The choices in life insurance policies can be confusing. Life insurance needs vary depending on your situation and it can be hard to know exactly where to start. The real question is do you need life insurance? According to the 2019 Insurance Barometer Study (Life Happens/LIMRA), 40% of those without insurance coverage would have immediate trouble paying living expenses if the primary wage earner died. When evaluating your insurance needs its best to think about what financial obligations need to be taken care of in the event of your death. Are you the main income earner for the family? Will a mortgage and other debts need to be paid off for your family to maintain their current standard of living? Are your insurance needs short term or long term? Are you healthy? Are you a business owner? There are certain major life changes that can trigger the need for life insurance; marriage, having kids, buying a home, retirement, or divorce.
Some common misconceptions about life insurance are that it is too expensive, I’m too young or I don’t need it. The cost of insurance can be designed to fit your budget and the younger and healthier you are the cheaper it will be. Life insurance needs to be thought of as a risk management tool and not really as an investment. Life happens and we never know when it will be our time. So, if you want to prevent major financial stress to your family in the event of your death then I would say you do need it. Did you know that life insurance proceeds are generally not counted as taxable income to the beneficiary unlike your 401k or IRA? Now let’s look at the different types of insurance that you may want to consider.
There are two general types of life insurance, term and permanent. Term is the simplest and least expensive. It can be a short term or long-term policy. Typically, 10, 15, or 20 years. You determine how much of a death benefit you want; you pay the set premium over the term of the policy and at the end of the term it goes away and you get nothing in return except that you outlived the term and winning at the game of life! This type of policy may be best for a young married couple that wants to protect each other in the event of a sudden death. The couple might decide to get enough insurance to pay mutual debts. A term policy might also be a good idea for parents with young children so that the kids are protected financially if something happens to one or both parents. The death benefit can replace income or be set aside for college.
Permanent life insurance has no set term. It’s a lifetime policy. There are many options when it comes to permanent life insurance such as universal, variable, or whole. These types of policies generally have a cash value feature which is designed to be a bit of a savings mechanism within the policy. Because of the different riders and index features within a permanent policy they tend to be a bit more expensive and the medical profile tends to be a bit more detailed. Depending on your situation, this type of policy could be a better fit. Permanent life insurance is more complex and can be used for estate planning, tax planning, and business planning strategies. Having a tenured financial advisor in your corner is necessary to help navigate the right solution for you when setting up a permanent policy.
Determining the right life insurance policy doesn’t have to be complicated. If you take the time to get educated about it, you will feel much more comfortable about your decision to have or not have it as part of your financial plan. When you are ready to review your situation to see if there is a need for life insurance make sure you meet with a financial advisor you trust that has experience dealing with complex life insurance solutions so they can help guide you in the right direction. Life insurance is not usually thought of as a necessary part of a financial plan, but I know many clients that have gained peace of mind knowing their loved ones are covered. Already have life insurance in place? When is the last time you had it reviewed? Is it still the right policy for you? Did you have more kids? Buy a larger home? Start a new business? Let us know how we can help!
Lesley Deason is Operations Manager at Henry+Horne Wealth Management and can be reached at 480-483-3489 or LesleyD@hh-wm.com