Most people don’t recognize life insurance for the versatile financial tool that it is.
If you have a spouse, children, or aging parents who depend on you, life insurance should be part of your overall financial plan. One of your greatest assets is your ability to earn income and maintain a comfortable lifestyle for you and your loved ones. We insure our homes against fires and our cars against collisions—and we should also insure our future quality of life.
Insurance is a Financial Lifeline!
According to LIMRA, only 59 percent of Americans have life insurance — and about half are underinsured!
Life insurance is a tool to protect against catastrophic losses, pass along wealth to future generations, and offer added financial security.
Here are some answers to our commonly asked questions, including 12 unique benefits to life insurance.
Why do I need life insurance?
At its core, life insurance helps you create a measure of financial security for anyone you’ll leave behind.
You pay premiums for the defined length of time and the insurance company promises to pay a death benefit to your beneficiary if you die while the policy is active.
Different folks will have different primary purposes for owning a life insurance policy. Here are some common reasons to purchase life insurance:
- Protecting family income.
- Leaving a legacy to children or grandchildren.
- Donating to a charity.
- Paying for funeral and burial expenses.
- Paying off mortgage or other large debt.
- Paying for a child’s college education.
- Planning for a special needs situation.
Term insurance works for most situations. While permanent life insurance covers you for life, it can be more expensive and may not be necessary if you aren’t interested in accumulating cash value.
A Word With Elliot
“I am often asked whether term or life insurance is right for most situations.
Term insurance works for most situations. While permanent life insurance covers you for life, it can be more expensive and may not be necessary if you aren’t interested in accumulating cash value.“
How much life insurance coverage do I need?
The amount of coverage you’ll need will depend on a few things:
- How much money your family would need to fulfill immediate obligations (e.g., funeral costs and other final expenses)
- Lifestyle expenses (e.g., childcare, housekeeping, landscaping)
- Cash flow
- How many children you have, and their ages
- Years of income that you’ll need to cover
- Annual net income your survivors will need
- Any one-time expenses you wish to fund
What type of life insurance should I buy?
“Term” and “permanent” are the two main categories of life insurance, and they each have their advantages. Most people will do well with a plain vanilla term life insurance policy. Life insurance can play different roles at various stages in life, so you may wish to consider a mix of both types of protection.
Term insurance is the simplest, most affordable form of life insurance. You’ll pay premiums in exchange for death-benefit coverage for the next 10, 20, or 30 years. If you make it past the term period, your policy expires, and you won’t get your premiums back.
Term insurance may be right for you if you’re looking for:
- Affordable coverage during your earning years
- Coverage for specific large expenses (e.g., your mortgage or your children’s education)
- Coverage for immediate obligations (e.g., medical expenses, funeral, and estate-settling costs, outstanding debts)
Permanent insurance has two unique features: a “cash value” component, and the death benefit does not expire. You’ll need to pay premiums for the rest of your life, but after a certain amount of time, the cash value will offset some or all of the cost of your premiums.
Permanent insurance may be right for you if you’re looking for:
- Offsetting a decrease in pension income from an early death in retirement
- Legacy planning; transferring wealth across generations
- Estate planning; providing liquidity to an illiquid estate or covering taxes from a sizable estate
How long will I need the policy?
This may be the trickiest of the big questions.
Of course, we don’t know when we’ll die, and that is a good reason to at least consider a permanent policy.
While many people only consider term life insurance to replace lost salary if they die before retirement, coverage after your working years can be critical for your surviving family.
If you’re purchasing a life insurance policy to protect a specific interest—for instance, a business loan or mortgage—also consider the potential duration of that need as you review your options.
A Word With Elliot
Everyone’s life insurance needs are different.
“This information is not intended to be a substitute for specific individualized advice.
Please contact me if you have any questions regarding how life insurance can fit into your financial plan.“
How does permanent life insurance help me build wealth?
A properly designed permanent life insurance policy can give you a wealth of benefits.
How much will my premiums cost?
The biggest factor on how much you’ll pay for life insurance is your age and your health, because the cost depends on your mortality risk to the life insurance company. The younger you are, and the healthier you are, the lower those term life insurance rates are going to be.
That said, life insurance is a very saturated and competitive market. In almost all cases, there will be a life insurance company that can offer a policy to you, even if you’re an older applicant or have health conditions.
Because of that, to get the best rate, your best bet is to shop a full panel of life insurance companies. Every life insurance company is going to approach underwriting, meaning risk evaluation differently.
Work with an independent broker who can shop your profile around to all the top life insurance companies. That’s the best way to make sure that you’re getting the best price.
How can life insurance be used in my financial plan?
Here are three case studies showing how life insurance can be used as part of a broader wealth management plan.
Case Study #1:
Ron’s retirement account funds & life insurance
Retirement account funds—both IRAs and 401(k)s—can be taxed twice for wealthier individuals: First as income and, next, with an estate tax.
Assume Ron has $1,000,000 in his IRA. To avoid the tax bite from his IRA upon his death, James buys a second-to-die insurance policy with his $1,000,000. After Ron dies, his wife receives the $3 million tax-free benefit.
Case Study #2:
James boosts death benefit by transferring current life insurance with cash surrender value policy
James had a 15-year-old second-to-die insurance policy worth $850,000 with a death benefit of $1.53 million.
His Financial Advisor recommended he do a tax-free insurance policy exchange.
The new policy had an increased death benefit of $3.48 million and there were no out-of-pocket charges.
Case Study #3:
Kathryn’s two-step annuity strategy
Kathryn buys an immediate joint-life annuity for $1,000,000. It pays $53,859 annually as long as Sarah and her husband are alive.
Next, Kathryn uses the annual payout to fund a $5.68 million second-to-die policy. In essence, Kathryn converted $600,000, the after-tax value of the initial $1,000,000, into $5.68 million.
Both the annuity and death benefits are guaranteed.
How do I find the best life insurance policy for me?
After thinking about life insurance and its wealth-preservation benefits, you probably have some questions of your own.
However, finding the best life insurance policy often means navigating a dizzying range of product features and pricing variables. To add to the confusion, every company is going to give you drastically different rates depending on how they assess your health and their own rating system.
The next step is to talk to a Fiduciary Financial Advisor who can help answer those additional questions and discuss your options.
We look forward to hearing from you.
Life insurance can provide value across all income levels, and far beyond a simple death benefit.
Contact me if you’d like to learn more about the best life insurance policy for you.
All my best,