Purchasing a life insurance policy is a decision many people evaluate during their lifetimes; however, oftentimes, people do not realize how critically important life insurance decisions can be for the futures of their loved ones. Many people desire to provide for their families; however, they often wonder exactly what “provision” looks like. Additionally, people often question whether life insurance is always necessary, how much they should purchase, and which variety they should choose.
Before analyzing the two key types of life insurance in greater depth, it’s important to understand when life insurance is necessary: we suggest that life insurance is essential when close family members are dependent upon your income stream or upon your valuable time (e.g.: in the case of a stay-at-home parent who homeschools the children). Additionally, there are some rarer instances where life insurance may be necessary to provide for burial costs or estate tax payments. If you do not have anyone dependent upon you, or you have sufficient assets to cover your end-of-life expenses, you likely do not need life insurance.
There are two basic types of life insurance from which you may choose: term life insurance and permanent life insurance. The type of life insurance policy that best suits your family will depend on your unique needs and the amount of insurance that you require.
Option One: Term Life Insurance
Just as its name implies, term life insurance covers your family for a specific period of time, or term, that you choose. Since it offers a death benefit but no cash value, term life insurance is an inexpensive way to protect your beneficiaries. Term life insurance is best suited for:
- People who have a temporary need for life insurance protection
- Individuals who need a large amount of insurance protection
- Those with specific business needs, such as additional coverage for a key employee
Once the term of the term policy expires, coverage ceases and the policy has no further value. It’s important to note that rates generally increase as the insured ages if a level-term policy is not selected.
Generally speaking, we recommend term insurance for our clients since they usually have a temporary need for insurance. Furthermore, we suggest that our clients purchase at least 10-15 times their annual income in insurance coverage in order that their survivors might have enough assets to provide for needs over a considerable period of time. We strongly suggest that proceeds from policies should be invested in order to slow the depletion of the assets.
Option Two: Permanent Life Insurance
Permanent life insurance is any form of life insurance other than term. The “flavors” of permanent life insurance include whole life, universal life, and variable life. These policies combine elements of term life insurance with a long-term, tax-sheltered savings plan.
Whole life is the most basic type of permanent life insurance. It provides coverage that lasts a lifetime and also builds up a cash value that you can borrow against, withdraw or use to pay future premiums. A life insurance policy with a cash value is ideal for:
- Those who have a lifetime need for insurance protection
- Individuals who prefer stable premiums over the life of the policy
While rates for a whole life insurance policy remain stable over the life of the policy, premiums are generally much higher than those of term insurance policies.
We rarely recommend permanent insurance policies. In most cases, it makes more sense financially to pay the lower premium for term insurance and to invest the balance in high-quality securities with a trusted investment professional. Unless you anticipate estate tax issues, insufficient assets to cover burial expenses, or have a disabled family member who you desire to care for beyond your death, it is generally much wiser to avoid the high fees of permanent insurance.
As you have likely ascertained, there is considerable complexity involved in assessing insurance needs. In order to provide appropriately for the needs of your family for the coming years, we strongly suggest that you complete a holistic financial plan which addresses your potential life insurance needs, including whether you need life insurance, and which life insurance approach you should select. Meeting with a financial advisor who can provide you with insurance planning advice will set your mind at ease. We find that clients who complete the planning process and implement recommended strategies come to know that their family will likely have the provision they need upon the client’s passing. It is our earnest desire that you would come to experience the greater contentment that comes from planning your financial life and aligning your investment approach with your needs.
If you have not associated yourself with an advisor who shares your values and who understands what is important to you, we strongly encourage you to do so. Should you have questions about life insurance, financial planning, or investment management, we would be honored to speak with you. Click the “Schedule a Conversation” button to set up a meeting with a member of our team.
Keywords: Life insurance, term insurance, permanent insurance
This article was written by Advicent Solutions, an entity unrelated to Semita Asset Management. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Semita Asset Management does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2012 – 2013 Advicent Solutions. All rights reserved.
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