Last Updated 28 Jan 2021

Insurance Planning

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The business of insurance is related to the protection of the economic values of assets. Every asset is an economic resource and has value. The asset would have been created through the efforts of the owner, in the expectation that, either through the income generated there from or some other output, some needs would be met. In the case of life insurance, the asset in question is a person. It produces goods or services and earns money through the application of knowledge and skills.

A human life is an income generating asset. This asset also can be lost through unexpectedly early death or made non functional through sickness and disabilities caused by accidents. Accidents may or may not happen. Death will happen, but the timing is uncertain. If it happens around the time of one’s retirement, when it could be expected that the income will normally cease, the person concerned could have made some other arrangements to meet the continuing needs.

But if it happens much earlier, when the alternate arrangements are not in place, insurance contributes to help those dependents on the income. As per first proposition if Sue Wright dies today, the family needs 75% of the present carry home salary of the combined income which comes to (75% of $80,000) $60,000, in case of single-parent household $50/month will be spent on child care expenses, which comes to $600 , so in this proposition Sue Wright needs $60600 for family maintenance fund. These funds are required to maintain the family based on needs approach.

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Suppose the Wrights found that both Tom and Sue had a life insurance protection gap of $50,000, then in that case if Sue Wright dies today then it is very much difficult to bridge the gap, because family maintenance fund required in the absence of one person is $60600. Both are knowledgeable investors, their after-tax returns on their investments portfolio have exceeded the rate of inflation by about 3%. To bridge the gap, they will plan to insure themselves accordingly, so in the case of any eventuality to any partner, their family will not suffer.

Insurance Planning essay

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