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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:
- 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 2000 will be
approximately $7,000. 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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
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