Life insurance is an expenditure
Question: Why does a person need to buy life insurance when it is just an expense for an item that you cannot see nor enjoy, and which further eats into the many other things that I have to budget for in life? If it’s protection I want, I might be better off hiring a body guard. Life insurance agents hardly look out for my safety. —asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.
Answer: Your question appears to miss out on a very important point. Life insurance does not guarantee that you will live, and by the way, neither does hiring a body guard. But life insurance, unlike a body guard, can protect your loved ones against the perils of losing financial support from you once you are called from this life.
So, you see, the shelling out of cash for life insurance premiums is more than just an expense, it is an expenditure to buy an asset.
As further proof that life insurance premiums are expenditures for buying assets, consider a company buying nonlife insurance to cover a major plant equipment that is capable of producing a great amount of revenues. Accounting standards state that the accounting entries should be: Debit: Prepaid Insurance for the expenditure amount and Credit: Cash for the same amount (assuming that cash was used to pay).
The accounting entries effectively classify the premium on the nonlife insurance policy initially as an asset and not as an expense. Every month, as the insurance coverage period shortens (coverage is for a predetermined period of one year), the company makes the following accounting entries: Debit: Insurance Expense for 1/12 of the premium and Credit: Prepaid Insurance for the same amount.
With the entries, the asset created with the Prepaid Insurance entry is reduced by 1/12 of its amount, with the reduction also booked as a corresponding expense. And only when there is a claim on a loss on the major equipment can the remaining Prepaid Insurance be expensed totally before the end of the year.
The same can be done for life insurance. But because life insurance coverage spans long periods of time, only a small amount can be expensed out in a year.
This means that for a good part of the period of coverage, life insurance is more of an asset, an asset that protects the family against the financial loss arising from the passing away of someone who is a major source of revenues.
Life insurance can also be an earning asset, not just an NPA or nonperforming asset. A participating life insurance policy can potentially earn dividends for the policy holder. Variable unit-linked policies have a portion of the premiums placed in investments, according to the preference of the policyholder.
And even if the life insurance policy did not pay out dividends or did not make any investment returns, beneficiaries will still receive an asset in the form of proceeds on insurance claims immediately after the last breath of the policyholder. This claim will offset the expenditures for premiums especially with today’s policies.
But perhaps the most important feature of life insurance is that it is a gift of the policyholder to his beneficiaries. For a fully loaded elevator to continually move, it must first let passengers off before allowing others to get on. It is the same way with life; you must first empty yourself before you can reap its rewards. And isn’t this what you are doing when you buy life insurance?
Just like you, life insurance companies are betting that you will not move on to the next life early. But just in case you do, they have the loved ones you will leave behind covered.
So, treat life insurance as an asset that will be your gift to your loved ones.
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