Life insurance helps to ensure that the financial needs of your loved ones are met after you pass away. Term and permanent life insurance are the two basic types of insurance policies. Deciding which type depends on your particular situation.
Term insurance is the most basic type of insurance. Coverage is purchased for a set period of time, for example, 5, 10, 15, 20, or 30 years. If you pass away prior to the term expiration then your beneficiaries receive the death benefit. if you live beyond the term, the policy expires. Many policies offer the option of extending your coverage, subject to certain restrictions and limitations.
Permanent insurance never expires as long as the premiums are paid. In addition, permanent insurance may also include a cash value, which can be used to help supplement retirement income.
Universal Life allows the owner of pay flexible premiums after the initial payment. The owner may change the death benefit from time to time (note that an increase in coverage many require evidence of insurability) and vary the amount and timing of premium payments, subject to certain minimums and standards.
Variable Universal Life is a form of permanent coverage that combines premium and death benefit flexibility with allowing the policy owner to choose from among different investment options. Values fluctuate based on market volatility. The extent to which this form of coverage is permanent is also dependent on the performance of underlying investments. Variable life insurance policy holders are subject to investment risks, including the possible loss of principal invested.
Length of coverage is permanent for whole life as long as premiums are paid. This may not be true for variable life or variable universal life insurance.
Clearly, replacing the lost income of a decedent is a significant factor when determining the necessary resources in the event of a premature death. However, there are other financial and lifestyle considerations that could affect your resource needs, such as:
- What type of family environment is desirable after the death of one parent?
- Will the survivor work full-time? Part-time? Return to work in several years?
- Would the survivor need extra day-care or nanny services?
- Would the survivor want to pay off large debts such as mortgages?
- Would the survivor want to pre-fund large expenditures such as college in advance?
Amount of Coverage
There are several “rules of thumb” that are sometimes used to help determine the necessary life insurance coverage. Unfortunately, those types of estimates are too often inaccurate and fail to accommodate any unique situations or expectations. Determining the proper amount of insurance coverage is often part science and part art and an experienced advisor can help you with that process.
Type of Coverage
In addition to the amount of insurance, the type of insurance should be considered as well. Term policies may be appropriate for some clients while for others permanent coverage might be a necessity or provide additional advantages.
Quality of Existing Policies and Insurers
Especially with recent market turmoil, the value of highly rated and conservative insurance companies has never been more obvious. Existing policies should be regularly examined for their performance as well as the ratings of the insurer in general. Your insurance should be reviewed periodically to determine if the policy continues to meet your needs.
It is also vital to have plans relating to the care of children or other dependents in the event both parents are deceased. Your wishes must be detailed in your will or other estate planning documents or you risk having the state determine the guardian of any children. Estate planning attorneys are used to help craft the necessary documents to ensure your wishes are followed.
Stay tuned for our following pieces on long term disability, long term care insurance, and personal and casualty insurances.
Registered Representative, securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and Apogee Wealth Advisors are not affiliated. 477 Madison Avenue, 6th Floor New York, NY 10022