Navigating Life Insurance

Life Insurance: Purposeful Protection

An unknown author once quipped “you don’t buy life insurance because you are going to die, but because those you love are going to live.” Nothing could be said that would ring truer.

Life insurance is arguably one of the most powerful financial instruments ever created. For an incredibly feeble amount of money, an individual can purchase a substantial amount of security for his or her family, business or estate. Approximately 60% of adult Americans have life insurance with 1 out of 5 saying they do not have enough, [1] 44% of younger Americans believe life insurance costs 5 times as much than a typical policy.

Regardless of why someone has yet to purchase a life insurance policy, the purpose of purchasing coverage will always remain the same. In broad terms, purchasing a life insurance policy is to fulfill one of four primary financial objectives.

For the Family

If one depends on you and your paycheck, you need to purchase a life insurance policy. Picture your monthly budget. Now imagine your partner trying to pay the monthly expenses without your financial contribution. From covering funeral expenses to eliminating debt, the financial well-being of those you leave behind is reliant on replacing your income as fast as possible.

Life insurance also provides a vehicle to fulfill the dreams and promises for your children. College tuition can be fully funded along with your daughter’s wedding wises or down payment on her first starter home. And for parents with special needs children, their lifelong medical needs can be secured.

Back a Business

Most businesses rely on key personnel to maintain their high level of success. Should one of those individuals unexpectedly pass away, an organization may be unable to recover. Life insurance plays a critical role in the financial soundness of closely-held businesses.

Life insurance policies are commonly used to fund cross-sell purchase agreements. The coverage readily provides the funds necessary for a business to purchase the interests held by the spouse of the deceased partner or shareholder. Effectively, life insurance can prevent becoming partners with someone never intended.

Many businesses’ success is often attributed to the efforts or knowledge of select individuals whose loss could sink an entire organization. Key-man life insurance can provide an influx of cash to buoy sales from the death of a top salesperson or hire consultants after the loss of your best engineer. For businesses, life insurance can actually buy the time needed to stabilize and continue profitable operation. 

Leave a Legacy

From small communities to big causes, charities to churches, Americans are an incredibly philanthropic people. If fact, together we contribute over $1B every day to charitable causes. [2] Unfortunately, when we pass away, so too do our charitable contributions. That is, unless there is a life insurance policy in place naming a charitable organization as the beneficiary. 

Life insurance is a wonderful way to support your favorite cause. With its relatively low cost, the proceeds can fund a myriad of organizations for lengthy periods of time, provide financing for the construction of new buildings, or furnish much needed supplies to a charity whose cause is in need. The opportunities are endless and will leave an indelible mark on those you help. 

Estate Planning

Estate taxes, also known as the death tax, remain a part of the tax code. While wealthy individuals certainly need to plan how their heirs will pay for the potential 40% tax rate on inherited property, the estate tax can also sneak up on everyday Americans. Small business owners, farmers, and property owners may find themselves with assets worth more than the $11.58M estate tax threshold. [3] 

Without proper planning, the IRS will look to liquidate assets to pay the estate tax as soon as nine months after ones passing. This can lead to the unwanted sale of a business, property, or farmland. Fortunately, life insurance can provide the financial means necessary to avoid selling any property. And while $11.58M is indeed a significant sum, the current tax law is set to sunset to the pre-2018 $5M level by 2025. 

[1] https://www.iii.org/fact-statistic/facts-statistics-life-insurance

[2] https://www.charitynavigator.org/index.cfm  

[3] https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

Which Makes Sense for You: Permanent or Term Life Insurance?

In a very broad sense, there are two types of life insurance:

• permanent life insurance and
• term life insurance.

Permanent life insurance is a type of life insurance that can stay in force for your entire life, as long as you pay your premiums in full. Permanent life insurance usually, but not always, builds cash value for you that you can use for expenses later in life.

On the other hand, term life insurance is only in force for a specified amount of time: usually 10, 15, 20 or 30 years. At the end of the term, your coverage expires and you will need to either convert your policy to a permanent life insurance plan (if available) or purchase a new policy for a new term. The advantage of term life insurance is that it’s somewhat less expensive than permanent life insurance.

Which is right for you?

The answer depends on what you’re trying to accomplish by having a life insurance policy. Are you insuring your life so that when you pass away your children will be able to go to college and your spouse will be able to pay off the mortgage? These are temporary concerns and so a temporary form of life insurance – term life – is best suited to address them.

However, if you are concerned about providing income to a widow or widower for life, funding retirement, or passing wealth to a future generation then you will find that permanent life insurance is better suited to address these goals.

Always ask yourself why you need your life insurance policy. If it’s for a temporary goal, then term insurance is probably best. If it’s to address a long-term need or concern, then it’s time to start looking at permanent policies.

Term Life Insurance

Term Life insurance is life insurance that you pay for during a specified length of time or term – generally one to 30 years. You select the amount of the death benefit or face amount to meet your needs.

Premiums, or payments, which can be the same amount or increase with time, must be made monthly, quarterly, semi-annually, or annually. If you die during the term of coverage, the face amount of your policy will be paid to your beneficiaries. Term insurance policies do not accumulate cash value and therefore usually offer lower premiums than other life insurance products with the same face value.

Universal Life Insurance

Universal Life is permanent insurance that has the potential to accumulate cash value. However, it offers additional features and options. For example, you can increase or decrease your policy’s face amount to accommodate your changing protection needs. You can also increase or decrease the dollar amount of your premium payments and make additional lump sum payments to your policy. Since a Universal Life policy accrues cash value, you can borrow against this cash value for any purpose.

You have the option to skip premium payments if your account has accrued sufficient value because the premiums will be taken from the accrued value. A Universal Life policy also has the potential to earn a higher rate of return than a whole life policy, although there is a risk that your rate of return could drop.

Whole Life Insurance

Whole Life Insurance is life insurance that you own for your entire lifetime. The amount of the death benefit or face amount can be selected to meet your needs.

Premiums, or payments, are fixed and can be paid monthly, quarterly, semi-annually, or annually. As more premiums are paid, your policy accumulates a cash value that grows on a tax deferred basis. In essence, whole life is like buying a house versus renting it. The monthly cost is higher than it would be for a term life policy, but with each payment you make you gain equity. You can borrow against a Whole Life policy for any purpose. Loans, however, require you to pay interest and any borrowed amount you do not pay back is deducted from the payout to your beneficiary at the time of your death.

Final Expense Insurance

Your family means the world to you. The last thing you want is to leave them with major expenses after you’re gone. Final Expense insurance is life insurance that helps provide the money they may need to pay medical bills, funeral expenses, legal fees or unpaid bills. It is an insurance policy that lets you decide how your assets are distributed. By planning ahead, you can help protect your loved ones from unnecessary financial stress when you die. And, you can distribute your assets in the manner you decide!

How Much Life Insurance is Enough?

One reason for choosing a life insurance policy is to figure how much your dependents will need after you’re gone. In order to choose the face value (the amount your policy pays if you die) of your life insurance you should consider the following:

• How much debt you have: All of your debts must be paid off in full, including car loans, mortgages, credit cards, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).
• Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.
• Future Obligations: If you want to pay for your child’s college tuition you will have to add this to the amount of coverage you want, which would be about another $100,000

Adding everything together, you will probably want a policy for $840,000 ($540,000 to replace yearly income + $200,000 for the mortgage expense + $100,000 university expense).

Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal).

Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. If you have a spouse or partner that also is a contributor to the family income, then it would make sense to go through the same exercise to determine the face value of the policy.