Brian Gruss Licensed Insurance Planner

Appreciating the Value of Life Insurance

Whenever someone passes away there is usually an associated financial loss. Such loss could be the primary income for a family or the replacement value of someone responsible for the care of a child or disabled parent. It could also be a business executive in charge of sales or an employee who managed the operation when senior management was absent.

This potential financial loss is often referred to as a person’s human life value. The value itself is calculated based on the future loss of an income stream, the future cost of replacement, or the immediate impact to a company while it attempts to replace the key employee.

For most families, the potential loss of income is the primary reason to buy life insurance. Losing the paycheck of a working spouse will leave most families in a tenuous situation. Their normal lifestyle becomes vulnerable on a reduced income.

In years past, the primary breadwinner was usually the father. The mother tended to the house, while the father headed to the office. Mom was there to welcome the kids home from school and Dad brought home the paycheck. Times have changed and today women participate equally in the workforce. Despite what continues to be an income discrepancy between the sexes, the money Mom earns is essential to the financial well being of the family.

Additionally, it is no secret that consumer debt in the U.S. is on the rise. Government data shows that Americans literally have a negative savings rate (i.e. we spend more than we earn). As such, any reduction in take home pay can potentially devastate literally hundreds of thousands of families. While this scenario is harsh enough while both parties are alive and well, the reality of what happens at the death of either breadwinner is frightening.

Because of these reasons, life insurance continues to play an important role in any financial plan. In fact, it should be the primary asset for families that stand to experience severe lifestyle disruptions should a spouse pass away. Unfortunately, the value of life insurance is frequently misunderstood by those who need it the most.

There are many variations of life insurance products to consider, but that’s a topic for another day. The important message here relates to the extraordinary value of life insurance itself, not any particular policy type.

Indeed, there are very few, if any, recipients of a death claim who have asked their insurance agent about the type of coverage. The fact is the tax-free death benefit provided a welcomed amount of cash at precisely the time when money was needed the most.

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Finding the Middle Ground with Return of Premium Term Insurance

Anyone who has ever shopped for life insurance has faced the difficult task of choosing between a term and permanent policy. The choice isn’t as clear-cut as it may seem: while term insurance may be less costly in the short run, permanent insurance features an attractive cash benefit. Not surprisingly, having to choose between these two types of coverages intimidates many prospective policyholders. In fact, some consumers are so baffled by this decision that they don’t purchase any coverage.

Fortunately, there is a new type of coverage for those consumers who just can’t decide what policy to buy. Return of premium term insurance (ROP) is a hybrid product that provides term coverage with a twist: policyholders get all of their paid premiums back if they are still alive at the end of the term.

To understand how ROP combines the best traits of term and permanent insurance, lets compare them side-by-side. If you purchase term insurance, you pay a set premium for a fixed term, usually between ten and thirty years. Term rates are low, especially if you are young and healthy. However, your money only buys you a death benefit: if you are still alive at the end of the term, you receive nothing.

Permanent insurance, on the other hand, provides the same death benefit protection, but also allows you to build cash value within your policy. This balance is handy if you need money for emergencies, college tuition, etc. The downside is that you can expect to pay for this benefit through significantly higher premiums.

ROP gives the consumer the best of both worlds by providing the protection of insurance along with the savings component. With such a policy, if you die, your beneficiary receives a lump sum death benefit. But if you live through the term, the insurance company returns all of your premiums. While ROP is an appealing choice for all kinds of individuals, it is especially useful for purchasers who need to fill a temporary need, such as:

-Insurance coverage for a key employee

-Individuals who are planning to refinance their homes

-Divorcees who are required to purchase insurance as part of their divorce decree

While ROP has many advantages, consumers should keep in mind that the cost of this coverage is somewhat higher than a typical term policy. And if you need to extend your policy past the initial term period, expect to pay significantly higher rates. The best strategy is to examine all options, carefully weigh the costs and benefits of each, and pick the one that can do the most for you.

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Empty Nesters Shouldn’t Say Good Bye to Their Life Insurance

The kids are all grown, and finally it’s just the two of you. Your life is changing, and you are making decisions about what pieces of your former lifestyle should remain the same and what should be altered. There are some items you will decide to let go, but make sure your existing life insurance coverage isn’t one of them.

Why do you need insurance at this time in your life you ask?  Here are ten reasons:

·   To accomplish financial goals – If your children are financially dependent on you because they are still in college, life insurance can help fund their education even if you aren’t around. Keep in mind that Social Security benefit payments for a surviving spouse and children cease when students finish high school.

·   To care for dependents – Life insurance will continue to provide for your parents and disabled adult children if you die before they do.

·   To buffer you from the Social Security “blackout period” – Social Security pays no benefits from the time the youngest child leaves high school until the surviving spouse applies for retirement benefits. This period is called the “blackout period,” and it can cause extreme financial hardship to the surviving spouse if there is no income stream. Life insurance provides much needed income.

·   To supplement reduced Social Security survivor’s benefits – If a spouse begins receiving Social Security survivor benefits earlier than the full-benefit age, their monthly benefit will be permanently reduced. In addition, because their spouse died early, salary increases that might have increased Social Security benefits were not applied to their record. A life insurance policy can help make up for these losses.

·   To supplement lost retirement savings – If a spouse died before retirement, they didn’t earn salary increases that might have increased employer pension benefits and/or IRA contributions. A life insurance policy can help make up for these losses too.

·   To meet commitments that were made at a time when there were two incomes – Financial commitments like mortgages or loans are based on the combined income of a two-paycheck couple. If each spouse has life insurance the survivor can continue to meet those commitments.

·   To pay for unexpected expenses – Funeral and burial costs, final medical expenses, estate administration and estate taxes aren’t always anticipated. Life insurance prepares you for these costs no matter when they happen.

·   To create a financial emergency fund – If a family doesn’t have an emergency fund equivalent to at least six months of income, they could be extremely vulnerable if one of the wage earners dies. This lack of funds could also impact the family’s ability to obtain credit. Life insurance can be the family’s emergency fund.

·   To supplement lost income if a spouse dies after beginning Social Security benefits – Each spouse receives a check for his or her Social Security retirement benefits. The earner with the larger pre-retirement income gets a benefit based on that income. The spouse with the smaller, or no pre-retirement income gets a benefit based on their own earnings, or half of their spouse’s Social Security benefit, whichever is greater. When one spouse dies, the larger retirement benefit continues, but the smaller one stops. Life insurance can make up for this income loss.

·   To provide for charitable causes – If you want to ensure your favorite charities get money after your death, you can designate some or all of your life insurance benefits to this purpose.

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