Stanley - 5 reasons to buy life insurance

Thursday, April 15, 2004

There are probably more than five reasons to buy life insurance, but there are at least five that are so fundamental they make the others pall by comparison. If you haven't bought life insurance for one of these five basic reasons lately, it may be time to get with your life insurance agent.

Protect your family

If you are a breadwinner with a dependent spouse and a couple of hungry mouths to feed, you almost certainly could use life insurance. One long-standing rule of thumb for measuring how much life insurance to buy is five times current salary.

But that's probably a starting point rather than a destination. Let's face it, the five times salary rule has been around since pre-history. In those days, no one thought twice about a strong Social Security system to provide a base of survivor income to loved ones; Medicare could be counted on to provide ongoing medical care to a surviving spouse and children; the employer's pension plan was guaranteed and insured; and the surviving spouse's life expectancy was far shorter than it is today.

Instead of relying on an out-dated, one-size fits all approach, why not have your agent conduct an analysis of your life insurance needs that reflects, among other things, your current spending pattern, your hopes and dreams for your children's education, inflation what you expect to earn with your current investments, and how much you expect to receive from Social Security and employer-sponsored plans.

Protect your business

Businesses routinely insure their hard assets including buildings, vehicles, equipment and inventory. Sometimes a company's most valuable assets -- the people that make it profitable -- are overlooked. But, how long would it take and what would it cost to replace your company's leading sales person, financial guru or operations manager?

A life insurance policy insuring one of these top dogs helps to protect the company not only against the cost of finding and hiring a replacement, but also the profits lost should one of them die unexpectedly.

The company applies for, owns and names itself policy beneficiary. Cash values are available while the executive is alive and the death benefits are received generally income tax free when the executive dies. If the company is in the 34 percent tax bracket and receives $100,000 of death benefit, that's the equivalent of $151,515 in before-tax profits. If your ratio of sales to profits is 10 to one, that means you would need sales of over $1.5 million to be worth as much as the life insurance to your company.

Protect your assets

Life insurance not only helps to protect your family and business during your working years, it can help protect the assets you've spent a lifetime accumulating. Unfortunately, a lot of people think federal estate taxes are a thing of the past, but the truth is that estate taxes remain with us through 2009 just to reappear again in 2011. Only those who die in 2010 get a break. Add probate fees, administration costs, and state death taxes into the mix, and even a relatively modest estate of less that $3 million can see a 50 percent loss of value.

Life insurance in a properly structured irrevocable trust is not subject to estate taxes, other death costs, and even the claims of creditors. The trust can be established to operate for years into the future to carry out the provisions that you set forth when the trust is created.

Through the trust, you can help to ensure that resources are available for starting and expanding businesses, buying or building a home, caring for a disabled descendant, or just giving future generations a leg up.

Provide for charity

Maybe you have a soft spot in your heart for an alma mater, a local hospital, or a valued church, synagogue or mosque. Some people favor a national research organization like the American Cancer Society or the America Diabetes Association. For others, it's a service provider such as the American Red Cross or Habitat for Humanity.

Did you realize that a life insurance premium about the size of your annual pledge can be a more effective way to help add a wing to a hospital, endow a chair at a university, or promote a new field of research? You can use an existing policy or a new one.

If you want a current deduction for your premium payments on an existing policy, you will want to transfer ownership of the policy to the charity. If you want access to policy cash values during your lifetime, you'll own the policy and simply name the charity as beneficiary.

Accumulate cash value

While the primary purpose of life insurance is protection against the risk of death, the cash value that accumulates over a long period of years in certain types of policies can be used as a source of emergency cash. Life insurance policy loans typically bear a reasonable rate of interest, can be repaid (and re-borrowed), and are generally tax-free. Withdrawals from cash values also enjoy tax advantages -- withdrawals are generally not taxable until they exceed the amount of premiums that were paid in to the policy.

With so much uncertainty about the future, including out-of-pocket medical expenses and long-term care costs, a little cushion in the form of cash value life insurance can't be a bad thing.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )

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