Individuals in the society may perceive life insurance as a lifetime protection policy for only the elderly, but in essence, life insurance can apply to anyone as young as newborn to over the age of 100 years. Since tomorrow is never promised, life insurance is a recommendation to anyone over 18 years. Life insurance provides an individual with an opportunity to protect the future of their loved ones in an effect they pass away, for they will not have to worry about payment of expenses. There are two types of life insurances provided by insurance policymakers to individuals depending on their needs. They are; term insurance and whole life insurance.
Term insurance enables individuals to purchase an insurance policy for a specific period. Term insurance is applicable in situations where an individual can buy life protection they require when they are not able to buy a permanent life insurance policy. It is therefore advisable for parents to have insurance policies for all their children and adopted children. Thus, understanding the life insurance needed by the family is essential because situations may arise where a child who has life insurance cover passes away or get killed, where term insurance come to play in this case. A child can be given term insurance for a specific period, for an instant in their first ten years after birth; then the insurance policy s changed to whole life insurance from the age of 16 for instance. Changing the lie insurance policy to whole life is essential since I anything happens to the child after that, their future is taken care. For instance, if the child is killed at the age of 2 years, by that age, whole life insurance is operational, therefore, in a scenario where the deceased has a child, the future of the child is taken care of despite the absence of the parent.
Whole life insurance is for the best of the entire family. The importance of whole life insurance premiums is that it provides guaranteed protection during the life of the policyholder. Additionally, whole life insurance builds cash value provided the payment of premiums is well taken care of. Using the case of term insurance, switching to whole life insurance takes care of life after the demise of the initial holder. Therefore, it term insurance is used for the entire life of the policyholder, the insurance will be worthless if the individuals do not file claims during the term period of the insurance.
Harrison Family Case
From the information given, both spouses earn gross income. Emily who is an accountant makes a gross income of $120, 000 annually and Malcolm earns an approximate $150, 000 annually from his business, thus giving a total income of $270, 000 for the family annually. Harrison family has two children aged one and four each entitled to a daycare service amounting to $350 per week amounting to $700 per week for both children. Later when their children reach a school-going age, they will attend a local public school where the expenses related to children care will drop to $100 per week per child. The parents utilize $500 per month. According to t Harrison’s family, the children are expected to be dependent until they are 21 years of age upon which they will no longer be dependent. Thus, a fall to $2,000 per month of expenses is anticipated.
The family recently purchased a home valued at $650, 000 with a mortgage of $350,000. Credits card for both spouses totals to $18,000. The family will fund the children’s university education expected to be $35,000 per child. Emily has superannuation insurance worth $250,000, and Malcolm as well as the same insurance valued at $75,000.
Assumptions
Funeral costs will cost $10,000; Final medical costs $15,000; legal costs $5,000; required emergency funding $25,000; Investment rate per annum is 5%; and Spouses life expectancy is 82 years.
Term Life Cover Calculation
The least expensive type of insurance is term insurance. Term insurance is affordable as it can be purchased even when an individual is young. As an individual get older, the risks of dying increases exponentially. Term insurance is similar to other types of insurance covers as an individual pays premiums in an annual, semiannually or quarterly terms. Term insurance is as well used as temporary protection making it inexpensive. Additionally, it provides death protection where there is no cash value build up from the paid premiums. According to statistics, term life insurance policies usually lapse without the collection of death benefits.
As you get older, your risk of dying increases, so the cost of term insurance increases exponentially. As with most other insurance coverage, you pay premiums annually, semiannually, or quarterly for the term. For this premium, you receive a predetermined amount of life insurance protection. Term insurance is very inexpensive and is generally used for a temporary insurance need. However, it only provides for death protection, and there is no cash value built up from paid premiums. Statistics show that the majority of term policies expires without collection of death benefits.
Insurance provides benefits upon the death of a breadwinner in a family. Therefore, to determine how much is enough for the life insurance is of focus. A necessary approach that can be used to determine the amount is the needs approach which has replaced the human life value approach as the needs approach answers the question of how much is enough.
Needs Analysis Approach
Needs analysis approach focuses on daily expenses of the family until the end of life expectancy of the youngest member of the family. However, several factors are considered in the calculation of the amount needed. The elements are; available loans; marriage of the children; non-working spouse provision; education of the children; kind of family lifestyle; the number of dependents and their related needs; and any other special needs. Summing up all the expenses of what the family needs give a figure of what the family needs with an assumption that Malcolm and Emily die today. The life insurance and the assets are then deducted. The gap which remains is what Harrison family has to bridge.
According to the Harrison family, the following factors have to be considered for the calculation; available loans; education of the children; family lifestyle; the number of dependents; and special needs.
Solution
1. Sum up all the needs of the family insured upon death
Mortgage ($350,000) + children’s education university education ($60,000) + emergency funding ($25,000) + Funeral costs ($10,000) + Final medical costs ($15,000) + Legal costs ($5,000) = $465,000
2. Monthly income needs
Family expenses ($3,000 *12) + parent’s needs ($250 * 2) + children’s needs (220 * 2) + childcare before school age ($350 * 2) + childcare after-school age ($100 * 2) + dependent living expenses ($2,000) + credit cards ( $18,000) + superannuation insurance ( $325, 000) = $382,840.
-Income of spouses ($270,000)
-Shortfall = Monthly income needs ($382, 840) – Income of spouses ($270,000) = $58,840).
-Income till children turns 21- $440 + $800 =$1240
Total= $712,920
3. Current invested assets 5% of $270,000 = $13,500
Shortfall = $712,920 - $13,500 = $699,420
Multiple Analysis Approach
Multiple approach focuses on replacing income, payment for funeral and the final expenses and including the amount of debts payoffs like mortgages and university needs. The amount is then subtracted with the current assets and life insurance.
Solution
Funeral + income+ university needs + final expenses + mortgage + = $10,000 + $270,000 + $30,000 + $15,000 + $350,000 = $675,000
Subtracting from current investment + life insurance =5% of $270,000 + $325,000 = $388,500.
Therefore giving a shortfall of $675,000 - $388,500 = $286,500.
For the Harrison family to assure its life insurance policy, they must cover a total of $286,500 as shortfall relating to one and half years of income salary.
Conclusion
The best type of insurance approach for Harrison’s family is needs analysis approach as it takes into consideration the needs of the family about daily operations and the future of the children both before and after school age. For Harrison’s family, adopting a cash value insurance which is whole life insurance which provides death benefits as the value increase as long as the family funds the policy (Gold, 2014). Additionally, cash value insurance is in assistance when dealing with obligations to do with taxation while paying for business, retirement or university fees. However, the insurance policy is expensive but can be advantages if Harrison’s family commits to funding the plan regularly.
References
Gold, J. (2014, September 24). 5 Most Common Mistakes People Make with Life Insurance. Retrieved from www.huffingtonpost.com: https://www.huffingtonpost.com/jacob-gold/five-most-common-mistakes_b_5877652.html
