Most people don’t realize that life insurance is an asset. In fact, it’s the best kind of asset or more importantly, a true asset as opposed to say..your primary residence (with a mortgage attached). As with all assets, there are some important things you can do with it both before and after the benefit is triggered. Let’s take a look at how life insurance should be viewed as an asset.
First, what is an asset? Some people have somewhat of a hazy view while others are just plain wrong. What about your primary house? Is that an asset? Well it depends. If you do not derive any income from your house and only pay out due to a liability (your mortgage debt), then it’s hard to call it an asset. Even when you have full paid off the mortgage, it’s still not ideally what you would want in an asset. An asset should pay income. Your primary home does not pay income. Yes, you’re building value over time but that doesn’t really help you make ends meet if a primary earner in the family passes away. In this regard, it’s more like a liability. It all comes down to cash flow and cash flow is what hits people so hard when the income suddenly vanishes due to the unexpected loss of a family member.
Life insurance on the other hand, can be the source of income if the insured passes away. It’s also the best kind of income because it is typically tax-free. Don’t underestimate the importance of this. If you you earn $50K annually through salary, it’s probably more like $35K after tax as you’re all too aware of. Average tax brackets tend to run from 20 to 30%. Life insurance benefits are generally not taxable. This means $500K is $500K. This becomes even more important since our tax system is “progressive”. This means that the more money “earned”, the higher your average tax rate will be. It can even approach 50% when adding federal, state, and so-called “windfall” tax rates. Congress has tried to go after this tax-free status of life insurance but the push-back has been too great. So we have a tax-free asset in term life insurance. Why, would this be an asset? It can create income. If you take your $500K (to continue our example) and invest it, at 5% you’re looking at $25K annually. That’s income derived from an asset and it’s a critical function of life insurance.
rYou can also just spend down this “asset” if you choose since it’s highly liquid. Selling a house can be a difficult proposition reliant on market conditions and other factors (not to mention the question of where are you going to live?). The life insurance benefit is cash. You do not get a more liquid asset than that. If you spend down the asset, you will not retain a residual asset which earns money but you will have more cash flow in the meantime. For example, if we spend $50K each year (to match our replaced income), we have 10 years at this level. At a minimum, that gives you a decade to get your financial house in order following the passing of a loved one and the lost income. Many people without life insurance find themselves having to make truly life-changing decisions in a very short span since they don’t have the immediately created asset that life protection offers. Again…most people will essentially be bankrupt in a matter of months if the family’s income disappears or is even cut in half. Term life provides the asset and more importantly, the income to avoid this situation at an affordable cost.
How do you choose among a number of different insurance policies? How would you know which one will benefit you in the best way possible? If you are considering any form of term life insurance, then this may be the best option for you. With a capacity to finance small-degree needs given a short period of time for attainment, the ten-year term life insurance coverage may be your best bet yet. This form of term life insurance can be renewed after the initial ten-year term but of course will entail a gradually increased premium amount for the same benefit payout.
A ten-year life term insurance policy works this way: During the ten-year period of the term life insurance policy, if the plan holder dies, the full face value of the coverage will be paid to his beneficiary either through lump sum payments or monthly income. If the beneficiary chooses to avail of the monthly income payout, the person should consider several different options with regard to the term life insurance policy. The first one involves an income agreement that applies to a specific period. This means that if the beneficiary may pass away while payments are still being made, the payments will cease to be paid even if the full face value of the original policy has not yet been released in full. Nothing more will be gained from the initial ten-year term life insurance policy.
Then there is the option of availing a ten to twenty-year payout arrangement for a term life insurance policy wherein you are assured that the full face value will be paid in during the span of that ten to twenty year period. With this option, beneficiaries can be provided with the interest payout option where they receive only an interest payout during the given period of time and after the ten or twenty years, the full principal amount of the term life insurance policy will be released.
The conversion privilege for a term life insurance policy usually extends to a maximum of only eight years for it to be converted into a more permanent life plan arrangement butt there are insurance companies which give the plan holder an opportunity to use the entire ten year period and still grant a conversion contract. There are also a number of rider options you can add to your initial coverage to increase the benefits from your term life insurance plan. These are the accidental death rider where the beneficiary payout is doubled if the plan holder dies in an accident and the disability rider wherein your premiums will be paid for you by the insurance company if you ever get into a situation that disables you as a result. The responsibility will be taken upon by the company after the sixth month that you are disabled.
A term life insurance policy may also entail certain minimum and maximum amounts which the company will issue depending on the plan holder’s age and medical condition at the time of application.
Term life insurance is a temporary life insurance covering specific period of time. In this type of policy the insured or the owner pays a premium for a period. The insurance company provides monetary benefit to the beneficiary in case of death of the insured during that period. It is the cheapest type of life insurance available to the general public. Usually the benefit received on death of the insured is income tax free.
There are four parties in term life insurance. The owner is the one who pays the premium. The Insured is the one on whose death, a death benefit(face value) will go to the beneficiary. The beneficiary is one who will receive the proceeds of insurance on death of the insured. The insurer is the company providing the insurance. Premium is the monthly or periodic payment made by the owner to the insurance company.
For instance, Amanda pays monthly 50 dollars to ABC Company for insuring the life of Bill (her husband) for a period of 10 years. In case Bill dies during the 10 years, ABC company will pay 6000$ to Jack (son of Bill and Amanda). Here the insured is Bill, the owner of the policy is Amanda, the beneficiary is Jack and the insurer is ABC Company. The premium is 50$ and the face value of the insurance is 6000$. In case Bill does not die during the 10 years, ABC Company will not be liable to pay any money to any of the parties involved. Often the owner and the insured are same. That is a person buys a policy to cover his own death and nominates a beneficiary.
Term life insurance is a legal contract with terms and conditions and assumed risks. Sometimes there are special provisions like suicide terms wherein on suicide of the insured there is no benefit accrued to the beneficiary. Term life insurance is based on two concepts, theory of diminishing responsibility and Buy Term and Invest the Difference (BTID). In Term life insurance the responsibility or liability of the insuring company reduces as the policy reaches its maturity. Term life insurance is the cheapest type of insurance policy available because there is no cash value at the end of the period. Studies have shown that the mortality rate in term life insurance policies is as low as 1%. Hence the concept of BTID. Rather than going for permanent life insurance (where on the expiry of period the owner will accrue some cash benefit and there is a savings component in it) it is considered cheaper to buy term life insurance and take care of the savings components by investing in other areas. With the present market giving good returns on investment, buying a term life insurance is a more attractive option than permanent life insurance. Term life insurance is available for a period of 5, 10, 20 years etc. As the age of the insured increases the premium increases. The premium is calculated based on mortality rate which is usually dependent on age, sex and whether the person uses tobacco. Most companies provide annual renewable term where in the term can renewed annually however the premium increases annually.
