The Truth About What Life Insurance Can do!
Life insurance is a cornerstone of financial planning for many, either as a nice-to-have or a necessity. But learning the ins and outs can seem daunting -- there are different forms, different levels of coverage one can purchase, and different life circumstances each may fit.
This brief guide can help you make sense of the life insurance landscape -- and get a sense for the role it can play in your financial plan.
Term vs. Whole-Life Insurance
With whole-life insurance, you exchange a series of payments -- known as premiums -- for a set payout to beneficiaries when you pass away. These policies have a "cash value" -- the share of the policy you may redeem early or borrow against. Some even have growth-generating investment options for this cash value. At a certain point, it may even cover your premiums.
With term life insurance as part of your financial planning strategy, you pay premiums in exchange for a sum to be paid out only if you pass away in a given period of time -- say, in the next 10 or 20 years. There is no cash value -- if you survive the period, the policy pays nothing. Neither can you cash it in early or borrow against it.
Depending on your age, whether you have dependents and your net worth, varying levels of insurance -- as reflected in the premium size and corresponding payout potential -- may fit you best. Many who have saved and invested well over time may not need insurance at all -- they are insured by their own assets, so to speak. If your beneficiaries can get by on your savings or their income after you die, insurance becomes less important. Even if you still own a policy, decreasing coverage in order to boost your savings potential may be a wise move.
Now, some use life insurance as a part of financial estate planning, but you should be aware of estate tax rules and speak with an estate planner before presuming this is appropriate or valuable in your situation.
What Is Universal Life Insurance?
Universal life insurance policies offer flexible premiums that may allow you to adjust how much you'll pay each year, by accessing some of the policy's cash value (though you will need to pay the minimum premium amount or the policy will lapse). Depending on your policy's potential cash value, it may be used to skip a premium payment, or be left alone with the potential to accumulate in value over time.
Potential growth in a universal life policy will vary based on the specifics of your individual policy, as well as other factors. When you buy a policy, the issuing insurance company establishes a minimum interest crediting rate as outlined in your contract. However, if the insurer's portfolio earns more than the minimum interest rate, the company may credit the excess interest to your policy. This is why universal life policies have the potential to earn more than a whole life policy some years, while in others they can earn less.
A universal life insurance policy might be a good choice if you want:
The flexibility to adjust your premiums and coverage amounts**
Cash value that you may be able to borrow from while you're still alive
Permanent* life insurance protection and access to cash values
What is final expense life insurance?
While most people don't like to talk about end-of-life issues, it is important to plan for them. Expenses associated with death, such as caskets and embalming, can have a substantial financial impact on those you love. Final expense life insurance can help protect loved ones from having to pay these costs out of pocket.
In 2017, the average funeral exceeded $8,500. In most cases, a basic funeral service will include a memorial, death certificates for the deceased, and housing the remains. In addition to those costs, there are also charges involved for goods and services, such as transportation, preparation and embalming, use of the funeral home, a casket and headstone, a burial plot, gravesite, the burial service or alternatively, cremation. There may also be additional costs, such as flowers and the printing of memorial cards.
Do I need final expense insurance?
That depends. If you already have term or whole life insurance, your loved ones can use your existing policy to pay final expenses. If you have term life insurance and you outlive the policy term, you may want to consider final expense insurance at that point.