Most people pride themselves on being the breadwinner for their family. They achieve great satisfaction from working hard to meet the financial needs of their spouse and children. These days, in many cases, both spouses share the responsibility of earning to support their kids. If you identify with this description, then it is probably hard to think about what it would be like for your family if you were not there. If your family is dependent on your income to maintain their standard of living, then you owe it to them to consider protecting them against the worst possible scenario – your unexpected passing – with life insurance.
A life insurance policy will provide a lump-sum payment to your beneficiaries if you are to pass away. In return for paying monthly premiums, your policy will pay out a pre-agreed upon sum of money to your family. A grieving family should not also be overcome with financial stress when the next mortgage payment or college tuition bill comes due.
Broadly speaking, there are two main types of life insurance policies: term life and permanent life. Term life insurance policies are designed to protect you for a specific period of time, typically 10, 20 or 30 years. Permanent life is designed to cover you for your entire life. Term life policies are in effect as long as you continue to pay the premiums over the given period of time, but they do not build cash value as you pay. Permanent life policies can build cash value over time which can become a valuable asset as you age.
Term insurance is typically much more cost-effective than permanent insurance. This makes term insurance an ideal solution for younger families looking to provide for survivor needs/income replacement. Some term insurance can be converted to a permanent policy in the future. We have found this “conversion option” to be particularly important. For example, you may not be able to afford the costs of a permanent policy today so a term policy may be appropriate.
If, in the future, you develop a health condition that makes getting a new permanent policy too expensive or even impossible, having a term policy that can convert to a permanent policy can be invaluable. Most conversion options permit you to convert the term policy to a permanent policy without evidence of insurability. Additionally, you can convert the policy based upon the underwriting classification that you received when the term policy was issued.
For example, you bought a term policy when you were 30 that was issued at a “Preferred Best” underwriting classification. Then, 10 years later, you get diagnosed with a significant medical condition. At age 40, as a Preferred Best policy purchaser, you may be able to convert it to a permanent contract at the same cost.
This is a huge benefit that should not be overlooked. In essence, buying a convertible term policy can lock in your insurability going forward. While permanent insurance can also be used to provide for survivor needs, it is often used for estate planning purposes, business succession planning or even for supplemental retirement income planning. There are several different types of permanent insurance including: (i.) Whole Life Insurance and (ii.) Universal Life Insurance. (Universal life can be further broken down into Guaranteed Universal Life, Current Assumption Universal Life, Variable Universal Life and Indexed Universal Life). To confuse matters further, permanent coverage can be issued on one life or on the life of two individuals (often referred to as “Second-to-Die” or “Survivorship” insurance). Survivorship insurance is a great vehicle for estate planning in that it is generally the most cost effective type of permanent contract.
As previously stated, the cash value in a permanent life insurance policy can be used to help supplement your cash flow in retirement, making permanent insurance a particularly appealing and multi-faceted product for many of our clients. What’s more, permanent insurance is a “tax favored” vehicle. Under current law, the cash value in a permanent policy grows tax deferred. You can take distributions from the policy up to your cost basis without any tax (assuming that the policy has not become a “Modified Endowment Contract” or MEC) and then if you need/want to access more of the cash value, you can begin taking loans against the cash value which can also be tax free. As such, the cash value in a permanent policy can be viewed as supplemental source of retirement income.
You may feel the need for a life insurance policy, but have no idea how much coverage you need. The truth of the matter is that every individual has different financial needs and can afford different premiums. The best way to define what you can afford and what you need is to meet with a Certified Financial Planner(r).
Besides being dependent on payout amount, premiums are also dependent on several other health and occupational factors. Age, sex, weight, health status and danger of occupation all factor into your risk profile. The more extreme the risk profile, the higher your premiums will be. At the same time, the higher your risk profile, the more likely it is that you should be investigating a life insurance policy.
The financial burden that comes from the loss of a loved one can add significantly to the burden carried by the already grieving family. While many of us may feel like we are invincible, the additional security provided by life insurance for the worst possible scenario is well worth the price.
If you have a life insurance, learn more about the benefits to an independent third party review here.