Although many families do not want to think too far into the future regarding their financial planning, proper life insurance coverage is often a very valuable asset. Life insurance is often used as a method to replace income for a family’s breadwinner, cover debt (student loans and the mortgage), or replace expenses (childcare etc.) for a non-working parent. If something were to happen, would you be able to continue on financially with little to no change? If the answer is no, life insurance would be for you.
Life insurance is generally the paying of a premium (on a monthly or yearly basis) in exchange for a lump sum of money when the policy holder passes away. There are several different types of life insurance policies, but we will keep it somewhat simple. We will discuss the ins and outs of term and permanent life insurance policies and which might be right for you and your family. Keep in mind that life insurance is always less expensive when you are young and healthy as opposed to older.
You may have some coverage at work, but it generally will not follow you if you leave your job. Additionally, if you invest the lump sum proceeds of your policy and receive a 5% annual return, will that provide enough income for your dependents to replace your salary?
Term Life Insurance
The most common, and usually least expensive, form of life insurance is term coverage. Often times, the term (the period of time for which you are covered) will be between 10 and 30 years. The length of the term will often be dictated by your goals and your cash flow (of course, 30-year term is more expensive than 10-year term).
If you are a young family who has young children and a new home, a 25 or 30-year term policy might be right for you. If your children are off to college in a couple of years and you have 5-10 years left on your mortgage, a 10-year term might be better for you.
Term is often more suitable for working families who know they need coverage, but cannot afford the cash outflow of permanent life insurance coverage. If the term ends and the insured is still alive, nothing will be paid out.
Permanent Life Insurance Coverage
Permanent life insurance coverage is in force (as long as the premiums are paid) until the day the insured passes away. At that point, the beneficiaries of the life insurance policy will receive a lump sum payout from the insurance company.
Although the premiums are generally much higher, a good deal of the premium is used to build cash value. This cash value will often earn some level of income, whether it is interest or returns tied to the stock market. A proper illustration will show you that the cash value increases based on your health and premium levels.
Permanent life insurance coverage is generally more appropriate for families who have the ability to withstand higher premium payments and are in the market for coverage that will pay at any time. The cash value can often also be used as an additional source of funds for college or in retirement due to the fact that the cash value is generally tax deferred or tax free.
As you can see, there are many different factors to take into consideration when looking into life insurance coverage. What is your goal? How much can you afford to pay per month? Will a term policy fully cover all of your needs? A seasoned planner should be able to help you answer all of your questions and come to an affordable solution for you and your family. I look forward to taking the time to review your plans and help you be financially fit!