Benefits of Life Insurance

Two of the most important benefits of Life Insurance are protecting loved ones against the FINANCIAL CONSEQUENCES OF THE INSURED'S DEATH and the LIVING BENEFITS OF LIFE INSURANCE.

FINANCIAL CONSEQUENCES OF DEATH

The financial consequences of death can be devastating. Nothing can replace a spouse, a parent, child, brother, or sister. But, the practical and financial consequences of death are another matter. Without life insurance, surviving dependents can suffer extreme financial hardship as a result of an individual's death. There exists the possible loss of future income as well as a number of sudden expenses that occur as a result of death.

The Consequences Of Dying Too Soon

According to mortality statistics, a certain number of people will die each year before reaching their normal life expectancy. When a breadwinner dies prematurely, the loss to the family can be tragic in so many ways. The survivors are suffering deep personal grief and must face some very serious financial consequences because they can no longer rely on the breadwinner's income. The consequences include:

A. Final Expenses

We frequently hear about the high cost of living, but dying can be expensive too. Look at some of the common costs that must be met when a person dies:

1. Funeral Expenses

   Funeral costs can vary widely depending upon the type of service, area of the country and other factors. According to the National Funeral Directors Association, the average cost of a funeral in the year 2004 will be approximately $6500.¹ In addition to the cost of the funeral, there may also be burial expenses (if separate), florist's fees, and prepaid expenses for future care of the burial site. Whatever the costs, they will most certainly increase over time, due to inflation.

2. Estate Administration

   Executor's fees and fees for the executor's attorney will make up most of this cost. Other expenses may include court or probate costs, the cost of appraising estate property, the cost of insuring estate property while the estate is open, maintenance or repair of estate property; particularly if it is to be sold, the cost of defending a will if it should be contested, auctioneer's fees and so on. The larger and more complex a person's holdings, the larger the administration expenses will likely be. But even modest estates may incur significant administration expenses.

3. Debts

   This could be another major cost. It includes automobile loan balances, credit card balances, promissory notes, bank loans and final expenses of the last illness - medical expenses that might not be covered by Medicare or health insurance. Accrued taxes may also be considered debts. This would include unpaid income taxes (federal, state and local), property taxes, and any other taxes that were incurred but not paid.

4. Estate Taxes

   Death taxes -federal and state- are yet another cost. Such taxes are especially important in large, unplanned (or poorly planned) estates. The federal estate tax rates are progressive. The larger the estate, the higher the tax-as much as 55%. This tax generally must be paid in cash within nine months of death. State inheritance and estate taxes vary widely.

B. Loved Ones' Future Security

In most cases, there are also obligations that extend into the future-security for those left behind. There may be a spouse who needs living expenses, mortgage payments to be made or children to raise and educate. If the deceased was an income earner, surviving dependents will have to manage without that income. If the deceased stayed at home caring for children, the surviving partner will likely face a substantial increase in expenses to replace the deceased's contributions to the family lifestyle.

No matter how many or what kind of financial obligations an individual leaves at death, there's only one thing that will satisfy them-money. For this reason, a person who wants to relieve his or her family of these obligations will plan to leave them with money sufficient to cover all these needs.

C. Income Needs

1. Dependency Period

   Funds need to be available during a time when it may be hard for the surviving spouse to work due to children. With the high cost of child care, a surviving spouse may not be able to make enough money to afford child care expenses.

2. Survivor's Blackout Period

   The "widow's blackout period" is the period of time during which social security has stopped paying the surviving spouse because there are no longer any dependent children. The widow would no longer receive benefits from social security until age 60.

3. Survivor's Retirement

   Providing funds for the surviving spouse's retirement is an important consideration. Especially if the spouse does not already have his or her own retirement plan.

D. Mortgage Payments/Rent Fund

The emotional effects of losing a loved one takes a long time to get over. Coupled with the need to uproot the family, it could make a difficult time even worse. So, when planning on family financial needs, things to look at are either paying off a mortgage or having enough funds available to make mortgage/rent payments for a period of time.

E. College Education

Being able to send their children to college and give them the best education possible has always been a dream for parents. The death of one parent should not hamper this dream from taking place. Life insurance proceeds can help pay for children's college education.

RETIREMENT/SAVINGS - BUILDING AN ESTATE

The following are some ways to build that estate to leave to your loved ones:

A. Life Insurance

A method of estate building is life insurance. It has the advantage of creating an immediate estate at the time it is most needed-when the insured dies. Another advantage is that it can be tailored to meet the full amount of obligations at death.

