Life Insurance

What is life insurance?

Life insurance is a financial product that, in exchange for timely premium payments, pays a death benefit when the person who is insured dies.

This death benefit is paid to the policy’s beneficiaries and is received by them, generally speaking, income tax free.

However, you define financial security for your family and your loved ones, one way of helping them to reach their goals is with life insurance.

 

The policy’s death benefit can be used by the identified beneficiaries in a number of ways, including:

Income replacement

 

Debt elimination

 

Future expenses (i.e., college tuition)

 

Who should consider life insurance?

 

Anyone who has loved ones that depend on them financially.

 

 

Those who anticipate a future change in family status and want to lock in protection and potentially lower premiums, while they’re still young and healthy.

 

Comparison of Insurance Types

There are two main types of life insurance: Term Life Insurance and Permanent Life Insurance.

Term Life Insurance

Term life insurance pays a death benefit in the event of an insured’s death during a specified period of time, such as 10, 15, 20 or 30 years. Generally speaking, term life insurance policies offer the lowest premiums.

These policies offer premiums that are guaranteed not to change for the guaranteed level premium period, i.e., 10 or 20 years. At the end of the term, many policies may continue coverage, but the premiums will increase annually.

You can look at term insurance like renting a place to live. You pay to have the policy for a specified amount of time, but once the policy expires you don’t own anything.

 

Permanent Life Insurance

Permanent life insurance is as it sounds – permanent. The insurance coverage lasts your entire life (as long as you pay your premiums and don’t allow your policy to lapse). Some permanent policies offer premiums that are guaranteed not to increase over your entire lifetime.

Some types of permanent life insurance policies have the potential for cash value accumulation. The cash value in the policy will grow on a tax-deferred basis.

If term life insurance is compared to renting, permanent life insurance can be compared to owning your home.

Term vs Permanent Insurance Chart


 

Cash Value Image

Cash Value

We build our financial lives over time by acquiring various types of assets. These include homes and cars – and financial assets such as bank accounts, investments and retirement accounts.

In addition to the death benefit, the cash value in a permanent life insurance policy can also be considered a financial asset that may be available to you.

If you own a permanent life insurance policy designed to accumulate cash value, the cash value can be used for:

Retirement planning: You can use the policy’s cash value as supplemental retirement income as well as to better manage your rate of withdrawal from other equity-based retirement accounts during down markets. The cash value can be an alternate source of income that can give you the flexibility to manage your retirement income more effectively at different points in your retirement years.

 

With access to the policy’s cash value during your retirement, you can use it to:

 

Withdraw less income from your retirement accounts, especially during periods of negative market volatility when it is more advantageous to limit your withdrawals.

College funding: Access to cash value of a life insurance policy can be used to supplement your existing college funding strategy.

As a source of cash or credit: There’s no restriction on what you can use your policy’s cash value for, so it can be an additional financial resource during both a time of need and a time of opportunity.

 

How much do you need?

Whether it is term or permanent insurance, the consideration for how much you need is the same. What do you want the death benefit to accomplish?

Is it to replace your income if you were not here?

If so, one method may be to take your income and multiply it by the number of years you think is appropriate.

Is it to eliminate debt?

Many people, for example, will purchase a life insurance policy in an amount equal to their mortgage.

When determining how much life insurance you’ll need, you may also consider other factors such as:

The value of your employer-provided benefits that your loved ones currently rely on.
 

Costs for any unpaid services that you may provide, such as child care, elder care, transportation, or home repair and maintenance.

How much life insurance you need is a complicated decision. Contact me with questions and for additional guidance.