The insured has to ensure that all relevant premiums are paid throughout the policy period, either physically by him or from the cash values accumulated by cash dividends or compound reversionary bonus. This will enable the policy to be kept in force and the benefits can be realized at the appropriate time. The sum insured becomes payable upon the insured’s death. Through his contract with the insurer, an immediate estate is created which may form a part of his total estate ie properties and business interests.

In comparison to acquiring property, owning a successful business, having cash savings and other forms of investments, the insured would most likely have to invest his limited time and resources.

To build a net worth of $200,000 would require possibly a lifetime for a majority of the working population. There is, of course, no guarantee of success, as there will be elements of economic of uncertainty, mismanagement, external factors, or timing, which may affect his good intentions. Proper financial planning is also needed to ensure that his investments are yielding increasing or acceptable returns.

On the other hand, purchasing a $200,000 life insurance policy creates an immediate estate of that amount at a fraction of the cost. Besides, most life insurance policies have increasing cash values. Such policies possess a certain asset value in which the insured can exert ownership just as with other personal property or assets permissible by law.

There are two other factors to consider in life insurance planning. The first factor is inflation. Coverage you purchased several years ago that you once thought was adequate may now be insufficient due to inflationary pressure.

The second consideration in your life insurance planning is life expectancy. Your life expectancy has two important characteristics which influence the way insurance companies price their policies. The first of these characteristics is that the probability of death rises with age. The second is that the probability of death eventually becomes a reality. In other words, insurance companies want to figure the average amount of time you will have to pay on an insurance policy before it is time for your beneficiaries to collect on that policy.

* Shop around and learn about the different types of life insurance policies that are available and that best suits your needs.

* Ask about comparison index numbers, and check several companies which offer similar policies. Remember, smaller index numbers generally represent a better buy when using the Net Payment Cost Comparison Indexes. And larger index numbers generally represent a better buy when using the Life Insurance Yield Comparison Indexes. Compare the financial strength ratings from top-rated life insurance companies by referring to the A.M. Best and Standard & Poor. Also compare quotes of similar products among the insurance companies. You can either engage the insurance agents to provide you with the quotes, or you can get your quotes online without any charges.

* Decide on the life insurance companies that provides quality insurance products, value, a wide selection of choices, low prices, accurate quotes and services that are reliable and responsive. Some life insurance companies do offered their insurance products online where you can get instant quotes free and make an online application from their website. It is fast, simple, and hassle free. You may want to consider the future performances and financial results of the insurance companies as they affect the cash values of the life insurance policies that you may want to buy. Some factors that may influence a life insurance company’s performance are expenses, mortality rates and investment performance.

* Make sure you feel confident in your insurance agent. Engage a professional licensed insurance agent with years of experience who is honest, efficient, patient, personable and timely in responding. A good insurance agent will be able to provide you with knowledge you need to make informed decisions, and personalized caring service dedicated to making your insurance buying simple and convenient.

* Read your life insurance policy carefully. Ask your agent or the life insurance company on matters that may not be clear to you. Do not sign an application until you review it carefully to ensure that the information is complete and accurate.

* Do not buy a life insurance policy unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.

* When you buy a policy, it is always the best practice to make the check payable to the life insurance company and not the agent.

* Review your life insurance program with your agent or company every few years to keep up with changes in your income and your needs.

The possible untimely destruction of these two forms of capital is a risk few businesses can afford to take. If a business fails, the individual worker and the economy will suffer. It is for this reason that both forms of capital should be insured or protected in some ways.

This is where insurance comes into play as an instrument of financial preservation. The protection it confers in no small way provides comfort to people. It is a powerful tool for risk management. Insurance, as an economic device provides the insured with financial certainty and security in an environment that is filled with the possibility of losses.

In strict terms, insurance cannot protect property or lives, but it can protect those insured against the adverse financial consequences of losing property and lives. For example, a factory, which is insured, does not prevent it from being burnt down. However, the insurance money collected can be used to construct a new factory in place of the destroyed one.

