Life insurance induces negative thoughts and emotions in a number of people’s minds. Such people may have had terrible experiences with greedy sales representatives or perhaps do not understand the concept. Life insurance is really a useful social and economic tool that ensures that the unfortunate few can be supported by the fortunate many. Sometimes even those with misgivings about life insurance spend too much on it. The reason is that they always look to receive returns from the plan while they are alive. That seems reasonable, but if life insurance is purchased without reference to other elements of the financial pyramid, the investment would not possess the value that it should have.
Life insurance needs are calculated using three main variables; final expenses, the first year shortfall and the income replacement fund. Final expenses include all the bills that must be paid immediately upon the death of a person. These include doctor’s bills, estate fees and creditors. The first year shortfall denotes the drop in household income that occurs within the first year of the insured’s death. The income replacement fund is an accumulated fund that substitutes the income earned by the insured. It embodies the principle of money working for you. Suppose you earn $8,000.00 per month. If you received $1,000,000.00 working at an interest rate of 8%, you’d receive your previous income as interest. That is the principle behind the income replacement fund. If you have coverage in place already, the coverage available is subtracted from the coverage needed. The calculation is represented in the following equation:
Life insurance need = (Final expenses + First year shortfall + Income Replacement Fund)- Coverage available
In dealing with life insurance, it is best to ensure that your coverage amount matches your coverage need. Then the ability to afford should determine the type or types of life insurance coverage that is most suitable to you. The duration of the needs would determine whether the life insurance plan should be permanent or for a term. Catering for education needs for children in the event of your death should be a temporary need, while wishing to create and maintain an estate would require permanent insurance. Universal Life and Whole Life plans are the major forms of permanent insurance while term insurance represents temporary insurance. Since term insurance is a lot cheaper, it can help ensure that you are fully covered within your budget. If you are underinsured and cannot afford more life insurance, then there is a good chance that you are spending too much on your current plan.
You may be fully covered and still spend too much on life insurance if you do not have sufficient medical and critical illness coverage. If you decided that you had $800.00 to spend on all insurance and invested $600.00 in a Universal Life plan and $200.00 on an annuity without medical or critical illness coverage, then you are not prepared for the risk of injury or illness whatsoever. If such may befall you, those plans may even be surrendered to fund the medical expenses.
Another major gaffe made in handling finances is putting aside for children’s education without the parents being properly insured. If something happens to the payer, then what would become of the education-savings plan? Most of the inadequate death benefit would be absorbed in final expenses and the first year income replacement. The dream of education may fade as a result of economic necessity. A related mistake is insuring the lives of children. Even if the parent or guardian is fully insured, life insurance is designed to protect one’s income. Having children medically insured is a great idea, but life insurance for the unemployed is a dim one, unless it’s used exclusively to cover final expenses. Indeed, life insurance for a person under the age of 18 costs more that it would for an 18 yr old. Also, in some cases where children are insured, parents do not possess adequate life insurance coverage.
When purchasing life insurance:
- Check that you have adequate medical cover
- Ensure that you have properly estimated the need
- Make it a priority to balance the investment in life insurance with other aspects of the financial pyramid
- Ensure that you have adequate coverage by utilizing term plans where relevant
Those who are approaching the age of retirement should evaluate their life insurance plan to see if it is still working for them and to determine its role in estate creation and maintenance.
Author: Darrell Victor
Article Source: EzineArticles.com
Provided by: Beading Necklace
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