Financial Planning: Personal Life Insurance

The bedrock of any successful financial plan is the use of insurance in order to protect against the financial losses that are incurred in the event of the death of a breadwinner, damages to personal/business property, illness and other hardship. With these considerations in mind, this research will commence with a discussion of the most common forms of insurance, traditional and non-traditional life insurance, and will conclude with the presentation of a hypothetical case.

A Discussion of Traditional and Non-Traditional Life Insurance Policies.

Life insurance offers a myriad of possible types of policies, each of which exhibits features that are beneficial to different clients depending upon their financial goals, needs and possible budget for such coverage. First, one encounters two types of traditional life insurance- Term and Whole Life. In the most basic of examples, the fundamental difference between Term and Whole Life is akin to the rental versus ownership of life insurance. Traditional Term insurance will provide a defined amount of death benefit for a defined period of time (typically 5, 10, 15, 20 years) for a defined premium payment; however, that coverage "terminates" at the end of the contractual term and the death benefit does not increase with increased need for protection, nor does the Term policy provide dividends or cash value. This type of insurance coverage is best suited for individuals who require large amounts of death benefit, but have budget restrictions in regard to how much they can spend to obtain life insurance. Additionally, the defined term aspect of Term coverage is ideal for those who have to insure the repayment of large debts for a set period of time; for example, a mortgage holder could effectively use traditional Term life insurance to guarantee the repayment of the mortgage on a family home, business, investment property, and the like (360 Degrees of Financial Literacy).

On the other hand, traditional Whole Life insurance is quite literally what the name implies- life insurance to cover the insured for their entire life (actuarial tables in fact provide for coverage to age 120, which is far beyond the human life span). This Whole Life coverage features a premium amount that will never increase, a fixed amount of dividends credited at defined intervals, and the creation of cash value that could be redeemed by the owner of the policy at any time. This type of life insurance is well suited for the individual who wishes to not only have life insurance coverage for the rest of their lives, but also for those who are looking to earn a rate of return on the money they invested in their life insurance program. Additionally, the policy owner can convert the cash values into retirement income should their need for the life insurance protection diminishes. The cash value that resides in traditional Whole Life insurance can also be borrowed at low rates of interest to meet financial needs (360 Degrees of Financial Literacy).

Like traditional life insurance policies, nontraditional life insurance policies likewise have certain features and are likewise appropriate for particular clients and situations. Universal Life is permanent life insurance, with a defined death benefit and the provision of cash value. However, the fundamental difference between traditional Whole Life and Universal Life is the ability within Universal life to have the flexibility in making premium payments because of the rate of return that the case within the policies provide. Also, the death benefit can be increased at anytime as long as medical guidelines are met in the underwriting, but of course, the premium swill increase in order to pay for the additional benefits that the policy owner wishes to obtain. This type of coverage is ideal for the individual who desires the stability of permanent life insurance, but will likely possess the financial resources in the future to increase the size of their policy, and is not sensitive to the increased costs of the policy itself (360 Degrees of Financial Literacy).

Variable Life Insurance gives the policy owner the choice of how the cash in this permanent policy is invested, which of course varies due to one's financial objectives and risk tolerance. This provides the possibility of substantial return on investment, but also the very real possibility of part or the entire principal being lost (360 Degrees of Financial Literacy). This type of policy is best suited for those who can afford fluctuations in their death benefits due to normal market fluctuations, those with a high tolerance for investment risk, and those who wish to not only have life insurance, but wish to make a variable investment as well.

A very suitable option for married couples is to purchase Joint or Survivorship Life Insurance. These policies can be in the form of first-to-die, whereas the death benefit is paid upon the death of the spouse who dies first. Conversely, second-to-die only pays out a death benefit once both spouses have died. These policies are well suited to pay estate taxes and other expenses that occur when a second spouse dies.

Case Study: John and Marsha

Lastly, the hypothetical case of John and Marsha will be presented as such: various scenarios will be put forth, and for each, an appropriate course of action will be prescribed (360 Degrees of Financial Literacy):

Life insurance for John, Marsha and Children- Due to the fact that this family has no established budget, some investment risk and the like, and the financial needs of the children if either John or Marsha were to pass away, traditional Term Insurance would meet insurance needs at a reasonable cost.

John's disability income insurance- The precarious financial condition of John and Marsha makes disability income insurance a must; the creation of a solid family budget will allow for the funds that will be necessary for such a need.

John's professional liability coverage- This is provided by John's employer and should not be a concern.

Review auto policy for adequate liability/review use of B+ company for auto coverage- According to the information provided, the main basis for the purchase from this company was based on a personal relationship with the agent, rather than the quality of the company. Based on the rating of the company, it could be suitable coverage, but an A or A+ rated company could offer better coverage, perhaps at a competitive rate.

Attractive Nuisance/Tree house, Trampoline, Dog and Antiques- The fact that the dog is a Pit Bull poses the very real possibility that the dog could damage the property of others and cause bodily harm. Therefore, a rider in the homeowner's policy should address this, as should other riders be put in place to address the tree house, trampoline, and antiques.

Long-term care- Chronic illness could spell financial disaster for this family if either parent were afflicted; therefore, long-term care is important for at least a minimal amount of coverage to offset medical costs, loss of the ability to generate income, and the like.

No umbrella coverage- Umbrella coverage can realistically and effectively be waived in favor of other needed coverages.

Need of cancer insurance- Lastly, a word on cancer insurance. Statistically, the odds of John contracting cancer is low; therefore, the funds that would be allocated on such insurance, in this instance, can be better spent on any number of policies such as long-term care which would cover a wider variety of illnesses and conditions.

Works Cited:

360 Degrees of Financial Literacy. Retrieved October 28, 2008 from the World Wide Web:http://www.360financialliteracy.org/Life+Stages/Parenthood/Articles/Life+Insurance/Types+of+life+insurance+policies.htm