LIFE INSURANCE: WHAT YOU NEED TO KNOW
September 2021
Sometimes, getting to a good place with your finances means thinking about things you’d rather ignore. Like, well, death. And what will happen with your finances once you’re gone. But it’s an eventuality that everyone has to consider, especially where our family, business and other dependents are concerned — and that’s where life insurance comes in.
What is life insurance, exactly?
Life insurance is insurance that hinges on either the death of the insured, or the end of a set period of time. It’s designed to ensure that the people who relied on you in life will be OK after you’re gone, and that your financial obligations don’t become someone else’s burden.
Life insurance comes in several different flavors. These are the main three:
- Term life insurance covers you for a set period of time. It covers your beneficiaries if you die within that time period (the “term”) — and that’s it. The policy expires once the term is over, or you may have the option to extend it (aka renew) at a higher monthly payment (aka premium). It’s common to buy “level” term life insurance, which means your premium would stay the same during the term and then can change once the term expires.
- Whole life insurance is a form of permanent life insurance. It covers you until you die, no matter when that may be. It usually costs more than term life insurance, and the payments will often stay the same (a “scheduled fixed” type of premium), although not always. A whole life insurance policy’s premiums not only go toward the cost of your policy, but also build up a “cash value” — an amount housed in a tax-deferred account that grows over time, and that you can borrow against. (It may even pay dividends, depending on the company.)
- Universal life insurance is another type of permanent life insurance, with elements of both term life insurance and whole life insurance. Like whole life insurance, it includes a cash value that grows in a savings-like, tax-deferred account, and you can borrow against it. But like term life insurance, it also comes with flexible premiums, which will likely increase as you get older.
"More than half of Americans overestimate the cost of life insurance by as much as threefold. This is especially true for younger generations. " *
Do I actually need life insurance?
By now you might be thinking, “This seems more complicated than I have the bandwidth for. Do I really need this? Can it wait?” I get it: It can definitely be overwhelming (and discouraging) to deal with a future financial hypothetical, especially one that you won’t be around for!
But if any of these criteria apply to you, it’s definitely worth considering.
- If you have children or other dependents. The first thing you probably learned about life insurance is that it’s for people with kids or a spouse who want to make sure they’re supported even after they’re gone. This is true, but it goes beyond children: Life insurance policies can help cover the needs of other dependents you may not have thought of yet, like siblings, parents, friends — even pets! — and be used for big costs like college, living expenses, and mortgage payments.
- If you (or your loved ones) don’t have much savings. Allow me to be a little blunt on this one: If you don’t have much money saved when you die, someone else will likely have to foot the bill for your funeral and burial expenses, which can average $7,000–10,000in the US. You can make sure your memorial costs are taken care of with life insurance.
- If you have private student loans, or any type of loan with a cosigner. Not-so-fun fact: While federal student loans are forgivable upon the borrower’s death, many private loans are not. If you die before you pay off a private student loan, your estate — that is, whatever savings or assets you had when you died — must be put toward the balance you still owe (which means less, or nothing, left over for your loved ones). Also, if you have a cosigner, whether the loan is federal orprivate, that cosigner will be on the hook when you die. Life insurance can ensure those debts don’t get passed on to the beneficiaries of your estate.
- If a life-threatening disease or illness runs in your family. If this is the case, do your research ASAP. If you wait until you potentially start showing symptoms, your premiums will be much higher — if you can even get covered at all. We can’t stress enough the concept of “future insurability”. Even if you don’t need insurance now, when you do, you may not qualify or pay much higher so lock in your insurability now!
- If you’re a business owner. What will happen to your business if something happens to you? Your employees? Clients? Partnerships? Who will take over the business? A life insurance policy can take care of any and all costs and expenses that stem from the transition. Life Insurance can ensure your share of the business is purchased with the life insurance proceeds.
- If you have a large estate. If you have a lot of assets that will need to be divided upon your death, a life insurance policy can help offset the cost of executing an estate plan or potential associated estate taxes.
Basically, life insurance can cover pretty much anything that you might want or need to pay for in the event of your death. It’s a way of clearing your balance(s) for others, and of ensuring the people who care about you can mourn your loss without having to also worry about the money part.
How much life insurance should I get?
A good rule of thumb for estimating how much coverage you need is to:
- Add up all the expenses you want to cover, such as income replacement for your work, a mortgage and children’s college expenses.
- From that, subtract the amounts that your family could use to cover those expenses, such as savings and existing life insurance. Leave out retirement savings if your spouse will need that later on.
If it turns out to be unaffordable, you can buy what you can afford now to lock in a good rate. You can buy more later, just be aware that several years from now your rate will be based on your older age and any health conditions you’ve developed.
How do I choose a life insurance policy? What should I be looking for?
As with any insurance, choosing a life insurance policy can be fraught. There are a lot of options out there, with different criteria and rules to contend with. We wish we could tell there is a one size fits all but there isn’t. The best way to determine what type to add to your financial planning is consulting with a financial planner. We typically ask our clients their philosophy on death and what they wish to protect the most in their absence. Below are some questions we typically ask to help guide our clients:
- Is it important to you to cover all the future costs you would have if you were alive such as living expenses, education funding, children’s weddings or retirement?
- Do you have family history of medical conditions or have existing medical conditions?
- Would you like to guarantee your beneficiaries will have a death benefit no matter what age of death?
- Do you want to leverage the life insurance policy as a living benefit?
- Do you only want to cover your working years and have your policy end around that time?
These are important questions to ask yourself, discuss with your life partner or business partner.
If you want to discuss this topic further reach out to your Financial Planner or schedule time with one of ours. BOOK TIME HERE
*In January 2021, LIMRA and Life Happens engaged an online panel to survey adult consumers who are financial decision makers
in their households. The survey generated over 3,000 responses. The results were weighted to represent the U.S. population.