Dollars & Sense: Re-examining the role of life insurance
While the 1990s were a time of economic prosperity and wealth accumulation for many, the 2000s have reminded people of the importance of diversification and protection. Certainly, economic and world events have caused many of us to refocus on a larger and more challenging financial picture.
For these reasons, it is more important to work with a qualified financial professional. And, wisely, many financial professionals are preaching the need for diversification as a means of better managing risk. But how many of them are suggesting that their clients take a second look at an old reliable tool – life insurance – as an essential element for a sound financial strategy?
Arguably, the biggest issue with life insurance is the tendency to oversimplify the whole process of buying it. It’s either term or permanent, some “experts” will say. Furthermore, these same “experts” will often advise that term is the only way to go for everyone.
Truth is, buying life insurance cannot be reduced to a simple either/or decision. It is much more than a simple commodity; it’s not like buying a book online or using the latest technology tool. And it will depend upon each person’s circumstances.
There are issues of:
• How much insurance you need and how long you’ll need it.
• How the actual contract is designed: What types or combination of types are best for your needs; how your insurance needs might change over time; the extent to which you are prepared to pay premiums over an extended period.
It follows that the life insurance policy a person owns should reflect that individual’s unique needs. There are no one-size-fits-all solutions when developing a financial security plan. For some, this could mean term life insurance; for others, it could mean permanent life insurance. It could mean a blended policy of both term and permanent insurance, or a combination of several types.
Whenever you get into the issue of term or permanent, it’s important to understand the fundamentals. With permanent insurance, the insurance proceeds are paid to your beneficiaries whenever you die, as long as the premiums continue to be paid. Permanent insurance has level premiums and a cash value that grows on a tax-deferred basis. Term insurance, on the other hand, provides a payout only if you die within a certain period of time. The premiums typically increase each time you renew your policy and it has no cash value. Initially, the premium for term insurance is considerably lower than that of a permanent policy. But, in the long run, the net cost may eventually be lower with the permanent plan.
Life insurance should be considered the foundation and most conservative element of any personal plan – the money that absolutely has to be there, no matter what the economic cycle or climate. Furthermore, choosing the right amount of insurance is more important than finding the right kind. After that, the type you buy depends on your timetable and budget.
A good financial representative will make sure you consider life insurance as part of your overall financial strategy. This is someone who can help you understand your insurance needs and help identify which products offer innovative solutions in a particular situation. Rather than push a product, a good financial representative will do these things:
• Ask questions about your goals and objectives and your long- and short-term needs.
• Analyze the information to determine the feasibility of these goals, objectives and needs.
• Make a recommendation to help meet your financial goals.
• Provide good service year after year, by letting you know how your plan is performing relative to your objectives. It’s a long-term relationship.
Article prepared by Northwestern Mutual with the cooperation of Mike Davis, a Rifle-based finance advisor and insurance agent with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Co., Milwaukee, Wis., and its subsidiaries.
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