Life Insurance - Why is the Key of Life
Life insurance is a key component of a sound financial plan. It provides money to your loved ones in the event of your death, allowing them to continue living comfortably without your income. There are several reasons why life insurance is so critical:
Replaces Lost Income
The most basic purpose of life insurance is to replace income that is lost when you die. If you are the primary breadwinner in your family, your spouse and dependents may struggle to pay the bills, mortgage, and other living expenses without your ongoing paychecks. The payout from a life insurance policy provides funds they can rely on instead of your income.
Pays Funeral Costs and Final Expenses
Funerals and final expenses like medical bills can cost thousands of dollars. Many families do not have savings set aside specifically for final costs. A life insurance payout gives your family an immediate source of funds to pay for your funeral, medical bills, and other debts without dipping into general savings.
Supports Your Spouse
The death of a spouse triggers a mountain of financial challenges. Life insurance allows your surviving spouse to avoid money stress on top of grief. They can use funds to take time off work if needed or hire help for household duties. It also safeguards their retirement plans if those relied largely on your income and contributions.
Cares for Minor Children and Adult Dependents
If you have minors or adult dependents, life insurance makes sure they are provided for financially. Minors can use funds to cover living costs, education, medical needs, and more until they become independent. Adult dependents, like a special needs child, have money to sustain their current lifestyle.
Leaves an Inheritance
For many, the payout from a life insurance policy forms part or all of the inheritance they leave. You get to decide how proceeds are distributed tax-free to children, grandchildren, siblings, or others you select as beneficiaries. This lets you care for loved ones even after you've gone.
Covers Estate Taxes and Probate Fees
Estates with higher values often trigger expensive estate taxes and probate costs. These can diminish inheritances left to heirs. Life insurance payouts are not counted as part of the taxable estate, so heirs receive proceeds free of these costs. Funds can also be set aside to directly pay expected estate taxes.
Supports a Business or Charity
Proceeds from a life insurance policy can be designated to a business or charity. It continues support for a business that would suffer from the loss of an owner or key employee. Charitable giving is extended beyond one's lifetime to reflect values and impact communities.
Factors to Consider When Purchasing Life Insurance
The benefits of having life insurance are substantial. However, there are several factors you need to consider when purchasing a policy:
Income Replacement Timeframe
Consider when income replacement is no longer needed. If you have very young kids, you may want coverage that lasts 20+ years. If kids are older, 10-15 years may suffice. Spousal needs also impact the ideal coverage timeframe.
Health and Family History
Current health, family medical history, and lifestyle factor into life insurance premium costs. Those in poor health or with a history of health issues pay higher premiums for the same coverage as healthier individuals. Get quotes from multiple insurers.
Policy Type - Term vs Permanent
Term life insurance is in force for a specific timeframe, usually 10-30 years. It has affordable premiums but lapses at the end of the term. Permanent policies last your whole life, have guaranteed payouts, and can accrue cash value over time. Each works better for different needs.
Coverage Amount
Determine a coverage amount needed to adequately replace lost income and meet expected final expenses. Also factor in immediate debts, like mortgages, car loans, student loans and credit cards, as well as future costs like college tuition.
Beneficiaries and Contingencies
Name primary and contingent beneficiaries on your policy. Assign percentages of proceeds they are to receive. Also consider special requests like payment only after a certain age for minor children.
Types of Life Insurance Policies
There are several types of life insurance policies that serve different financial needs and planning priorities. The five main types of personal life insurance include:
Term Life Insurance
Term life insurance policies provide coverage for a set timeframe, usually 10, 20 or 30 years. This type has no cash value buildup but offers guaranteed payouts in the event of your death at affordable premium costs. It is a good choice for income replacement needs that end at a future point and works well for young families with limited budgets.
Permanent/Whole Life Insurance
Permanent or whole life insurance covers you for your entire life, whenever death occurs. Premiums are fixed for life and predictable. Part of payments go toward cash value that grows tax-deferred over time. This can be borrowed against or withdrawn later as needed. Premiums are more expensive than term policies, but death benefits and cash value payouts are guaranteed.
Variable Life Insurance
With variable life insurance, funds are invested so policies can build up cash value that then fluctuates based on market performance. Most investment options are mutual funds chosen by the policyowner. Initial coverage amounts may also fluctuate over time. Premiums also adjust up and down over time. Returns aren't guaranteed but can outpace whole life policies.
Universal Life Insurance
A universal life insurance policy offers permanent coverage for life. Part of premiums go toward cash value. What sets it apart is its flexibility - allowable payment amounts can decrease or increase within set parameters, age and health changes won't limit payment adjustments, and owners can alter death benefit amounts. It takes more tracking but adds control.
Survivorship or Second-to-die Policies
These policies pay out when the second spouse passes away rather than on the first death. Premiums are usually less expensive in total because the policy covers two lives. Payouts fund the transition of assets and property to heirs after final estate taxes and probate fees are paid at the second death.
Tips for Purchasing Life Insurance
If you determine life insurance is right for your situation, keep these purchasing tips in mind:
- Compare quotes from about 10 different life insurance providers to find your best option. Insurers assess risk factors differently, so premiums and approvals vary.
- Consider a policy with living benefits that pay out part of a death benefit early if diagnosed with a terminal illness while of sound mind.
- When opting for permanent life insurance, look for policies with non-MEC status for optimal tax perks.
- Remember to update your policy as life circumstances change - new marriage, new child, new job, etc. This keeps coverage adequate for evolving needs.
- For families, consider buying lower-amount individual policies vs. one high-value policy. It prevents gaps in coverage when a parent dies first.