While it might not sound romantic, having life insurance is a great way to say “I love you.”
Obtaining a policy (or better yet, a series of policies) shows that you care enough about your loved ones not to leave them in financial dire straits after you die. While we all have dreams to enjoy a long and fulfilling life with our families and love ones, life actually happens and sometimes interrupts our grand plans. Life insurance provides security and peace of mind that your loved ones can still have the great future you want for them (and they deserve) even if you are no longer around.
Then why doesn’t everyone have a life insurance policy?
Our death is never fun to discuss and not usually seen as a pressing issue. We tend to think we have more time than we actually do to get our “affairs in order. Add to that the fact that life insurance products can be complicated and overwhelming. It is hard to know how much insurance to get, what type of policies to use, and which agent and company to trust. In the end, as with most tasks that are difficult and bring little enjoyment, dealing with life insurance just gets pushed down the to-do list. Unfortunately, the consequences of waiting too long can be devastating.
So where do you begin?
The place to start is to think about why you need life insurance. The most basic reason is if you have an obligation or need to provide income replacement for others who depend on you. In other words, if someone will suffer financially when you die, you need life insurance because it provides cash to your family after your death. This cash, known as the death benefit, replaces your income and can help your family meet many important financial needs like funeral costs, daily living expenses and college funding. What’s more, there is no federal income tax on life insurance benefits. Another reason is, if you are a business owner, you may need to provide funding for your desired business succession plan or to insure against any debts your business may owe upon your death. For some, life insurance can also can be used as a way in which to provide funds to offset estate taxes.
Here are some scenarios to help you understand how life insurance might apply to your particular situation:
Who Needs It?
(1) You’re Married
Many people mistakenly believe that they don’t need to think about life insurance until they have children. Not true. What it one of you died tomorrow? Even with your surviving spouse’s income, would that be enough to pay off debts like credit card balances and car loans, let alone cover the monthly rent and utility bills? If you’re planning to have children, you’ll want to buy life insurance now instead of waiting until pregnancy—some companies won’t issue policies to pregnant women.
(2) You’re Married With Kids
Most families depend on two incomes to make ends meet. If you died suddenly, could your family continue meet all their financial obligations—from paying rent or the mortgage to daily living expenses? Could your family continue their standard of living on your spouse’s income alone? Would their plans for the future—like college stay intact? Life insurance makes sure that your plans for the future don’t die when you do.
(3) You’re a Single Parent
As a single parent, you’re the caregiver, breadwinner, cook, chauffeur and so much more. Yet nearly four in 10 single parents have no life insurance, and many with coverage say they need more than they have. With so much responsibility resting on your shoulders, you need to make doubly sure that you have enough life insurance to safeguard your children’s financial future.
(4) You’re a Stay-At-Home Parent
Just because you don’t earn a salary doesn’t mean you don’t make a financial contribution to your family. Childcare, transportation, cleaning cooking, and other household activities are all important tasks, the replacement value of which is often severely underestimated. With life insurance, your family can afford to make the choice that best preserves their quality of life.
(5) You Have Grown Children
Just because your kids are through college and the mortgage is paid off doesn’t necessarily mean that you no longer need life insurance. If you died today, your spouse will still be faced with daily living expenses. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you’ve worked so hard to achieve now and into retirement?
(6) You’re Retired
Depending on the size of your estate, your heirs could be hit with an estate-tax payment of up to 45% after you die. The proceeds of a life insurance policy are payable immediately, allowing heirs to take care of these taxes, funeral costs and other debts without having to hastily liquidate other assets, often at a fraction of their true value. Life insurance proceeds are also generally income tax free and won’t add to your estate tax liability, if properly structured.
(7) You’re a Small-Business Owner
Besides taking care of your family, life insurance can also protect your business. What would happen to your business if you, one of your fellow owners or a key employee died tomorrow? Life insurance can help in a number of ways. For instance, a life insurance policy can be structured to fund a buy-sell agreement. This would ensure that the remaining business owners have the funds to buy the company interests of a deceased owner at a previously agreed upon price. That way, the owners get the business and the family gets the money. To protect a business in case of the death of a key employee, key person insurance, payable to the company, provides the owners with the financial flexibility needed to either hire a replacement or work out an alternative arrangement.
