Life insurance is a fantastic tool that can be used to protect your loved ones and the assets you accumulate, during your life. However, it’s not the right solution for everyone. Life insurance may be appropriate to cover a short-term gap or during specific stages of your life. Unfortunately, many young people purchase life insurance with hopes that the family will become wealthy, or they use it as a forced a savings tool rather than a risk management solution. Insurance is really about protecting and sustaining the goals, dreams, and financial successes you have in life. Investment management is the proper instrument to utilize for building wealth, while insurance is used to protect that wealth. Therefore, it is important to know when you need insurance and what type of protection is most efficient for your situation.
Insurance products are used in a variety of ways: companies use them to forge buy-sell agreements which protect the business should the owner(s) pass away unexpectedly. People planning their estates may use life insurance proceeds to pay off remaining debt in the estate, in turn, this can protect beneficiaries of other estate assets and lighten the administrative needs of the trustee. If you are married and have minor children, then you may purchase insurance to protect your family’s lifestyle and future. Additionally, life insurance can be a great way to remove assets from your estate while preserving wealth for future heirs. Due to the new Tax Laws passed in 2017, this type of estate planning is only necessary for the top 1% wealthiest people in the nation.
There are many different types of insurance offerings available. Over the years, insurance companies have become fairly creative in designing different contract options. The majority of insurance contracts are built, fundamentally, upon three core products:
1. Whole Life Ins.
2. Universal Life Ins.
3. Term Life Ins.
Whole Life Insurance is known as permanent insurance; this means your policy covers your entire lifespan and provides a death benefit as long as you continue to pay into the plan. There are a variety of Whole life policies to choose from, but the essential components are as follows:
It provides a savings module to build up cash for future needs.
There’s also a stated investment component in which earning accrue based on premiums, minus, fees and expenses.
Whole life insurance usually has a minimum guaranteed rate of return that provides a way for people to experience tax-deferred growth in a very conservative manner.
Be mindful that fees can erode growth if you don’t keep up with inflation over time.
Whole life policies can be expensive, and they are not flexible to your changing life circumstances.
Universal Life Insurance is another permanent insurance offering. Like Whole life, universal life is a vehicle that creates cash buildup for savings. The cash grows tax-deferred which means you will be taxed on the distribution as ordinary income and it will be included in your Adjusted Gross Income on your tax return. The benefits of the Universal Life are as follows:
It provides more flexibility than Whole Life insurance offers. You can have level premium payments and a flexible death benefit. You can use your cash value to pay premiums if needed at different stages of your life.
Once the policy matures, which is 5, 10 or more years depending on your contract, you may have a guaranteed cash balance.
The insured doesn’t direct investments unless it’s Variable Universal Life (VUL) insurance. When you select VUL, you may lose the guaranteed cash value benefit.
Term Life Insurance is used to cover expenses for a certain period of time. It pays a predetermined sum, and the protection ceases at the death of the person covered under the policy or at the end of the term, whichever comes first. You have the option at the end of the term to renew the policy if you need insurance coverage for an additional number of years. Typically, you have term coverage to protect your family until the children reach age 25. The coverage amount can be level or decreasing. The decreasing coverage amount is typically selected when you decide to use the insurance as a tool to pay-off a declining mortgage debt in the event of your passing. The idea is that the amount of coverage decreasing each year equals the amount you are paying down through your mortgage payment.
Term life is appropriate for a young family. Typically, both spouses have coverage of their own to protect the surviving spouse in the event of a tragedy. The amounts may vary between spouses and are based on the surviving spouse’s financial need to support the ongoing well-being of the family. It is low cost, and provides pure protection. However, if you need savings help or want lifetime coverage, term life insurance will not be your best pick. Also, you run the risk of paying the premiums each year and never needing it, which is why term insurance is about protecting risk and not about savings or investment growth.
If you haven’t protected your family, your business, or your wealth with insurance products, now may be a good time to contact your insurance agent. For more information, see the sources below. Do you need more comprehensive planning? Meet with one of our CERTIFIED FINANCIAL PLANNER™ professionals to create peace of mind for you and your family.
Allstate. What is Whole Life Insurance? https://www.allstate.com/tools-and-resources/life-insurance/whole-life-insurance.aspx. Pulled 11.20.18
Insurance Information Institute. What are the Different Types of Term Life Insurance Policies? (2018). https://www.iii.org/article/what-are-different-types-term-life-insurance-policies pulled 11.20.18
Pendell, C. (9.12.2016). What is Universal Life Insurance and How does it work? https://www.jrcinsurancegroup.com/what-is-universal-life-insurance-and-how-does-it-work/ pulled 11/20/18.