Have you ever awakened after a wonderful night’s sleep, opened your eyes, stretched, looked out the window and said to yourself wistfully, “Today is the day I’ll learn more about life insurance.” Probably not. Life insurance isn’t exactly something we like to toss around in our heads while we go about our day. However, there are times in life when the topic becomes extremely important – and we wish we learned more and select the right life insurance coverage for your specific needs.
Allow us to help shed some light on the subject of life insurance and offer some suggestions for being prepared.
1. Why get life insurance?
Could your family survive financially without you?
Generally, the answer to this question is based on risk and protection. Anyone is at risk for their financial well being if you were to die or become disabled today. This is an emotionally-filled question, but one we often ask our clients: Would your untimely death create a financial hardship for someone, e.g. a spouse, a child(ren), a dependent parent or significant other? If the answer is yes, possibly, or probably, it would be reasonable to consider the purchase of a life insurance policy. Such policies provide tax free benefit to your selected beneficiaries. Such an infusion of money could help those you care about stay in their home, meet expenses, satisfies your dreams and goals, such as paying for college for your loved one; even if you are no longer around.
Does everyone need life insurance? Not necessarily. If your untimely death would pose no financial challenge for your loved ones, associates, business or other relationship, then you might not need such protection now. If that changes in the future, you might delay such a purchase. If you feel you are likely to marry, have children, have financial obligations you might not want to delay such a decision. Life Insurance is issued based on your current health. It is priced accordingly and determines your premium and possibly your death benefit. This process is called the Medical Underwriting Process. It is when your medical record, a paramedical exam and lab work compliment your application to determine your insurability. Sometimes the outcome causes you to limit the coverage you can afford.
2.What kind of policy is best?
There are generally two types of Life Insurance contracts, ones that offer only a death benefit (known as Term Life policies) and ones that accumulate cash value inside the policy above the face value (known as Whole Life policies). Term policies are generally less expensive than the “whole life,” and cease to provide a benefit when you stop paying the premium. The premiums can either increase annually for the duration of the policy or you can “lock-in” a level premium for a period (or Term) of time, such as level for 5, 10, 15 or 20 years. After that time either the premium increases or the protection lapses. These types of policies are ideal when there is a short term need for such coverage, e.g. protecting a loan or mortgage, until the kids are out of college and on their own.
Whole life (cash valued) policies generally have higher premiums that remain level, grow cash inside the policy on a tax-deferred basis, and over time could have enough cash value to leverage through dividends (if available) to pay the premium into the future. One could stop paying the premium allowing the policy to effectively “pay itself”. These policies would, as such, last the whole of your life. Although each policy is different, and there must be assumptions to conclude what is described here in, it is a type of policy with many features not available in Term Life policy.
3. How much coverage should I get?
There is no set answer to this question, as everyone is different. This is one approach we often suggest clients take – obtain the coverage that would allow for these things:
- Amount to pay off mortgage
- Amount to liquidate all other debt
- Amount to pay for 4 years of college per child
- Amount to equal 1/2/3+ years of my income for my partner/spouse
This can serve as a guideline and can be modified to your specific needs. Sometimes a combination of Term and Whole life policies can help you reach your goal of enough protection at a reasonable price.
If you do not have a need for life insurance, maybe a more important consideration is a very different form of protection, i.e. Disability Income Protections. This type of policy provides you income payments if you become unable to do the main duties of your regular occupation due to an illness or injury. This tax-free benefit would allow you to pay your bills while you recover prior to returning to work. This type of insurance is probably suitable for anyone who has gainful employment and could not economically sustain themselves for a year while sick or injured. Many have argued that such policies are more valuable than life insurance policies. Honestly, I think there is need for both to be considered as having enough value for you. In some cases, employers have some inexpensive options that should be considered as a portion of your overall insurance program.
Having had a serious car accident less than a year ago, one often sees such events as wake-up calls and drive you to double check to see if your plan is up to date. Don’t wait for such an event. Planning to get around to it someday is naïve. Today is someday!