Addressing the need for life insurance is an important part of every financial plan. With proper planning we can make sure that the plans we set forth will not get derailed by an early death. The key and most important component of insurance planning is the death benefit or the amount of money that will be provided to survivors upon death. To consider this amount we will look at the persons income, the number of dependents, retirement plans, their spouse’s income, liabilities and other income needs. From there we need to determine how long we will need to have that coverage in place. Once we’ve arrived at these figures, we need to determine the type of insurance we want to put in place. In general, there are 2 different types of life insurance, term and permanent.
Term insurance has a guaranteed level premium for a set “term” of years. For instance, a 20-year term policy will have the same premium every year for 20 years after it is issued. After 20 years the premium will go up every year and, in most cases, these increases make it cost prohibitive to keep the policy in force. It will be determined after 20 years as to whether it makes sense to continue to pay the premium but in almost all cases the policy owner will decide to let the policy lapse.
There are different types of permanent insurance but the common characteristic across all of them is they offer a guaranteed death benefit no matter when you die. Where a person with a 20-year term policy will cease to have coverage after the term is up and their policy lapses, the person with a permanent policy will continue to have coverage if they continue to pay their premium. One of the most popular types of permanent life insurance is whole life insurance. Whole life will have a level premium for a set period but, unlike term life insurance, the policy is paid up after that period. For example, a Whole Life Policy with a 10-year premium length and a death benefit of $1M will have the same premium every year for 10 years and after that period is up it will be paid in full. You pay the 10 years of premium and you are guaranteed a death benefit of at least $1M no matter when you die.
Permanent might sound like the most attractive option at this point but there is a catch. Because permanent insurance guarantees a death benefit, the premiums are significantly higher. Sometimes they are 10-15 times higher. With that said, many types of permanent life insurance have living benefits that term policies do not. For example, whole life will build up a cash value that is a pool of money in the policy that builds up over time that can be withdrawn at any time.
There is a lot of controversy around whether permanent or term insurance is the better choice. We will not address this debate today, but everybody’s financial situation is different, and we must consider all factors when making this choice.
In closing, life insurance might be the most selfless purchase that can be made. The one thing it will bring you is piece of mind that those you love the most will be taken care of no matter what this crazy thing we call life throws at us.
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