Which Life Insurance is best for Me?
Why buy life insurance?
Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways:
1. Income replacement
For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a life insurance policy can help supplement retirement income. This can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.
2. Pay outstanding debts and long-term obligations
Consider life insurance so that your loved ones have the money to offset burial costs, credit card debts and medical expenses not covered by health insurance. In addition, life insurance can be used to pay off the mortgage, supplement \retirement savings and help pay college tuition.
3. Estate planning
The proceeds of a life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets.
4. Charitable contributions
If you have a favorite charity, you can designate some of the proceeds from your life insurance to go to this organization.
How much life insurance do I need?
To decide how much life insurance to buy, you need to first figure out what your goals are in purchasing this coverage. Ask yourself the following:
- Do I want to spare my loved ones funeral costs and outstanding debts?
- Am I concerned that my spouse or domestic partner will not be able to continue to pay off the mortgage if I die suddenly?
- Do I have dependents who count on my income?
- Am I concerned about college savings for my children or retirement savings for my spouse if I die suddenly?
While all situations are different, here are two scenarios to help you think through the questions you should pose to your insurance professional:
If you have children, a spouse who does not work outside the home or aging parents who you financially support, you have dependents. Alternatively, you may simply have a spouse or domestic partner who would be unable to pay the mortgage without your financial contribution. In either case, your loved ones will no longer have your income to help them pay the bills and maintain their lifestyle after you are gone. You will have to purchase enough insurance to provide for their future, while considering how much of your budget should be devoted to life insurance.
Some insurance experts suggest that you purchase five to eight times your current income. While this may be a good way to begin estimating your family’s needs, you will also need to figure how much your dependents will need to pay for some or all the following:
- Cost of owning a home (mortgage, maintenance, insurance, taxes and utilities)
- College savings
- Food, clothing, utilities
- Child care
- Nursing home or elder care
- Retirement savings
- Funeral expenses and estate taxes
Your family may also need extra money to make some changes after you die. They may want to relocate or your spouse may need to go back to school to be in a better position to help support the family.
If you are young and plan to have a family in the future, you may also want to consider purchasing life insurance now so that you can lock in a good rate.
Just because you don’t have dependents, does not mean you don’t have responsibilities. For instance, you may be concerned with not being an economic burden to others if you die unexpectedly. You may also want to leave some money behind to close family, friends or a special charity as a remembrance. In this case, you should purchase enough coverage to pay funeral and burial expenses, outstanding debts and tax liabilities, so that the bulk of your estate goes to your family, friends or charities.
Your insurance needs will vary greatly according to your financial assets and liabilities, income potential and level of expenses.
Types of Life Insurance Policies:
Term Insurance is the simplest form of life insurance. It provides financial protection for a specific time, usually from one to 30 years. These policies are relatively inexpensive and are well suited for goals, such as insurance protection during the child-raising years or while paying off a mortgage. They provide a death benefit, but do not offer cash savings.
Purchasing term insurance is like renting a home. It is a short-term solution. Monthly costs are usually lower, but you will not be building equity. Just as many people rent (while saving to buy a home), individuals who need insurance protection now, but have limited resources, may purchase term coverage and then switch to permanent protection. Others may view term insurance as a cost-effective way to protect their family and still have money to put into other investments.
Tip: Buy term insurance if you are looking for the least expensive way to protect your family during your peak earning years (i.e. until the children are grown, and the Mortgage on the home is paid off).
ROP Term (Return of Premium) Insurance
ROP (Return of Premium) Term is term insurance with a twist. At the end of the term of the insurance policy you will receive back 100% of the premiums that you paid throughout the term of the policy. This hybrid, has recently become popular, and costs more than pure term, but less than whole life.
Tip: When buying ROP term insurance, keep in mind that the return of your payments that you will get back at the end of the ROP term, will be highly depreciated due to inflation. But if your budget permits paying the higher premium over pure term, it may still be a better alternative for you.
Whole Life or Permanent Insurance:
Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher. This type of insurance is good for long-range financial goals.
Purchasing permanent insurance is like buying a home instead of renting. You are taking care of long-term housing needs with a long-term solution. Your monthly costs may be higher than if you rent, but your payments will build equity over time. If you purchase permanent insurance, your premiums will pay a death benefit and may also build cash value that can be accessed in the future.
Another advantage of certain whole life policies is that before you purchase the policy, you will know what your cash value accumulation will be, at a specific time in the future. This is called Guaranteed Whole life, and it is a great advantage for those who want, or need a specific accumulation at a specific time in the future. This makes Whole life insurance a great financial planning and estate planning vehicle.
Tip: Whole life is ideal for those with above average and steady income, and accumulated wealth who can benefit from the proceeds of the policy upon their death, helping their heirs to pay off any outstanding debts or estate taxes (if applicable), without having to liquidate any existing assets to pay off taxes, debts, or estate settlement charges.
How often should I review my policy?
You should review all of your insurance needs at least once a year. If you have a major life change, you should contact your insurance agent or company representative. The change in your life may have a significant impact on your insurance needs. Life changes may include:
- Marriage or divorce
- A child or grandchild who is born or adopted
- Significant changes in your health or that of your spouse/domestic partner
- Taking on the financial responsibility of an aging parent
- Purchasing a new home
- Refinancing your home
- Coming into an inheritance
I hope this article has been helpful to you.
By Robert Hernandez, Frontier Insurance Agency, LLC
Note: We currently offer insurance exclusively in New Jersey. For a free consultation, call Frontier Insurance Agency at (201) 868-2828, or email us with any question at email@example.com and we will respond to you the same day.