Few topics can put a damper on conversation at a party like life insurance, and yet from thirty-somethings, I get questions about life insurance all the time. As clients move into their thirties, life insurance often becomes a more pressing concern, and rightfully so.
Looking back at the planning pyramid that we have discussed previously, we see that protection is a basic necessity. I’ve worked with numerous clients who purchased a nominal amount of coverage when they were married or got their first real job, and now as we start the planning process we learn that they need to increase coverage. The reasons for doing so are simple: life insurance is designed to replace income should the person earning it not be alive to earn it. As one’s income increases, inevitably, their standard of living goes up (bigger house, new cars, private schools and activities for the kids, etc.), and life insurance assures that the family can maintain this standard of living, pay any final costs, and not have to worry about money.
There are many ways to structure a life insurance plan for a family. Another question I receive quite often is what are the types of insurance, and what should I buy? The second part of that question requires consultation with the client—every family is different and therefore every solution is different. Following is a brief breakdown of the three main types of life insurance:
· Term Life—Term Life is the most basic type of coverage, and for younger clients, the way to buy the most coverage for the least cash outlay. There are many forms of term life, but the most popular cover someone for a specific period of time (a term). It could be ten or twenty years, for example. In return for that coverage, the policy owner pays a premium that is usually guaranteed to be level over that period of time. Because the person is young (in your thirties) and chances of dying are low, and the insurance company knows that risk is for a set period of time, premiums are generally low.
· Whole Life—Whole Life is on the opposite end of the spectrum from Term. It is designed to cover someone for their entire life. Premiums are level, and are guaranteed to stay the same over the insured person’s lifetime. The policy builds cash, known as “cash value”, over time. How much cash is a function of the claims experienced by the company, the interest the company has earned on their investments, and their expenses. Cash that builds up in a Whole Life policy can be accessed from the policy without being taxed. In addition, there comes a point where you can stop paying premiums, and let the earnings of the policy pay for itself.
· Universal Life—Universal Life is sort of a hybrid of Term and Whole Life. This product was originally designed to be a permanent product like Whole Life, but have internal charges like Term. What that means is that in the early years the actual cost of the insurance is quite low, and any excess you put in goes into cash value. The premiums, however, are not guaranteed, and if the interest rates stay low or the premium isn’t high enough, the policy owner may need to pay more premium to keep the policy in force later in life. This is not an attractive scenario. There is one type of Universal Life, however, that can be set up as basically “term for life”—it is set up so it does not build cash value, but is guaranteed to stay in force until age 120 or 121, depending on company. This is a great fit between traditional Term and Whole Life.
The inevitable questions become, how much coverage do I need, and what type of policy is right for me and my family? Those are questions that generally can’t be answered in a five minute conversation. I feel it’s important to analyze the coverage you have in place through work (if any), and any existing personal coverage. Also, it’s critical to know what your needs are. This comes through analysis of salary, debt, and expenses. If you have a stay-at-home spouse, he or she should also be covered. Imagine life without them running the household.
This can seem like a very foreign subject and something that is easy to put off to a “better time”, but it is a very smooth and quite educational process. We also use powerful planning software that can help with formulating a life insurance plan. If you’ve been thinking about looking into this, please do not put it off—unfortunately as humans, we don’t tend to get in better health as time goes by; it goes the other way. The better one’s health, the better one’s rates for coverage are. I’ve had several instances over the years where people have put this type of planning off and had a major health issue come up, only to be unable to get coverage at all.
If I can be of assistance in this foundational area of planning, please feel free to contact me.
Monte Miller (865) 776-5577 firstname.lastname@example.org