Life insurance proceeds are generally payable in full to the beneficiary shortly after the insured's death. How much is paid depends upon the death benefit of the policy.

B. Savings

One could deposit money in a savings account at regular intervals. These savings might provide an estate that could meet all obligations. There are, however, a couple of problems with savings accounts. First, since money can be easily withdrawn, the savings balance may not increase.

A second problem is that one might not live long enough to accumulate sufficient savings to handle all obligations at death. So savings, while a good practice, may not be absolutely relied upon to create an adequate estate.

Third, except for certain types of accounts, such as IRA's, earnings from savings accounts are taxed as current income, necessitating more deposits to reach retirement objectives.

C. Other Investments

Investments can also provide significant returns. Lots of people have created additional savings through securities (such as stocks and bonds) and real estate. But lots of people have also lost money to investments that either failed or did not meet expectations. There are no guarantees when it comes to investments. There's always an element of risk. And just like savings, one might not live long enough for an investment program to create a large enough estate. In some instances, these investments may not be at maximum value when needed.

Life Insurance As The Solution

If people could predict the future, most would rush out and purchase as much life insurance as they could obtain. Life insurance can provide the money a family needs for continued security when it needs it the most. That's the most important job of life insurance. It provides a new source of cash and income so a surviving family can continue to live in comfort after the death of its primary income earner.

LIVING BENEFITS OF LIFE INSURANCE

We've talked about the death benefits of life insurance - the benefits the beneficiaries will receive when the insured dies. But life insurance can also provide benefits for the policyowner or insured while he or she is living. Living benefits are another way life insurance can help people.

Cash Values

Some types of life insurance policies that last for the entire life of the insured are called permanent insurance. These policies, in addition to their death benefit usually accumulate cash values. Prior to the insured's death, this cash value belongs to the policyowner and can benefit him or her in many ways.

The premiums paid for this kind of life insurance are higher than those paid for term life insurance. Term Insurance pays a death benefit only if the insured dies during the term of the policy and accumulates no cash values.

Withdrawals And Loans

Some permanent life policies permit withdrawals from the cash value-money to be used by the policyowner for any purpose. The amount withdrawn, however, is generally subtracted from the policy's face amount (the death benefit).

The policyowner can also take out loans from the insurance company using the policy's cash value as collateral. The loans must be paid back or the amount of any outstanding loan and interest will be deducted from the policy's face amount when the insured dies.

For Retirement Planning

When people get older, they may begin to look at their life insurance policies in a different light. What had provided protection against the financial consequences of premature death may now be used to help them enjoy their retirement years. The cash value can be used as additional income during retirement (e.g. to help pay for that trip of a lifetime they've been planning to take, to buy that new car or to help provide college education for grandchildren). It's wise to remember, however, that life insurance is not an investment. Its main purpose is to provide a death benefit. There are other and possibly better ways to save for retirement, but life insurance is unique in that it can offer payment of the full face value of the policy when the insured dies while accumulating a cash value during the insured's lifetime.

For Education Needs

Similar to retirement needs, cash values may be used for educational needs. Funds could come from a policy taken out on the life of an infant with cash values accumulating until he or she reaches college age. Or it could be part of planning for the future with a policy on the life of one parent or perhaps both parents. The policy protects against the insured's premature death and, in the event he/she lives on, can provide cash values to help pay college costs.

THE CONSEQUENCES OF LIVING TOO LONG/THE RETIREMENT YEARS

During 40 or more years of working, a large amount of money can pass through an income earner's hands. Most people's earnings levels do increase over time, through raises, promotions, fringe benefits or incentive plans. And with each increase, they gradually become accustomed to a higher and higher standard of living.

They may:

• purchase a larger home;
• dine out more often;
• buy new cars more frequently;
• provide their children or grandchildren with college educations; or take expensive vacations.

As people reach old age, their earnings begin to diminish. Many people save very little for the future; instead, they live for today and let tomorrow take care of itself.

Financial problems eventually become severe when people attempt to retain the life-style they enjoyed when they had more income. It's like trying to fit a size nine foot into a size five shoe. It hurts. They are forced to face reality; the money won't stretch far enough. They have to either take a part-time job or lower their standard of living considerably.

Life Insurance As The Solution

Life insurance products can offer a practical solution to the retirement need. Through the benefits of life insurance, a retired couple need not become dependent on outside sources for their financial care. Life insurance can provide cash or lifetime income.

Remember:

People don't plan to fail, they fail to plan.

People must plan for their future, not only their dreams but the unforeseen woes.

1 "NFDA Fact Sheets." National Funeral Directors Association, www.nfda.org.
Site viewed on 02/04/09.