Life Insurance plays a very important role in Risk Management. In the event of p

Question

Life Insurance plays a very important role in Risk Management. In the event of premature death, that which occurs prior to a child being able to care for themselves, and in the absence of sufficient assets to cover costs, I believe a parent has an obligation, a responsibility to carry life Insurance. As a Certified Financial Planner, I continually meet with clients and prospects (parents) who either have no life insurance or not enough coverage. Unfortunately, the life insurance discussion is not an easy one, and many people have negative, preconceived notions of both the life insurance broker and the life insurance company. Use this forum to debate this issue. Take into consideration the costs, and merits of both term and cash value policies.

Explanation / Answer

Term Insurance This is the simplest form of life insurance.

Two important things to know about term insurance are:

1.it provides only death protection—it only pays benefits when you die, and

2.it is temporary—the death benefit protection ends when the term of the policy ends; if you live past the policy’s term and continue to need death protection, you will need to get a new policy. Some advantages of term insurance include: •relatively low premiums (depending on health) •death benefit coverage for a defined period of time •could possibly be converted into a cash value policy in the future (subject to contract terms) Cash Value Insurance A more flexible form of life insurance, cash value life insurance (commonly called “permanent” insurance) can offer death benefit protection for your beneficiaries no matter how long you live. What’s more, it can potentially provide an additional benefit during your lifetime with its ability to grow cash values income tax-free inside of your policy . Although generally more expensive than term policies, cash value policies usually provide greater benefits. Some advantages of cash value insurance include: •death benefit coverage for life (subject to contract terms and policy funding) •cash values may be accessed if financial emergencies arise1 •cash values have the potential to provide supplemental retirement income1 •cash values have the potential to grow and may be accessed income tax free (as long as the policy stays in force)1

Advantages and disadvantages of cash value insurance:

Advantages Policies generally guarantee* level premium payments for life.

Policies allow you to accumulate cash value over time. Cash value insurance can provide life-long protection. Because it doesn't need to be renewed, you no longer have to worry that declining health will affect your insurability (unless you decide to buy more insurance). You may borrow against your cash value funds at any time, for any reason, although doing so may reduce the death benefit available to your survivors if the loan is not repaid before your death. You can make withdrawals from the cash value account of some policies, although this will reduce your level of life insurance benefit. *Guarantees are subject to the claims-paying ability of the policy issuer.

Disadvantages

During the early years of a cash value policy, the premium will usually be significantly higher than for term insurance.

If you need coverage only for a short period of time, your net costs will be significantly higher than if you purchase term insurance. The internal costs and expenses associated with a cash value policy can be difficult to understand.

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