For most couples, having life insurance during the wealth-accumulating years can make a lot of sense. Also, some people may consider having a policy even in retirement, if their goal is to leave a financial legacy. Life Insurance has a lot of potential benefits to consider such as:
- Replacement for the loss of income of a spouse
- Paying off liabilities such as a mortgage, auto loans, or credit cards
- Covering education costs for children
- Providing a lump sum for the surviving spouse to utilize in retirement
- Leaving a legacy to family or charitable organizations
When it comes to life insurance, it’s not simply deciding if you want it. It’s also deciding which kind. Here are three main types of life insurance:
Level Term Insurance
This is the easiest type of insurance to understand because it is similar to other types of insurance you have (auto, home, disability etc.). With Level Term Insurance you pay a premium each year and, if you die, the insurance carrier will pay a death benefit to your beneficiaries. Typical term periods are 10, 20, or 30 years. While you are in the level term period, your premium will remain the same. Once your policy is outside of the level term period, the premium will begin to increase; oftentimes it will increase substantially. A few reasons where this type of insurance is appropriate:
- Replacing income in the event of an untimely/unexpected death
- Paying off liabilities
- Funding education goals
Universal Life Insurance
This is sometimes referred to as “permanent term insurance”. This product is usually underwritten to make sure a death benefit remains in place until age 90, 95, or 100. Sometimes there is a cash value in the earlier years of the policy, but this is usually eaten up by internal costs and expenses as the policy reaches maturity. This product is often used when someone wants to leave a financial legacy to their kids, church, or charity. Also, it can be used to ensure alimony or other similar court settlement agreements are paid, even in the event of an unexpected death.
Whole Life Insurance
This type of insurance is conservatively underwritten, and because of this, it is often the most expensive type of insurance. It does have a cash component that takes several years to begin accruing. A lot of the products I have seen take approximately 10 years to break even from what you have paid in premiums compared to what’s available in cash value. This is another type of permanent insurance that is frequently used in legacy planning. When Estate Taxes were an issue for many Americans (back when the exclusion amount was $3.5 Million or less) these policies were purchased to provide liquidity to pay Uncle Sam at death.
What is the right type of insurance for you?
We typically recommend Level Term Insurance for clients when the primary goal is income replacement during the wealth-accumulation years. It’s the most affordable, and usually isn’t a significant burden on cash flow. However, if your goal is to leave a financial legacy, and you can afford it, then Universal Life or even a Whole Life policy might make sense.
The best strategy, when making these decisions, is to work with a qualified financial professional that understands all the moving parts of your personal situation and is making a recommendation that is in your best interest.
Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
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 information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning Inc. and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and type and amount of insurance purchased. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. C14-019165