Life insurance is an important element of holistic financial planning. Regardless of your preconceived opinions on life insurance, at its core it is a valuable product that can provide security and liquidity to your loved ones after you pass on. Before we share our thoughts on how life insurance can best be utilized, we’ll go over the main types of life insurance most people come across.
Key Types of Life Insurance
Life insurance policies fall into two main categories: Term Life Insurance and Permanent Life Insurance.
Term Life:
Term life is the most basic and typically most affordable form of life insurance. Term life provides coverage for a fixed period of time—typically 10, 20, or 30 years. If the insured passes away during the term, the policy pays a death benefit to the beneficiaries.
Whole Life:
Whole life insurance falls under the category of permanent insurance which provides coverage for the entire life of the insured. Whole life policies feature a fixed premium and a cash value account. Part of the premium you pay to the insurer goes into this cash account which grows at a guaranteed rate.
Universal Life:
Universal Life insurance is another type of permanent insurance that allows you to have flexibility and adjust your premiums and death benefit over time. With these flexible features, universal life policies are often more complex than the other two types.
Best Uses of Life Insurance
Life insurance has a wide range of uses; however, we think some of the most common and best uses of insurance are:
- Income replacement for your dependents in your working years.
- Fund higher education for children if you pass away prematurely.
- Pay off debt that you could leave behind like a mortgage or business loans.
- Help facilitate continuity planning for your small business.
- Using a death benefit to pay for expected estate taxes.
What type of life insurance is right for me and how much do I need?
What type of life insurance is best? There is not one definitive answer to this question. Life insurance coverage and policy recommendations should be tailored to individual situations. This being said, term life insurance aligns with our philosophy the most and is generally the best fit for those we work with. This is because we don’t view life insurance as a lifetime need for most of our clients. We view life insurance as a tool that helps people in the accumulation phase of life protect their legacy should they unexpectedly pass away.
We think at minimum, individuals should have enough coverage to pay for any outstanding debts and replace lost income. Spouses who don’t have an income but are primary caretakers of children should have coverage as well. A popular method of determining how much term insurance one needs is by taking a multiple of their annual income. This is a good starting point; however we prefer to make recommendations more customized to the situation.
What to do with a policy you don’t need
Often enough, we come across clients who have permanent life insurance policies they no longer need. If this is the case for you, there a generally a few options to consider. You can:
- Surrender the policy for its cash value.
- Convert the policy to an annuity.
- Sell the policy.
- Donate or gift the policy.
Most life insurance policies are often never given a second look after they’re issued. This is because most policies are sold by brokers or agents, who are typically compensated by commission. Even if a policy was a good fit when you purchased it, it’s worth reviewing as your life changes.
If you're unsure how life insurance fits into your overall plan, we're here to help you evaluate your options and make informed decisions.
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PAST PERFORMANCE IS NOT A GUARANTEE OF CURRENT OR FUTURE RESULTS. Examples of historical information included in this presentation do not, nor are they intended to, constitute a promise of similar future results. Specific client portfolio allocations, risks and returns can and may deviate from these examples depending on accounts and types of investments available through each account. Future market views by WJ Interests, LLC may vary significantly from the historical examples presented herein and no one receiving this summary should assume that WJ Interests, LLC will be able to replicate successful views in the future.
