Life insurance is essential to some people. To others, it’s a completely unnecessary financial product. In between those two extremes are a range of views on the role of life insurance in a comprehensive financial plan. However, there exists a rather interesting perspective on life insurance yet.
There exists a school of thought that life insurance is not merely essential, but can be a complete financial program. Naturally, this perspective would have staunch opponents.
While life insurance is not of equal value to everyone, it can certainly contribute to a complete financial plan. The contribution of life insurance to financial planning is two-fold:
i) As a financial product in the “protection” phase of a financial plan.
ii) As a financial product that encompasses broader elements of financial planning
Life insurance immediately creates an estate. This feature of life insurance suggests that it can replace the economic value of a person. The financial dependents of an insured would not necessarily suffer economic hardship in the event of the insured’s death. Even if you just pay for pure life insurance, you would be adding value to our financial plan.
As a stand-alone financial product, life insurance can also ensure that ordinary people without large volumes of cash can acquire loans and mortgages. That life insurance immediately creates an estate makes it a vital tool for estate planning. Apart from merely creating an estate, life insurance can also help preserve and transfer it as well.
Life insurance plans are very diverse. This implies that some life plans offer more value than others; or at least greater facilities. Several life insurance products are hybrid, cash-value-based or have optional supplementary benefits attached. These benefits are what can convert a life insurance product into something resembling a complete financial plan. Here are some other areas that a comprehensive life insurance plan can offer:
i) Medical and health insurance: These are considered to be the most fundamental aspect of a financial plan. Life insurance plans also offer optional supplementary benefits like income disability and critical illness. Those provisions intersect with other aspects of financial planning.
ii) Retirement: Some hybrid life insurance plans may have an annuity or retirement plan embedded in them. In other cases, the savings accumulated over time in a cash-value life insurance plan can contribute to your retirement fund.
iii) Emergency fund: The forced savings feature of a life insurance plan can help you to create an emergency fund with minimum fuss.
iv) Savings: Although cash-value life insurance should not be used strictly for investment, the savings or investment portfolio may be used to assist portfolio diversification. The accumulation rate or rate of return for cash value insurance is normally a bit higher than rates for other cash and income options.
v) Taxes: In most cases, the proceeds of life insurance are immune from taxation. Also, the proceeds from cash-value insurance are not usually subject to tax. This may vary among states or countries. However, there would be a few conditional exceptions to this.
Life insurance is a financial tool. It is as not good or as bad as the person who uses it, but based on how it is used. The notion that a well-developed life insurance plan can be a complete program is a slight exaggeration. However, few would argue that a life insurance plan- whether pure or comprehensive- cannot contribute significantly to a complete financial plan.