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Issue 3 • AUGUST 2007 





The Basics on Life Insurance

Life Insurance is one of those items that most folks don't care to discuss, but is critical to your overall financial plan. In this months newsletter we will list some common reasons to have life insurance along with the different types of insurance available.

Why have Life Insurance?

1. To provide for your family's financial wellbeing.

2. To pay off debts

3. To provide liquidity for your estate

4. To keep a family business operating

5. To leave a legacy with a donation to college, non-profit or foundation.

How Much Coverage? Unfortunately, this is not an easy answer. It all depends on personal assets, desired goals and potential for estate tax. A rule of thumb commonly used for young families is 10 times the wage earners salary. Actually going through the process of developing a financial plan gives us more accurate data.

What's the difference in Term and Permanent: Think of term life as renting a house and permanent life as buying the house. The term life is purchased for a set period of time (10, 15 or 20 years) in which you have level premiums and are able to leverage a lot of coverage for a smaller premium. The downside is that the coverage expires at the end of the term. This type of coverage is suitable for individuals looking for coverage of items 1,2 and 4 up to retirement age.

Permanent life is designed to build cash value and to be in effect throughout your lifetime. So in effect if you want to guarantee that the life insurance is in place even if you pass away at 90, then permanent coverage is the answer. The downside is that it's not cheap. Since the insurance companies realize they are going to have to eventually make good on the benefit the premiums are much higher than term life. More prevalent to items 3,4 and 5.

Types of Insurance:

1. Term Life: coverage that is in place for a certain amount of time.

2. Permanent - Whole Life: designed to build a cash value and have the premiums paid through age 99. That's the actuarial date that the cash value will equal the face amount of the coverage

3. Permanent - Universal Life: similar to whole life but comes in much larger amounts and offers the ability for higher funding of the policy to build more cash value. The account grows at a projected fixed rate based on the performance of the insurance companies investment manager.

4. Permanent - Variable Universal Life: similar to universal life but the investment options for the cash value are chosen by the policy holder. The investment values will fluctuate with the market depending on your underlying investment picks. This policy is one of the most oversold and least understood ones out there. Many consumers have a misunderstanding that this type of policy has a guaranteed return. Not so, in fact it can lose cash value and ultimately crash. Should only be purchased after review by a financial advisor not selling the product.

Insurance Tips

Selecting the appropriate amount and type of insurance is challenging for most consumers. The life insurance analysis in most financial plans will help simplify this and arm you with enough information so that you can confidently shop for coverage.



James A. Daniel,
CFP®, AIF®

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation for financial services. Consult with your financial professional if you have any questions.

The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.


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