Likewise, an insured person cannot be protected against dying or disease, but the dependent is protected financially if such events precipitate unexpectedly. In any of such similar cases, the insured would be in economic dire straits if not for the financial protection conferred by insurance. In short, insurance as an economic device provides the insured with financial certainty in an environment that is filled with the possibility of losses. In providing such benefits, insurance brings peace of mind to people - and to society at large.

Another benefit of insurance is its ability to provide for more optimal use of economic resources. In the absence of insurance, individuals and businesses will have to create and maintain a relatively large contingent fund to meet the many pure risks they have to assume. The potential losses and consequential losses due to capital destruction must be met by funds generated internally. More of the profits will have to be retained in the business instead of distributing them to the owners. This is necessary because the business needs funds to grow, and plowing back the profits is one way to provide the funds needed internally. Now there is an added burden to set aside funds for such contingency. This would, in effect reduce the owners’ income further.

To safe guard contingent funds, investment risk must be reduced to the minimum. As such, it will be necessary to invest in low yielding but secured investment like bank deposits. Such a conservative investment strategy will earn low interest income for the funds. Keeping the funds in such low yielding investment would deny the business the opportunity of investing more productivity. With insurance, the risk of loss is minimized or eliminated through transference. The contingent fund against such risks could also be created immediately. With the needed funds to cover losses in place, the business has more space to utilize its earnings - either for increasing the income of owners through higher distribution of profits or to employ them for higher yielding investment. And it is the “magic” of insurance that made all these possible.

* Final Expenses - These includes funeral and burial expenses, cost of probate, legal and accounting fees, and federal estate and state inheritance taxes.

* Unpaid Debts - Last illness expense, personal bills, credit card debt, loans and mortgages and other outstanding liabilities.

* Adjustment Fund - This fund allows for adequate bereavement due to loss of a loved one. It may be used to cushion the immediate lifestyle adjustment that a family may face. The family may be forced to move, or the surviving spouse might have to look for a new job. In addition, a working spouse may find it difficult to return to work immediately after the death of a partner. The spending habits of the survivors usually change and should be considered when determining the financial loss.

* Income Replacement - A consistent income stream should be considered to help pay for the family’s living expenses, such as mortgage payments, monthly bills and daycare.

* Education Fund - When the breadwinner’s source of income is cut off, the children’s education may be affected if the education fund is not sufficiently provided.

* Dependent Income - This provision of fund may be considered for their dependents and aging parents.

It is always a good practice to run a Life Insurance Needs Analysis based on either the Rule of Thumb or Income Protection Model. The Rule of Thumb indicated that a sum assured of 5-10 times of a person’s annual income be used. If the person’s income is small and saving rate is low, then the higher end at close to or at 10 times will be considered. If the person’s income is large and saving rate is high, then the lower end of the scale at 5 or 6 times will be used. In the event of a stay-at-home spouse, estimate the economic replacement costs for services rendered and input as annual income. The Life Insurance Needs Analysis will give you an in-depth overview of your family’s potential need for capital and how much you need for your life insurance.

With compound interest, the amount of $5 is added onto the initial $100 and becomes additional capital sum to be invested at 5%. The total amount derived where the initial capital p is accumulated over n years at an interest rate of i% is $127.63.

The interest of $27.63 earned through compounding the interest over the same duration is $2.63 more than interest earned under the simple interest method.

Rule of 72, as it is commonly called, allows us to measure how fast an investment is gaining in value. By dividing the number 72 by the interest rate, we can then ascertained the number of years it will take for a value to double itself. However, there are other factors which should be considered when using this rule such as inflation rate and interest rate achievable.

For example, assuming an interest rate of 5%, it will take an investment of $250,000 to double in value to $500,000 in approximately 14 years (72/5 = 14.4 years).

Where the policy has a profit-participating feature, the level premium may be reduced due to the presence of accumulated cash values. Insurers use the level premium system to price life insurance products so that the premium rate does not increase as the insured’s mortality rate increases due to older age. The payment of level premiums throughout the life of the insured enables the insurer to create a reserve fund from the excess premium collected. These are invested and accumulated in the insurance company in the form of policy reserves.

