big bill that could take a large chunk of your estate. In addition to the federal taxes, many states have similar taxes. If you really want your hard-earned assets to go to the children, you will need some way to pay the taxes.
All of the above are very good reasons to make sure you have the right insurance coverage. Make no mistake about it, though, not everyone needs a great deal of coverage. If you are young, single and looking to stay that way, you may not need a great deal of insurance. And if youre concerned about retirement, tax deferred annuities have become a very attractive way to invest in the future while providing insurance coverage today.
So, what do you do to 1) decide if you need insurance, 2) determine how much and what kind of insurance you need and 3) figure out where to get it? The answer to the last question depends on your own circumstances. What do you have, what do you owe, who do you want to have your assets after you die? It would be wise to sit down and ponder these questions before going any further.
Once you have made some of these decisions regarding you and your familys future, we suggest you call someone you know in the insurance business. If you dont know any life insurance agents, here is a hint most of them are called financial planners these days. Call them up and see if they can help you decide what you need.
You can go to any number of places on the World Wide Web to get insurance planning tools such as www.insurance.com, or www.fool.com. Both of these sites have good general information on insurance. A little web research can be helpful in finding out what information your agent will need so that when you go to the agent you will be prepared. This will save both you and the agent valuable time.
Regardless of what you will do to find out what your needs are, eventually you will need to buy the insurance. You can do this through the internet or with an agent. Buying insurance over the Internet has the advantage of being a little less expensive. But the disadvantage is it is difficult to know if you are really getting the insurance thats best for you. If you visit with an agent and follow her or his advice, you may still not wind up with the best policy, but that way, you will have someone to blame if you find out you goofed. All kidding aside, you have the best chance of getting the right insurance if you meet one on one with an agent or financial planner first.
No matter what you do, you will soon find that there are a million insurance products out there and it can be very confusing. The remainder of this article briefly touches on the different types of insurance.
Term life is called that because it is issued for a period of time and either dropped or renewed thereafter. You can get a one-year policy relatively inexpensively or longer term policies that cost more. The longer the policy term, the more it will cost because the insurance company charges people based on how long it thinks you will live. Since premiums increase as you get older, companies factor in the expected premiums over a longer time than they would in a one-year policy.
As a very simple illustration, assume you will be buying term life for the next 20 years. Assume it costs $1,000 this year and increases $100 over each of the next 19 years. Your bill is expected to increase $100 and by the end of the 20 years, the annual premium will be $2,900. Total premiums will be $39,000. If you purchased the policy for 20 years, that $39,000 might be the same, but your annual cost would be $1,950. This is a very simplistic explanation and not what would really happen, but it does illustrate the principle of spreading price increases over a period of time.
Term insurance is very good if all you are looking to do is cover a specific risk for a specific period of time. For instance, if you had a child aged 10 years old, you would want to make sure he or she got the needed education, food and other life necessities. After 11 years, though, your need goes away as that child graduates from college and gets a high tech job earning twice as much as you do. So, you may want a 10 or 20 year level premium term policy.
Within the general category, there is yearly term, convertible term, decreasing term, non-guaranteed term and any other term you might like to add. We wont go into all the differences this month. Suffice it to say that each has its good and bad points, would be wisest to discuss all options with your agent/advisor before making a decision.
Permanent insurance is called that because it stays with you for life, unless you stop paying the premiums. It is also a much more expensive insurance policy than a term life policy, but it does have several advantages.
If you are looking to 1) provide insurance coverage in the event you die too soon, 2) want to lock-in your costs now when you are young and 3) want to have something to show for your premiums other than the cancelled checks, permanent insurance may be for you.
When you pay your premium to the insurance company on a permanent policy, not all of the premiums paid are needed to cover the cost of insurance. A portion of the payment is used to pay the insurance cost. The remainder goes into an accumulation account for you as the policyholder and begins to accumulate cash surrender value. Cash surrender value is what you would receive if you cancelled your insurance contract. It is also the starting point for determining how much you can borrow against your policy.
The rate at which the cash surrender value grows depends on the type of insurance you have and what return the guaranteed cash value is based upon. If you have a policy with a guaranteed cash value, regardless of company performance, your cash value will increase from year-to-year based, at a minimum, on the guaranteed cash value. You can expect this result in a whole life policy. The downside to this is that you have no say in the investment of your assets and the high premiums can become a big burden if you go to work one day and are escorted out of the building by security.
Universal Life is another type of permanent insurance that allows you the flexibility to fund your insurance at the levels you want, within IRS guidelines. After the initial premiums are paid and the insurance company has taken all of its administrative fees and premiums representing the cost of the insurance, any amounts above that are invested for you. If you want more going into this investment vehicle, you can do so, but beware of putting too much in the account. There are potential pitfalls here due to IRS regulations.
Since both whole and universal life policies allow the insurance company to invest your assets, be sure to pick a good company with a good track record.
Variable annuities are another type of insurance, but amounts over the premium and administrative fee costs are invested in mutual funds you choose. Generally, you are limited to mutual funds offered by your insurance company, so be sure to pick a company that has a good selection of funds. Normally, such policies allow you to change your investment mix within the same fund family at no cost. Since the value of the annuity is based on the underlying investments, it is always possible to have a decrease in value at any one given time.
This article touches only on the major types of insurance policies. Within them all, there are many different variations. You must carefully evaluate your current and future goals before jumping into the sea of insurance policies to choose one for yourself, but dont let that stop you. If you have a need to insure, and especially if you have a spouse and children, it is a very good idea to have some level of insurance.
Dont let the many choices confuse you. We have a great deal of experience in helping our clients determine their real goals and needs. Once we have done that, we can help you decide what is best for you in terms of insurance.
Come by and see us. We promise, you will be glad you did.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.