Every Good Financial Plan Needs Life Insurance

Life insurance is an important element of a financial plan. According to the California Society of CPAs (www.calcpa.org), if there are individuals who depend on you for financial support, your financial plan should provide a source of income for your spouse and dependents in the event of your untimely death. Life insurance fills this need and also can serve estate planning purposes, such as paying estate taxes.

The best life insurance coverage for your family depends on how much coverage you need, how much you can afford to pay in premiums, the period of time for which you need coverage, and whether you want pure protection or are looking for an investment as well. There are two types of life insurance: term insurance and permanent policies.

Term insurance is the most basic and often the least expensive type of coverage. It is meant simply to provide a benefit in the event of death. You can buy term insurance for one year at a time, or for a specific period such as five or ten years. If you die during the term, the proceeds of your policy are paid to your beneficiary. Premiums for term insurance are based on age and, with a renewable term policy, increase annually because you are a year older.

There are level-premium term policies available that provide a fixed payment amount for a specific term, say, 5 years, 10 years, or to age 65. Although the initial premiums are higher with level premium policies, they do not rise on an annual basis as is the case with renewable policies. Some term policies can be converted without a medical examination to a cash value policy.

In contrast to term policies, permanent life insurance, or cash value insurance as it is sometimes called, provides a savings or investment component in addition to the death benefit. Permanent insurance, as its name implies, is designed--and priced--to be held over the long term. The premiums you pay are used to make investments, so the policy gradually builds up a cash value. The three most common types of cash value insurance are whole, universal, and variable life.

With whole life coverage, the more traditional type of cash value policy, premiums remain the same over the life of the policy. You can borrow against the policy at a rate that is typically lower than market rate. However, it's important to know that any loan amount that is outstanding at the date of death of the policyholder will be deducted from the benefit paid. You also have the option of withdrawing some of the cash value of your policy and remaining insured, or you can surrender the policy and receive its full cash value.

Universal life also offers a combination of death benefit and cash value but with more flexibility. You can adjust, subject to specified minimums and maximums, the amount of the premium you pay into a universal policy, and you also may increase or decrease the amount of the death benefit while the policy is in effect. In essence, that means you can choose a larger cash buildup and a smaller death benefit or a larger death benefit and a smaller cash buildup.

Variable life insurance is designed for investment growth. As with whole life, the premium is fixed but you choose how to invest your policy's cash value. The value of the death benefit and the cash buildup fluctuates depending on the performance of the investments you select.

In determining the cost of your premiums, the insurer takes into account factors such as your age, gender, medical history, and dollar amount of life insurance you select. Group policies offered through an employer or group are generally less expensive than comparable policies you would buy on your own. If you do need to shop for your own coverage, CPAs say you should get several quotes since premiums can vary from company to company.

In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.