Did you know that one third of all households would feel adverse financial impacts within one month if a primary wage earner died? Life insurance isn’t a fun thing to think about, and it may seem like an unnecessary expense. But if you have people who depend on you for financial support, then life insurance is really about protecting them in case something happens to you – your designated beneficiary would collect a financial benefit upon your death. Life insurance can be confusing, so here’s a rundown of the basics.
Types of Life Insurance Term Life Insurance is the simplest and generally the cheapest form of life insurance. Coverage is purchased for a specific period of time. It can usually be renewed, but premiums will increase based on age and health factors. This type of life insurance has no cash value.
All other types of life insurance are permanent. There are several varieties, but they include a savings element that builds cash value, in addition to the death benefit. Once that cash value accumulates, it is accessible to the policyholder tax-free. The following are some of the common types of permanent life insurance.
Whole Life: You purchase this policy to cover your entire life, as long as you keep paying premiums. Premiums remain constant throughout the policy, and the insurance company invests a portion of your premium that becomes the cash value. These are more expensive than term life policies in the early years, but they even out because the premium does not increase.
Universal Life: This policy is similar to whole life, but has the potential for higher earnings on the savings component. It is more flexible in terms of changing premiums and face value throughout the policy. There is usually a guaranteed return on the cash value. Disadvantages include higher fees and the possibility of increasing premiums.
Variable Life: A variable life policy generally has fixed premiums, and you have control over the investment decisions for the cash value portion. However, this is riskier because there is not guarantee for the cash value.
How Much to Buy? LIMRA research finds that approximately 50 million households recognize they need more life insurance. But how much is enough? Many people decide based on an income replacement calculation, between 5 and 10 times the amount of their current income. However, it’s important to think about your personal circumstances:
Is yours the sole income in your household?
Are there other expenses, such as college tuition, that may arise in the future?
Don’t forget to include potential medical and funeral costs.
Above everything, you want to be sure your family does not get stuck with bills, debts, or expenses that they cannot afford. Some employers provide life insurance as part of their employee benefits package; however, you may want to consider buying additional coverage, depending on your needs.
Why Purchase Now? Buying life insurance may seem unmanageable right now, but it could be a smart decision. Unlike other insurance coverage, life insurance is affordable. According to LIMRA, most people estimate the cost of life insurance at three times its actual cost.
The top three reasons Americans give for owning life insurance in 2018 are to:
Cover burial and final expenses (91 percent)
Help replace lost wages/income of a wage earner who had died (66 percent)
Transfer wealth or leave an inheritance (63 percent)
Did you know that life insurance does even more than provide financial security for your beneficiaries? It can help pay for college and support retirement security and other financial goals.
Have more questions about life insurance or want to review your current coverage? Contact a member of our personal lines team.
While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or change circumstances of any information herein or for the consequences of any reliance placed upon it. This publication is distributed on the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice or services. Readers should always seek professional advice before entering into any commitments.