Blog post #395
Are you and your loved ones protected if the unexpected occurs?
Do you need life insurance? What kind? How much?
These are important questions and the answers can be complex. We can provide you with valuable and useful guidance, both in this blog and discussing this with you.
The most common purpose of life insurance is to provide replacement of income or earnings for family members who survive a spouse or parent who dies prematurely, or before the family had built up adequate resources.
If you have loved one(s) who depend on you monetarily and you do not have adequate savings or investment accounts if you were to die, then you likely have a need for some form of life insurance. Good financial planning would guide you to have savings and life insurance to cover living costs in excess of what your survivors can generate, to cover basic living expenses, such as housing, clothing, everyday expenses, as well as what your family may want to provide for college education, if you have children who will likely be attending college. Life insurance can also cover funeral expenses and other items, such as outstanding debts, including car loans and car lease obligations.
How much life insurance coverage do you need?
Everyone will have different needs for life insurance, based on their assets, age, stage of life and other specific issues. If you are in your 30s or 40s, have children and are just beginning to save for college and retirement, you may have a significant need for life insurance. If your children are grown and on their own, and you have significant assets, you may have much less need, or no need, for life insurance.
You should consider how much money your loved ones would need in both the short and long term. Ask yourself what are the immediate expenses they would need to cover if you passed away and how much money they would need for the future? Especially if you have children. You should consider your housing costs, property taxes and insurance, as the later items likely increase over time.
Calculating your need for life insurance is where our guidance, along with an insurance professional, can begin to provide you with answers, as determining the amount of coverage that is needed is difficult. Then, once the cost of insurance premiums are obtained, we would work with you to see what is an appropriate balance of insurance coverage and premium cost that could fit into your family’s budget.
Beyond determining how much life insurance you and your family may need, and then the cost of insurance, there are many types of life insurance. To keep things simple, let’s focus on the two major types of life insurance….term and permanent (whole life) life insurance policies.
Term life insurance policies provide insurance for a certain period of time and the premium paid into the policy provides a death benefit to your beneficiaries if you pass away during that stated term. Most common is a renewable term policy, for a certain period of time, say 20 years. With such a policy, you pay the same premium every year, and any health changes in your life do not impact the premiums, as long as you pay the annual premium on time each year. Term life insurance policies are generally more affordable than whole life policies because the insurance is only for the specified term. Term policies usually do not cover you late in life and there are no other features, such as investment aspects of these policies.
Term policies are generally best for younger people, as the cost is less and more insurance can be obtained. These policies are best to cover you and your family into your 50s and 60s, as your children may become independent and you build your family savings. However, the cost of term insurance, especially if the premium is not fixed, can become prohibitively expensive as you get older, certainly beyond 70-80 years old.
Permanent life insurance policies can be useful when you want to provide coverage for later in your life, well past your 60s. There are many types of permanent life insurance, such as Whole life, Universal and Variable Universal life insurance, each which can have many different and sometimes, complicated and/or expensive features.
Whole life insurance can provide coverage for up to a lifetime (a term that you need to verify within each policy, as the policy states an expiration age, such as age 95 or 100), if you stay current on your premium payments. Some whole life insurance policies build cash value or pay dividends during the life of the policy. You can borrow against the cash value, if needed. We would not advise this, unless you carefully weigh your alternatives, as if you do not pay the borrowed cash value back, your loved one(s) will get a reduced death benefit due to the unpaid loan, at the time of death.
In general, we feel that insurance policies should provide you with insurance only, and not offer investment aspects, as the investment features of those types of policies can be quite expensive. Universal life insurance can offer flexible premiums and have the potential to build account value and Variable Universal life insurance can also offer flexible premiums, investment options and the potential to build account value.
As you consider various types of insurance policies, they can get quite complicated. We recommend that you consult with a licensed life insurance advisor, who can help you navigate which life insurance policy and company you should use, review with you which life insurance policy you should consider and help you decide on the amount of coverage that works best for you and your family.
We are independent investment advisors, meaning we are not compensated by any investment firm. The insurance industry is quite different, as most life insurance professionals are paid by commissions for the products they sell. We recommend you consult with an independent insurance professional, who works with more than one company. That does not mean you should not talk with an insurance agent who only represents one company, but make sure that you talk with multiple agents or at least one independent insurance professional.
As part of the comprehensive financial planning that we provide to clients, we can provide you with a referral to an independent insurance planning firm that we have worked with, that has been vetted by our back-office firm. They can provide you with independent, expert analysis and advice, as well as work with us to coordinate the planning, decisions and process with you. We do not receive any compensation by working with them.
Together with this outside firm, we can help to guide you through the complex maze of life insurance policies and terminology.
In the past, life insurance was also a key part of estate planning, as many more families were subject to estate taxes. As the estate tax exemption is now over $11.4 million per person (almost $23 million for a couple), unless you have assets in excess of that amount, you would not have estate tax obligations and would not need life insurance for the liquidity that life insurance provided to pay for estate taxes, if the bulk of your assets were illiquid.
If you have older life insurance policies which you obtained many years ago, for estate tax or just general coverage purposes, please contact us if you would like this outside insurance firm to review your existing policies. This may be helpful if you have a policy with cash value or to confirm the age at which your policy may expire.
Life insurance can be another place to find financial comfort and security for your future. It can also be a very complicated area. While we are not experts, we are knowledgeable and can work with you and other experts to help you through this process.
Please contact Brad or Keith if you would like to further discuss life insurance related matters.