Life insurance: is it missing from your plan?
Life insurance may be a cornerstone of a sound financial plan, providing potential financial stability to a surviving spouse, children, or other family members in the event of your untimely death. Sadly, many Americans have no life insurance coverage whatsoever, and of those who do, many don't have enough.1
Appreciating the importance of having adequate life insurance is one step, while assessing your own unique needs is quite another. As a starting point, determine your net earnings after taxes as well as your routine living expenses. Then take into account any outstanding debt -- such as a mortgage, education loans, or other loans -- as well as future tuition bills and how much a surviving spouse might need to adequately fund a retirement nest egg.
Generally, you'll want a benefit that will cover all of these expenses. Planning specialists sometimes say that it's a good idea to buy a policy that would provide the equivalent of five to seven times your annual salary. That standardized approach may work for some people, but in reality, your decision may not be that simple.
Term life vs. whole life insurance
Once you have an idea of the coverage you need, evaluate whether term life or whole life insurance is more appropriate for you. Term life is the more basic and less expensive form of life insurance for people under age 50. A term policy provides coverage for a predetermined period of time, typically one to 10 years. Premiums increase at the end of each term and can become prohibitively expensive for older individuals. Unlike many other policies, term insurance has no cash value. Benefits are paid only if you die during the policy's term.
Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy's cash value tax free, although loans reduce the policy's death benefit and cash value, and may trigger a taxable event if the policy lapses.
Potential uses throughout life
While ensuring the financial security of loved ones is a critical use of life insurance, there are other ways it might be used to meet planning goals throughout the stages of one's life. For instance, people in their peak earning years may use life insurance to help protect their wealth while potentially accumulating additional tax-deferred assets. Older people might consider using life insurance as an integral part of an estate planning strategy designed to pass wealth to future generations -- and less to Uncle Sam.
Determining the right type and amount of life insurance coverage you need is easier said than done. To make the most accurate assessment, contact your financial advisor or insurance agent.
1Life insurance policies are subject to substantial fees and charges. Death benefit guarantees are subject to the claims-paying ability of the issuing life insurance company. Loans will reduce the policy's death benefit and cash surrender value and have tax consequences if the policy lapses.
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