Life insurance explained – on your terms
You’ve probably heard the phrase, “The check’s in the mail.” Life insurance is just like that. It’s a financial tool that makes sure there’s a check in the mail for your loved ones if anything happens to you.
Clients often ask us if they really need life insurance. Brook Deaver, Infinitas advisor, said he typically answers that question like this, “If someone depends on your income, doesn’t it make sense to protect that income stream?”
So while you may not like the idea of paying another insurance premium, doing so can give you peace of mind that your loved ones – who likely rely on your income – are protected should they lose you.
Here are more of the common questions clients ask us about life insurance.
Are there different types of life insurance?
Life insurance policies can be divided into two categories: term and permanent. Term life is for a specific period of time – like a term limit. It primarily provides a death benefit to protect your loved ones if they lose you. At the end of the term, the policy has limited value since at that point, the premium usually increases significantly.
Permanent life insurance stays in effect as long as you or the policy account value continue to pay the premium. There are different types of permanent insurance, but the two most often discussed are whole life and universal life.
Whole life and universal life policies have a lot of flexibility in how they can be designed. For example, one common design allows the policy to stay in force the rest of your life. Another allows the cash or investment value inside the policy to accumulate over time. There are also many ways you can use the accumulated value. For example, you can withdraw and spend it, use it to pay future premiums or use it to create an income stream.
Deaver said that permanent life policies can get a bad rap. “Some insurance agents or advisors think they’re the only tool in the financial planning toolbox,” he said. “These policies are great options when they’re used properly. Just make sure it makes sense for your unique financial needs.”
How much life insurance should I have?
We all want to make sure our loved ones get that monthly check – but we also want to make sure our monthly premium stays in check, right?
Deaver highlighted one basic formula to help determine the right amount of coverage. “A good rule of thumb is to divide your annual salary by four percent,” he said. Using this guideline, a professional with young kids who makes $100,000 a year would have a life insurance policy of $2.5 million. This amount would replace their income lost upon death and ensure the professional’s family could maintain its current lifestyle for many years to come.
Working with a financial advisor on a needs analysis is another good way to determine the right amount of coverage, Deaver said. “This looks at the number of kids and dependents you have, as well as their ages, to determine how much life insurance you really need.”
What would happen if I didn’t have enough life insurance?
“Sadly, one of my clients passed away in a motorcycle accident,” Deaver said. “He was woefully underinsured because he didn’t appreciate the value of having an adequate amount of life insurance. After the accident, his wife and children had to recover from the emotional and financial toll, and were forced to lead a very different lifestyle than they were accustomed to.”
If your life insurance policy fails to replace all the income lost upon your death, the result could be not just emotional hardship for your loved ones, but financial hardship, too.
I’m in my 20s or 30s. I’m too young for life insurance, right?
Not exactly, Deaver said. When you apply for life insurance, the company weighs the risk of insuring you. The higher the risk, the higher the premium. In most cases, the younger you are when you get life insurance, the cheaper it will be. In addition, getting life insurance early helps protect your insurability later.
“I helped a client get life insurance when he was in his 20s, single and had no children. Ten years after he bought the policy, he had a melanoma removed from his back. If he’d waited until his 30s to get life insurance, it would have been much more expensive,” Deaver said. “But since he already had life insurance, we were able to convert it from a term to a permanent policy without additional analyzing by the insurance company. As a result, he got a great rate on his new policy, even with a history of cancer.”
How do I find the policy that’s right for me?
When looking for a life insurance policy, Deaver said it’s best to work with an experienced insurance agent or advisor, and one who isn’t tied to one company. “We’ve just scratched the surface here as determining the right amount of coverage and the ideal policy design for an individual or a business situation can be quite complex,” he said. “Infinitas has deep expertise and works with dozens of companies, which allows us to find the right life insurance policy for clients.”
Want to make sure the check is always in the mail for your loved ones? Let’s talk about life insurance on your terms. Learn more: [email protected].
*Fixed insurance products and services offered through CES Insurance Agency are separate and unrelated to Commonwealth.