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Life Insurance in 2016

Life Insurance in 2016

As we get older, settle down, start a family and develop a career we begin to understand how important life insurance is to a sound financial plan and a secure future. Life insurance is relatively inexpensive so there really is no reason why you shouldn't get yourself covered immediately.

5 Reasons why Life Insurance is so Important

  1. If your family and loved ones rely on you for financial support then life insurance is crucial. Your life insurance plan replaces your income and will support your family if something were to happen to you.
  2. You can create an inheritance by investing in a life insurance policy and name your dependents as beneficiaries. This will provide your family's future and allows them to have the backup they would have received if you were still providing for them.
  3. Every day living can be expensive and your life insurance policy can cover any outstanding debts you may have incurred instead of passing that debt onto your family members, including burial and funeral expenses. Without life insurance this can otherwise create a lot of pressure and a huge burden causing even more emotional stress.
  4. Every parent wants assurance that their children will be looked after should anything happen. Additional coverage in your life insurance policy while your kids are still at home can help provide for them in terms of further education, or experiences like getting married or starting a business.
  5. There is no amount of money that can ever replace you in your family's life but investing in life insurance now rather than later really can offer the peace of mind everyone longs for when building a family.

Term Insurance Provides the Largest Death Benefit for Your Premium Dollars

Term life insurance provides pure income protection at a low cost. As its name implies, you can buy it one year at a time or for a specific term, typically 5, 10, or 15 years. If you die within the term selected, a benefit is paid to your beneficiary. If you outlive the term, no death benefit is paid.

The cost of term insurance gradually rises as you age.

There are two basic types of term policies from which to choose. One type is an "annual renewable policy," in which the premiums increase each year. The other is a "level premium policy," which allows you to lock in a premium for a fixed number of years.

Permanent Insurance Combines a Death Benefit with an Investment

Permanent insurance policies such as whole life, universal life, or variable life, combine a death benefit with a savings feature. Premiums can be several times higher than you would pay initially for the same amount of term insurance because, in addition to a death benefit, part of your premiums are invested and build up a cash value. Any earnings are tax-deferred until you cash in the policy or it is distributed to your beneficiaries. If your beneficiary receives the earnings, they are exempt from federal income tax.

Permanent Insurance Combines a Death Benefit with an Investment

Permanent insurance policies such as whole life, universal life, or variable life, combine a death benefit with a savings feature. Premiums can be several times higher than you would pay initially for the same amount of term insurance because, in addition to a death benefit, part of your premiums are invested and build up a cash value. Any earnings are tax-deferred until you cash in the policy or it is distributed to your beneficiaries. If your beneficiary receives the earnings, they are exempt from federal income tax.

Universal Life Insurance

Universal life insurance offers more flexibility than a standard whole life policy. With a universal life policy, you can vary the amount of the premiums you pay and choose the amount of death benefit you want. That means, with the same premium dollars, you can choose a lower death benefit and a larger cash buildup, or a smaller cash buildup and a higher death benefit. For this flexibility, expect to pay higher fees and administrative costs.

Variable Life Insurance

With variable life insurance, the policy holder controls the investment of the cash value portion of the policy, choosing from investment options with varying degrees of risks and rewards offered by the insurance company. Earnings generated by the policy are not taxed while the policy is in force.

Since the value of the death benefit and the cash buildup fluctuates depending on the performance of investments you choose, these policies come with a certain level of risk. Good investment performance will lead to higher cash values and death benefits. The reverse holds true, although most policies come with a minimum death benefit.

CPAs say that life insurance serves different purposes at different times in your life. But keep in mind that its most important function is income replacement, so make every effort to buy as much protection for your family as you need. Once you've determined your needs, shop around. Look for a company and an agent who can help you get the right type and amount of insurance at an affordable price.

You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA website to search for a CPA in your geographical area or specific area of expertise.

This article was submitted by the Michigan Association of CPAs.