Contributed by: Nick Defenthaler, CFP®
In my blog a few weeks back on Insurance Basics, I explained the importance of carrying coverage, even though it can be a tough check to cut when your premiums are due. Now, we’re going to look closely at the different forms of life insurance and discuss its importance in a well-rounded financial plan.
As the name implies, permanent insurance is a type of coverage designed to last your lifetime. Because the coverage is permanent, premiums are typically costly depending on age, health status, and type of permanent coverage (whole life, variable life, universal life, variable universal life). Each type of permanent coverage has two components: a death benefit and a savings component, known as the policy’s “cash value.” Although part of your premium each year is going to build up the policy’s cash value, in many cases there are more efficient and cost effective ways to save for retirement first, such as a 401(k) or an IRA. If these are being maximized, then utilizing life insurance for retirement savings could potentially make sense because a policy’s cash value offers tax-deferred growth. Some of the more common situations we recommend utilizing a permanent life insurance policy for include those who want to leave a guaranteed legacy to family or charity. They are also often used for estate planning purposes if you have significant assets as a mechanism to pay for estate tax.
A term life insurance policy contains a specified term of coverage, typically ranging between 10 – 30 years where premiums are fixed and there is a guaranteed death benefit. Unlike permanent insurance, there is no savings component or cash value, so your premium dollars are going to purchase insurance and insurance only – just like your auto or homeowners coverage. In most cases, the younger you are, the cheaper annual premiums will be so it usually makes the most sense to buy this type of policy early so you’re guaranteed insurability if your health situation changes, keeping your premiums reasonably priced. This does not mean that if you’re a little older you can’t buy term insurance; it just means it will be more expensive because the likelihood of a thirty year old passing away within the specified term is much lower from an actuarial standpoint than someone in their mid-forties or fifties.
Group life insurance is a type of coverage that is offered by your employer through an insurance company. In many cases, employees receive a “complimentary” amount of coverage—typically for the same amount as your annual salary—as part of their benefits package. You may have the option to purchase additional coverage as well, up to certain limits, at a low cost. Another perk of group coverage is that there is typically no formal medical underwriting so it’s a good option for those who aren’t in the best of health. A lot of clients I’ve spoken to believe their group coverage they have at work is sufficient. In most cases, however, it isn’t even close to being enough. Often times, clients are surprised to know that more than likely, if they leave their employer, they can’t take the coverage with them because it’s a benefit offered by the company (non-portable like an individual term or permanent policy). Typically we recommend pairing group coverage with an individual policy, to not solely rely on it as your only source of life insurance coverage.
As you can probably see, we’re just scratching the surface of the complex topic of life insurance, and there are many things to consider when purchasing coverage and deciding on what type of vehicle to protect yourself and your family. Life insurance is something all planners at The Center are licensed in but as you’re probably aware of, it’s not our main focus. Our goal is to take a look at your entire situation and identify which type of coverage makes the most sense for YOUR specific situation. When’s the last time you reviewed your coverage? Do you have enough? What’s changed in your life that makes the case for adding or removing coverage? These are the questions you should be asking yourself at each stage of life and it is something we can help guide you through to make sure you, your family, and your financial plan are protected.
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation.