Despite what you have heard, you can beat death and taxes.
- Beating death is leaving your family with enough to pay off their house, take a year off work to put their lives back together, and pay every bill in full and on time.
- Beating taxes is growing a retirement account by compounding interest on deposits or leaving your children with a large sum of money while avoiding what would ordinarily be a 40-percent tax.
- Beating death and taxes is when a couple who have never been wealthy is able to leave a college or hospital enough money, tax-free, to erect a building with their names on it.
Life insurance is unique. Its positive effects may take years to build, but when they come, they are sudden and powerful. Very few breadwinners are able to create that kind of financial impact for their families while they are alive, no matter how hard they work or how long they live. Considering its tax-exempt status and the cost-reward factor, life insurance is "like exchanging pennies for dollars,” as the great life insurance sales representative Ben Feldman used to say.
Any opportunities to provide for your family expire when you die, so planning your life insurance is vital to ensure that they are taken care of. When you are six feet under, you are in no position to renegotiate. Heartwarming stories of families, loved ones, and even charities being well provided for, are played out every day – along with horror stories of children, elderly parents and spouses falling on tough times following an untimely, unanticipated death.
Striking a Bargain
Let’s start with the basics. What is life insurance? Life insurance is a legal contract between you and an insurance company, which promises to pay a previously agreed-upon sum of money to a specified beneficiary when you die. You decide who will receive that money, and that is a choice you as the policy owner can change at any time.
It is common for life insurance policies to be worth a lot of money relative to a person’s earning ability and his or her financial net worth - typically several years' worth of earnings. For instance, someone earning $50,000 per year might own a policy worth $250,000, $500,000 or even more. A person’s life insurance payout could easily be more money than he had ever received in one lump sum during his lifetime.
No one, not even a court, can change or interfere with who the beneficiary is once the time comes for the benefit to be paid out. That is the insurance company’s end of the bargain and they are not only motivated to uphold it (because their reputation is at stake), they are legally bound to follow through according to your wishes.
What is your end of the bargain? As the buyer and owner of a life insurance policy, you are referred to as the policyholder, and your part of the agreement is to pay the insurance company a regular premium, which is an agreed-upon sum of money for as long as the agreement requires the policy to last. It might be for a number of years or it might be indefinitely. Monthly, quarterly or annually are the most popular premium intervals.
Be sure to come back next week for the second part in this series, Cheating Death and Beating Taxes part 2, How Insurance Works.