LIFE INSURANCE CAN CREATE GENERATIONAL WEALH
Life insurance is meant to replace your income if you die prematurely. If you’re married, in a committed relationship, or have children who depend on your income, you need life insurance. If you have a stay-at-home spouse or partner caring for your home and children, you would be faced with some very substantial costs to replace those services if he or she dies. Here are the primary types of life insurance to choose from; each product has its appropriate uses:
TERM LIFE INSURANCE
Like home and auto insurance, term life insurance is pure insurance in that it pays off only if you make a claim. The cost of the insurance can go up every year or remain level for a specific number of years. You can lose your insurance coverage if the term expires and the policy isn’t guaranteed renewable or if you elect not to renew. However, term insurance is the cheapest form of life insurance, and the only appropriate type of life insurance for most people.
Twenty-year level term coverage is generally an excellent option for families with young children because the insurance will be there to support the surviving family at least until the kids are grown. Here are some options to consider:
Level premium insurance, which is extremely cost-effective, guarantees a set premium amount for a set number of years. Choose level premium term insurance with a guaranteed level premium for the number of years that you anticipate needing the coverage.
A guaranteed renewable rider is a very attractive feature available with many term insurance policies. It ensures that you’ll be able to retain a term policy at the end of its initial term — if you still need the insurance — simply by paying the premiums in effect at that time. You don’t have to reapply or provide evidence of insurability.
If you need coverage for only five to ten years, you may want to consider Annual Renewable Term (ART) life insurance because it tends to be less expensive for the first five or six years of the policy, but every year thereafter, the premiums continue to increase. It makes no sense, though, to buy this coverage unless you won’t need it very long. In every other situation where term insurance would be appropriate, go with the level premium term insurance.
PERMANENT LIFE INSURANCE
With permanent life insurance, the cost is substantially higher in the first several years of your coverage. However, the cost can’t go up. The initial premium rate is as bad as it’ll ever get, and the insurance company can’t deny you benefits as long as you pay your premiums on time. So, if you need life insurance coverage forever — for example, if you need cash available for your heirs to pay estate or inheritance taxes upon your death — you’re a good candidate for permanent life insurance. Permanent insurance comes in two primary flavors:
Universal: You may possibly need a lot of life insurance now and well into your retirement years. If this is the case, get universal life insurance for at least a portion of your life insurance needs.
Whole: If you need coverage for your entire life, no matter how long you live, whole life insurance might be the right option.
WHY YOU SHOULD GET LIFE INSURANCE
One of the most fundamental questions you should ask yourself when contemplating life insurance is this: Will someone in my life be adversely effected (from a financial standpoint) by my untimely death? This is different from “Will someone be sad by my untimely death?” I will be sad. But I do not want to assume your financial liabilities.
- If You Were To Die Tomorrow, Who Would Assume Your Debt? If you own a home, a business, or have personal liabilities, someone else will become responsible for those liabilities (generally your next of kin). Therefore, your spouse, your parents or your siblings could end up having to pay your debts after the good Lord takes you.
- Do You Have Children? Guess what? If you have kids and you don’t have life insurance, you may have put your entire family at risk. I know that seems a bit harsh but it is a potential reality. Enough said on that.
- Are You A Business Owner? What would happen to your business if something were to happen to you? Do you have a succession plan? If you a business owner and do not have a succession plan, speak to a financial advisor to get you on track to help you create one. This could mean purchasing some type of insurance product and creating some documents determining who would inherit your business and its assets and liabilities.
How Much Insurance Do You Need? This is not an easy question to answer and everyone is different. First, it depends on the variables I mentioned above. It also depends on your age, your sex (men are generally more expensive to insure than women), and how much insurance you can afford. The general formula used by insurance agents is somewhere between 7-10 times your annual salary. For example, if you make $100,000/year, you should consider buying somewhere between $700,000 to $1,000,000 of insurance. That being said, if your life is complicated (kids, business, lots of debt), you should probably look to increase that amount. Again, consider seeking the advice of a financial advisor who understands your financials before making this decision.
Where Should You Buy Life Insurance? Insurance is an interesting industry. Some companies are better at certain products than others. My advice is to speak to a financial advisor as opposed to a “captive agent”. A captive agent is someone who works for an actual insurance company and only sells that company’s insurance. Whenever I present clients with insurance options, I generally show them 12-15 quotes from various providers so that the client can see the differences in price. Also, as I mentioned, term life may not be the best type of product for you. A financial advisor can assess your situation and help guide you towards a policy that makes the most sense for you. In most cases, advisors will not want to over insure you; however, I cannot say the same for a captive agent.
What Else Should You Know? Life insurance is a big purchase and one that will stay with you for many years. If you have an old policy laying around, consider having it reviewed by your financial advisor. It may make sense to buy more insurance (especially if your life has changed in the past few years) or to let the old policy lapse. Finally, even if you have a group life insurance policy through your employer, do NOT assume that it is an adequate amount. Most group life policies that are offered through employers will cover 3 times your salary. Even if it is an adequate amount, what would happen if you were to leave the company or get fired? You would suddenly be without any form of life insurance. Finally, insurance becomes progressively more expensive as you age. In fact, premiums can be almost 2 times as expensive for a 40-year old versus a 35-year-old. Try not to wait on buying insurance as it may only become more of a financial burden.
Like most things related to the financial planning arena, insurance can seem complicated and overwhelming at first. Seek some help from a professional you trust and don’t be afraid to ask questions. This is a big purchase and something that could seriously impact your loved ones down the road.