(8) You’re Single
Most single people don’t need life insurance because no one depends on them financially. But there are exceptions. For instance, some single people provide financial support for aging parents or a sibling with special needs. Others may be carrying significant debt that they wouldn’t want to pass on to family members who survive them. Insurability is another reason to consider life insurance when you’re single. If you’re young, healthy, and have a good family health history, your insurability is at its peak and you’ll be rewarded with the best rates on life insurance.
What Type of Life Insurance Do I Need?
The type of life insurance you should buy depends on your family goals, dreams, and circumstances. The two main types of insurance you’ll hear about are “term” and “whole life.”
Term insurance is in effect for a specific period of time and if you do not die during that period, the insurance doesn’t pay. For example, you may have a 20-year term policy (a common one among parents with young children). Each year, you pay your premium and if you don’t die during that year, you’ve lost the premium (but gained your life, which is nice!). Because it’s 20-year term, the rate will remain the same for 20 years, at which point you have to re-apply for the insurance, which means full application and health exam and a rate increase because you are 20 years older. You can even talk to your insurance agent about strategies called “stacking” where you use different term lengths, such as a ten-year, twenty-year, and thirty-year, to maximize coverage while taking advantage of locking in lower rates while you are younger and healthier.
In addition, there are some term life insurance policies that allow you to recover a majority portion of your premium payments at the conclusion of the term if you do not die. These are called return of premium life insurance policies. This is a nice option as your premium payment can be viewed as a small investment. While theses premiums will cost more than a regular term life insurance policy, it can be viewed as a safe investment. Your rate of return would not be subject to the same market fluctuations as an investment portfolio, and, of course, in the event of death, the payout to your beneficiaries will be much larger than had you simply invested the premiums in an investment portfolio. Never mind, for some more cost conscious, it is just comforting to know that you will get your money back if the benefit isn’t used.
Whole life insurance policies are permanent policies that cover you as long as you live. That means this policy is kept in force for the rest of your life, no matter how long you may live. In addition, there is a savings feature to them in that they have a cash value accumulation which you can use during your life in what is known as a policy loan. In sum, you practically pay premiums throughout your lifetime and make use of the cash value benefits while you are alive and upon death since your beneficiaries get the death benefits. As a result, these policies are likely to be more expensive than term policies but also highly suitable for long term responsibilities like surviving spouse’s income needs and post-death expenses.
Universal life insurance policies are also permanent policies that cover you for as long as you live. However, this policy is also termed “adjustable life insurance,” because it offers more flexibility compared to whole life insurance. You have the liberty to reduce or increase your death benefit and also to pay your premiums at any time and in any amount (subject to certain limits) after your first premium payment has been made. You can even withdraw accumulated cash value (as opposed to taking a policy loan) or use it to make premium payments in more difficult financial times. In sum, universal life insurance offers all-round protection to your loved ones, thanks to its security, flexibility and variety of investment options.
Life Insurance Is Part of Your Estate Plan, Not Instead of One
The bottom line with life insurance is to make sure you realistically assess your needs and then purchase an amount of insurance that meets that need. The best way to do that is to meet with an experienced insurance agent that help you develop your insurance plan. You will then want to determine how that insurance plan is incorporated into your overall estate plan. While having life insurance is a great thing, you do not want your good intentions to go to waste or actually hurt your loved ones. For example, a large insurance pay-out to a young adult (over eighteen) could easily be wasted due to poor money management or life’s many temptations; or it could disqualify a student from financial aid; or worse disqualify a disabled beneficiary from receiving the means-tested government benefits and health insurance they rely upon.
Consult Your Team of Advisors
These are just some scenarios that could happen, but can be avoided with the right combination of insurance and estate planning. That is why we recommend that you run your insurance decisions by your wealth management team which should include a financial advisor, insurance agent (which could be your financial advisor), a CPA and your estate planning attorney. This way you can get balanced advice that is not driven by a team who is interested in keeping your family out of court, out of conflict and well-cared for when you can’t be there.
This planning is so very important. Don’t delay any longer. Get started today.
Kevin Snyder of Snyder Law, PC, is a trust and estate planning attorney in Irvine, California. If you live in Orange County or Southern California and have more questions about life insurance or estate planning in general, please contact Kevin and his team. They will gladly discuss with how you can better protect what matters most. Drop us a line; we will be happy to hear from you
p.s. Click here to attend to attend one of our “How to Protect What Matters Most in 3 Easy Steps” workshops. There is no cost or obligation and we promise you will learn a lot and have fun.