A life policy in force for at least three policy years would have an element of cash value which will increase over the years of continued premium payment. During the lifetime of the insured, the policy with cash values can be surrendered for an amount equivalent to its cash surrender value, if a need arises. If this happens, the protection also ceases. Sometimes a part of the cash value can be taken out as a policy loan, if there is a need for some emergency funds. Such a loan will attract interest and the interest rate will be determined by the insurer at that particular time. The proceeds are payable when premature death occurs or maturity at age 100 whichever comes first.

Purchasing a whole life policy at a young age allows an insured to enjoy lower premium besides securing an adequate life cover. However, it is undesirable for younger people with small children who cannot afford the high premiums during the early years of the policy.

If you like premiums that will remain fixed and predictable over time, you may want to consider a Whole Life Insurance policy. It provides certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values. Your premium amount is usually level during the insured person’s lifetime.

Whole life policies issued with profit participation shares in the divisible surplus or profits of the insurance company, and those issued without profit participation will not do so. Returns in the form of dividends are payments from savings resulting from mortality, expenses and investment returns, The premium for participating policy is usually higher than non-participating policies. In spite of this, participating policies are gaining popularity. Participating policies will carry higher cash values. It is also likely that premiums need not be paid throughout life, for this type of policies, which to many people, is an attractive feature.

Insurance on the other hand, transfers an existing risk ie the risk of death to the insurer. The risk existed even before the insurance is bought. And through the pooling of similar loss exposures of a large group of contributors, the insurer’s risks are spread, and hence are reduced. Even though losses are inevitable, the pooling ensures that the risks for the insurer are well covered which is reflected in the rate structures.

Loss is the ugly outcome of risk. because of the possibility of loss, it gives a reason why people purchase insurance against risks. But not all risks are insurable. For a risk to be insurable, it must meet certain criteria, which is to ensure that the losses that occur are within the means of the insurer to handle. The concept of “true insurance” versus “specially-arranged insurance” should be differentiated.

You have probably heard of famous hairstylist insuring their hands and well-known movie stars insuring certain parts of the body for a large sum of money. These arrangements are not what we termed as “true insurance” but are “special-arranged insurance” that cover specific risk that are undertaken by large underwriting groups like Lloyds of London. The premiums arrived at are estimates of the potential loss based on special techniques developed for such purposes that are not normally used by insurers to determine their premium rates.

Term life insurance is purchased because it is the simplest form of life insurance, which provides the greatest insurance protection at the lowest initial premium. It is useful in providing temporary life insurance cover for individuals who could not afford the higher premiums of the other types of life insurance. It is never used when there is a permanent need for insurance to provide estate protection or business continuation. Otherwise, it is the least expensive form of life insurance protection a person can buy. Its lower cost makes it possible to use the extra money arising from the difference between the low premium of term and the relatively high payments for straight life, for more rewarding investments.

Term life insurance can be used as a tool to provide life insurance for the duration of a financial loan, mortgage loan, or employment of key-person. It can be taken out to cover a period of higher expenditure when the children are at college or university to ensure that their education will not be disrupted due to the untimely disability or demise of the breadwinner.

Basic term life insurance is non-participating in the insurance company’s profit performance and hence carries little or no cash values. Premiums for term life insurance are determined at the point of purchase and will remain the same for the duration of the policy period. The premium will change upon renewal and usually at a higher rate due to older age. In the long run, the total term premiums paid when compared to life expectancy are more than a permanent insurance.

Some of the features of term life insurance include option for renewal (Renewable Term Life Insurance), conversion (Convertible Term Life Insurance), both renewal and conversion, reducing sum assured (Decreasing Term Life Insurance) or increasing sum assured (Increasing Term Life Insurance).

In general, term life insurance is suitable when your life insurance needs are temporary, or your life insurance needs are long-term but your budget does not permit the higher premiums of permanent life insurance.