Life Insurance Explained - Here's Why You Need It
"In this world, nothing can be said to be certain, except death and taxes." Benjamin Franklin said it in 1789 and it's still true today. The unfortunate reality is that we all need to be prepared for death in some capacity and that's where life insurance comes in. The idea can be both intimidating and uncomfortable but there are several reasons that you may want to start thinking about it now. We put together a comprehensive guide so you can decide what type of policy works best for your family.
What is life insurance?
Life insurance is a contract between the insured (policy owner) and the insurer (insurance company) in which the insurance company will pay a lump sum payment upon the insureds death, in exchange for premium payments over the life of the policy. Most death benefits from all types of life insurance are income tax-free.
Who needs life insurance?
Anyone who has dependents. This does not just include the breadwinner of the family. When determining who in your family should have insurance policies consider the value they bring. Some may assume that a stay at home parent would not need a life insurance policy but consider the cost of replacing that persons duties. It's also important to consider if the beneficiary would need help paying off a mortgage or paying for college.
Anyone who owns a business. Think about how much cash the business would need if you die. You may need the money if the beneficiary would continue the business or even need to close or sell the business and pay any outstanding debts. If you have a business partner, consider the financial hardship they would incur in your absence.
If you have debt. Consider who would assume your debt in the event of your death. Do you have a home loan or substantial personal liabilities? Generally your next of kin would become responsible for those loans or debt so make sure you have a policy that will cover those costs.
What types of life insurance are there?
There are many varieties of life insurance. The more common types are explained below.
Term Life Insurance. A policy designed to provide financial protection for a specific period of time. These policies could last for 10, 20 or 30 years based on the policy you choose. The premium amount will be guaranteed for the life of the policy. This type of policy is normally less expensive than a permanent policy but if you don't use it you lose it. Term life insurance can be beneficial for those looking for protection or income replacement during a certain season of life, such as starting a new business or raising a family. Once your term life insurance policy reaches the end there is a chance you "won't get anything out of it," but in that case, congratulations, you're still alive!
Universal Life Insurance. A type of permanent life insurance policy designed to provide lifetime coverage. Universal life insurance policies are flexible and can allow you to raise or lower your premium or coverage amount throughout your life based on your needs. These policies generally have higher premiums than term policies. Universal policies can be beneficial to those who are looking for a flexible estate planning strategy and to preserve wealth intended for beneficiaries.
Whole Life Insurance. Another type of permanent life insurance policy designed for lifetime coverage. Unlike Universal policies, whole life policy premiums are fixed and often higher than both universal and term. The policy also has a cash value, much like CD's or bonds (backed by the insurance company) which can serve as a savings component and may accumulate tax-deferred over time. Whole life policies are beneficial to those hoping to preserve wealth intended for beneficiaries.
How much coverage do you need?
This question is hard to provide a straight answer for and depends heavily on your families needs. The cost can depend on your age, your health, your sex (men are often more expensive to insure than women) and simply, how much you can afford. For term policies many people think about it in terms of income replacement. For instance, say you are 10 years away from retirement and are currently making $100,000/year. Replacing your income until retirement would be $1,000,000. If you have special circumstances like businesses and a family, you may want to consider a higher amount of coverage. We suggest that you consider seeking the advice of a financial advisor who understands your needs before purchasing a policy.
How much does it cost?
This also varies greatly based on what you need and who you are. A generic term policy for a healthy 30 year old male can cost less than $500/year for a 20 year term and a million dollar death benefit. A universal life policy or a whole life policy could cost the same person 10 times that. This is why considering why you need the policy and who will benefit from it is so important.
Where should you buy life insurance?
The insurance industry can feel a little scammy when you're shopping around. This is where a financial advisor could help guide you in the right direction rather than starting with a "captive agent." A captive agent is someone who works for one specific insurance company and sells only that insurance. It can be better to be presented with multiple quotes and policy options and narrow it down from there based on so you can see what's included and the difference in price.
There is a lot of information to process and things to consider when choosing the right policy for you, but having the burden of your families financial future off of your shoulders is priceless. For more information on financial planning and estate planning you can check out this article about living trusts and this article explaining wills, trusts and probate.
Do you have any Denver based life insurance companies that you have enjoyed working with? Share with us in the comments below or in our forum!