Yeah. I know. Most people don’t want to even think about life insurance. It’s not the most fun subject to talk about. But for many people, it is one of the most important.
The primary reason people think of buying life insurance when they are younger is to protect their family. Often times the reality is that if the primary breadwinner were to pass away the income would stop. And if the family is younger, they probably haven’t accumulated enough in assets to live on if the income were to stop. Hence, the need for life insurance.
I am very passionate about life insurance. I’ve seen what not having it can do to families. On a personal note, my dad shared with me that when he was growing up, his dad, who was an attorney and the sole breadwinner died suddenly of a heart attack at the age of 33. My dad was only 10 at the time. This affected my dad in a major way, in fact, throughout his entire life. His dad did not have any life insurance, and they went from being fairly well-to-do to struggling to get by very quickly. So in a nutshell, especially for younger families, life insurance can:
- Replace your income so that your family can pay for ongoing expenses
- Help your family avoid dramatic changes in lifestyle in the event of your passing
- Cover the cost of a child’s education
- Help you to leave a legacy for your loved ones
Life insurance can also be important for many reasons if you own a business including when:
- A buy/sell agreement needs to be funded with life insurance
- A Key Person life insurance policy needs to be put in place to help protect the profitability of a business going forward
- You are trying to retain and/or reward key employees, or want to offer special benefits only for key employees
But what if you are retired or are planning to retire soon and have already created several income sources: do you need to even worry about life insurance?
Every situation is truly unique.
You might be using a strategy designed to maximize a pension or protect a social security benefit – you could have any number of other reasons, each very individual and unique to your situation.
And here is the fun part of life insurance
Wait … what? Did we just say “the fun part of life insurance?”
OK, here’s the deal. Life insurance can benefit you while you are living. If certain permanent cash-building life insurance policies are funded properly and structured the right way, it can be designed to build cash value on a tax-favorable basis. Specifically, the cash value in these policies can grow, tax-deferred, and if you access the cash value in the way we suggest, you do not pay any income taxes. This can be a nice strategy, especially for higher income earners looking to grow their assets in a tax-deferred manner and potentially their future tax liability. You can read more about this advanced strategy here.
Types of Life Insurance
Let’s keep it simple. There’s basically only two types of life insurance. There is term insurance and permanent insurance.
Term insurance is super easy to understand. What is most commonly offered by life insurance companies is 10, 15, 20, and 30-year terms. Your rates are typically much less than they would be for permanent insurance, and are guaranteed not to change for the length of your term. You may cancel your policy at any time if your situation changes and you no longer have the need for life insurance.
Permanent insurance is more complex. There are different types of permanent insurance which can all be designed to accomplish different objectives. In the most simplistic terms though, think of permanent as coverage you can’t outlive. The policy will stay in force no matter how long you live. Of course, this is dependent upon funding the policy properly and the policy performing as per the design.
So, which is better? Term or Permanent?
Answer: it depends on your situation. Specifically, some questions you will want to ask yourself are:
- Why do I want to purchase life insurance? In other words, what do you need to get out of it?
- Who would be the beneficiary?
- How long do you need the policy to stay in force?
How much coverage do I need?
Every situation, every person, every family is so very different, it is impossible to give a blanket statement on how much life insurance you might need. We start by looking at your current needs and obligations, taking into account your expected short and long-term expenses.
Your short term expenses would include the cost of your final expenses, such as a funeral, medical bills and any outstanding debts you leave behind.
Next, we look at your long-term expenses, and determine how much it would cost to maintain your family’s standard of living, plus what their day-to-day living expenses (food, gas, housing, clothing, travel, entertainment) might look like.
Finally, we consider the long-term expenses, such as elder care for your parents or aging spouse, or education costs for your children or grandchildren.
Last, we look at your liquid assets. Liquid assets could be anything that can be converted to cash quickly. This does not generally include vehicles, houses or the property that your family lives at, but does include stocks, bonds and other investments that can be sold with a minimum of impact to its value.
Since we are completely independent here at Milestone Wealth, if a life insurance policy is appropriate as a part of your financial plan, we can shop the market and review your options with you. If you’d like to have a conversation about this, you should drop us a line and we’ll have a chat!
Milestone Wealth: helping you take care of what you care about most
If you are ready to start talking about life insurance, or if you just have questions about any aspect of getting yourself and your family covered, call or fill out our contact form today to get started.