Mo Vidwans
We tend to look at any kind of insurance as an unnecessary expense. But it is actually an important tool to be used wisely, especially by young families. When I was young and felt invincible, I did not quite understand the significance of insurance and even worse the reasons as to why would I need it! I hear the same sentiment from many young clients and I can’t blame them for thinking that way.
The money from the insurance protection, as the word implies, is meant to be there when the unexpected and unthinkable happens and financially we are not ready for it. And happen it does in every life sooner or later. We don’t presume bad things would happen to us but they do occasionally and what the insurance coverage does is that it protects us from financial ruin. Getting into a serious car accident, sudden loss of a key life and a house burning down because of a lightning strike are all examples of such events and we need to be ready for them. Insurance is something we must have and hope that we never use.
There are many different kinds of insurances that we need to consider.
Life Insurance
I have the hardest time convincing young people about this. However, they simply have to imagine, unless they are independently wealthy from the beginning, as to how the family will be taken care of if they are disabled or are not around for whatever reason. Will the income flow continue? Will the family be able to live the same lifestyle? Will the children be able to bring their dream of college to fruition? Young families are the ones who need this insurance more than anyone else. When we get older and the children are on their own then it is not as important.
Term Life:
As the name suggests this insurance is only valid for the term of the contract, generally between 10 and 20 years at a time. It is the cheapest form of life insurance. For the duration of the contract the premium will stay the same. There is a health check involved and those who are not in good health or have unhealthy habits like smoking or being overweight will pay higher premium. It is ironic, as you may have concluded from my previous articles, how health comes in the picture so promptly in every financial thing we do. When the time comes for renewing the term life contract health gets reviewed again. We can get term life, at a reasonable price, for a long time if we maintain good health.
Whole Life:
There are many different morphs of this life insurance and new products are introduced just about every year. This form is more expensive in the beginning but one never has to renew the contract again ever regardless of your health. That is one of the important advantages of having such insurance. There are other advantages also such as a savings/dividend component and more.
The decision between the two forms of insurances comes down to how long you need the insurance for and how your health is. Premiums are not a big factor over the long run.
Insurance provided by the workplace:
The free insurance provided by the workplace is “term life” and no health check is needed. Because of that the premium is generally higher. My suggestion is that take what is offered free to you but nothing more. If you perceive a need for more insurance it is best to buy on your own and not through the workplace. This additional insurance will also stay with you for the rest of your life and not disappear when you change jobs.
Life Insurance in Estate Planning:
Life Insurance can be a valuable element, especially when combined with a Will or a Trust in managing and preserving the estate you have and passing it on to your heirs. Our estate can be subject to many expenses immediately after passing if not managed properly. Proceeds from a life policy can be income tax free and can be used for many expenses by the beneficiaries.
If the estate needs to go through probate or pay estate taxes then life insurance policy premium can be used to reduce the estate size (thus avoiding estate taxes). Not only it provides quick and prompt cash but also it allows money to be passed to the designated beneficiary essentially bypassing the probate. If done properly, the benefits are distributed tax-free and remain untouched by potential debts.
Life insurance policy can be used by business owners to keep the business in the family. In many situations, families can use insurance benefits to cash out the other partners or heirs as desired or previously planned thus preserving continuity in the business, family peace and harmony. It would help if the discussion as to how the transition would happen has taken place prior to the event.
Disability
Statistics show that about 25 percent of the 45 and under population would be disabled for a variety of reasons for 6 months or less. That is alarming. Good thing is that, for most of us who work, we have at least some disability insurance available through the workplace free of cost. It is recommended that we should look at complementing the disability insurance from workplace and pay for it ourselves. When we retire, this insurance can be discontinued. The initial period of no coverage, how much coverage and how long and the definition of the disability would be some of the variables to be considered and the premium would change accordingly.
In the next month’s article (part II) I will continue discussion on other forms of essential insurances such as Health, Auto, Home and others.
