Life Insurance. The Difficult Discussion We Should All Think About Having
Life insurance is probably one of the most widely misunderstood and often avoided financial topics. It’s a hard topic to bring up, because nobody wants to think about dying. But having that discussion now may help you make better financial decisions for your and your family’s future.
Four commonly asked questions:
Who needs
life insurance?
From the minute we take our first breath to the moment we take our last, life insurance can be one of the most important pieces of any financial plan. Whether it’s parents taking out a life insurance policy on a child, a newlywed couple buying policies, or a person increasing their coverage due to a significant increase in income or net worth, there are countless scenarios where life insurance can play a part in protecting your assets and providing for your survivors, no matter how old you are.
When do I need to buy life insurance for myself?
If you are on your own, independent of your parents and have a job, you may want to consider purchasing your first life insurance policy. This is especially true if you have dependents. You’ll want to provide for them in the event of your death.
Beyond your twenties when you may be starting your career and building a family, you generally should continue to have life insurance in place to protect your assets, provide for your survivors and cover any outstanding debts that you may have – including your home.
How much life insurance is suitable for me?
The general recommendation is to have enough life insurance in place to cover ten years’ worth of income. If you earn $40,000 per year, that’s a $400,000 benefit that would be paid out to your beneficiaries should you die. However, some people also factor in future expenses. For example, those with children often figure the cost of a college education into the policy amount, which can average $157,000 for a four-year degree in 2039 [source https://vanguard.wealthmsi.com]. A financial professional can help you work through your current financial situation and future needs to determine a policy amount that’s suitable for you, no matter what life stage you are in.
What if I have life insurance through my employer?
Many individuals select term life insurance through their employer – this is called group life insurance. Because it’s a group, the cost is usually covered by your employer or you can increase that death benefit through a minimal payroll deduction. But it is not “portable”, meaning the policy ends when your employment ends. If you leave or lose your job, you lose that benefit. While it’s a great supplement, having a portable term insurance policy separate from your employer is highly encouraged so there is no lapse in coverage.
Term Life and Whole Life Explained
Term Life
Term Life insurance is an insurance policy you purchase to cover you for a period (or term) of 10, 20, or 30 years. For example, if you take out a 20-year term life policy when you are 25, that policy will expire when you turn 45. To continue coverage, you’d have to re-apply and qualify for another term policy to take you to, say, 65. The older you get, the more expensive term life insurance can be because your morbidity risk increases. Morbidity rates are calculated by analysts and help insurers predict the likelihood that an insured individual will contract or develop any number of specified diseases based on a number of personal and geographical health factors, thus determining rates. With that said, term life insurance is a great place to start to protect your income and lifestyle. Depending on your age and other factors, you can have a reasonable amount of coverage and monthly premium to protect your income and assets during your working years. If you die during the contract period, your beneficiaries will receive payment specified in the contract at once. This money can be used to cover years’ worth of expenses for your loved ones.
Some term policies are “convertible” and others are not. A convertible policy allows the policyholder to change a term policy into a whole life policy without going through the health qualification process again. So, it’s important to inquire about this feature as it helps protect from the risk that one later determines a need for additional coverage but has since incurred a health problem causing them to no longer qualify for a new policy.
Whole life
Whole life insurance – commonly referred to as permanent life insurance – is so named because it lasts for your whole life. Many policies extend to 120 years of age. The reason many people choose to take out a whole life policy is that it can provide a tax-free benefit and tax-deferred growth for its cash value when structured properly. Cash value life insurance is a form of permanent life insurance that features a cash value component. The policyholder can use the cash value for many purposes, such as a source of loans, as a source of cash, or to pay policy premiums. Simply put, it can provide a death benefit without the expiration limits of term benefits and it has the cash value component. This can provide other retirement options for retirement income strategies beyond the typical death benefit.
Long-Term Care Considerations
Long-term care (LTC) or extended care protection helps pay for qualified care in your home, care in a facility, or other long-term care services. While LTC protection may not be top-of-mind for someone in their twenties, thirties or even early forties, it should enter the conversation if 1) you have aging parents who will likely need care in the next 10-20 years, or 2) if you are nearing retirement. If you find that you don’t need care after all, you can access the cash value during your life or make the death benefit part of your financial legacy.
LTC protection is designed to prevent catastrophic and quick depletion of the income sources you planned for in your retirement income strategy. Having these conversations with your loved ones can be deeply emotional. No one wants or plans to have lasting health concerns as they age. But they are also necessary, because the risk is very real – which is why a growing number of baby boomers are seeking information about these income and health protection solutions.
Peace of Mind
Whether it’s life insurance or long-term care protection, these are important pillars of your financial plan that should not be ignored. Having the difficult conversations and doing some planning now will give you peace of mind for yourself and your family. A financial professional can help you determine which option is best for you.
RESOURCES
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