Personal Financial Security – Life Insurance As A Risk Management Tool

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This is part 1 of a series discussing life insurance as personal financial security. You can find part 2 here.

 

The primary purpose of life insurance is the transfer of financial risk of death to a life insurance company in exchange for premium payments.  This is simple in concept.  However, life insurance products, contract forms and how they are designed for use are deceptively complicated.

In the simplest of terms, there are two type of life insurance policy forms: temporary coverage called term life insurance and permanent coverage.

  • Term life insurance is coverage that pays a death claim if you die during the term of coverage.  For example a 10 year term policy provides coverage for 10 years and terminates at the end of 10 years.  Term coverage does not accrue any cash value.
  • Permanent life insurance pays a death when you die.  It also accumulates cash value.

The first planning tenant for personal financial security is “it is more important to have the right amount of life insurance than the right kind of life insurance.”   For personal financial security, the amount of life insurance is determined by quantifying objectives for final expenses, paying off debts, educating children, replacing lost wages and family members with special needs.  Then liquid assets are deducted from the quantified objectives and the gap is filled with life insurance.  This gap is frequently filled with term life insurance on the theory that over a long period of time debts get paid off, children complete their education; wealth is created by savings, investments, retirement plans and business interests.

Over time, if enough wealth is accumulated then the family may have sufficient resources to self-insure their financial security and the need to life insurance may become superfluous.  However, if the accumulated wealth is insufficient, then it would be prudent to continue life insurance coverage (more on coverage continuation options later).

Please contact David Wexler, CLU, ChFC, AEP to find out more about planning for Personal Financial Security