By: Noel Roach
The inevitability of death is never fun to talk about. However, to ensure a well-thought-out financial plan, you must take the time to consider what will happen to your finances when you (or your spouse) pass away. Life insurance should especially be a consideration if 1) a child, spouse, life partner, or parent depends on you and your income and/or 2) you want to leave a legacy to children or grandchildren. Other reasons for securing life insurance include needing to insure a business loan and wanting to offset funeral costs and the death tax.
In this blog we will describe when and why you would implement various types of life insurance. As always, consult your financial adviser to make a decision on what best fits your overall financial strategy.
Term Life Insurance
Term life insurance is the most straightforward and inexpensive. Coverage is purchased for a period of time or a “term”. Usually the increments are 10, 20 or 30-years. Similar to car insurance, term insurance carries no cash value. For example, if you don’t wreck your car, you don’t get your car insurance premium back. With term insurance, if you don’t die during the covered term, you don’t get your premium paid back to you. However, if something were to happen resulting in death during the covered “term”, the policy would pay the death benefit. This benefit would be tax-free.
Typically, our clients start evaluating life insurance when the first child is on the way. If something were to happen to you or your spouse, your family’s financial security may be in question. In addition to paying the regular bills, likely the family would need to hire extra help to run the household.
In my opinion, term insurance is too inexpensive to not have life insurance coverage. For example, here are rates for a non-smoker living in Kansas (as of April 2020). This individual wanted a $2,000,000 death benefit and a 20 year-term policy:
| Gender | ||
| Age | Male | Female |
| 30 | $57/mo | $45/mo |
| 40 | $91/mo | $79/mo |
| 50 | $244/mo |
$194/mo |
Note: These rates are paid for the entire 20-year term. The rates will not increase with time.
Do you want to discuss how term life insurance might fit into your overall plan? Make an appointment with our team, or just cut to the chase and get a quote by emailing connect@financialdesignsinc.com.
Permanent Life Insurance
Permanent life insurance is… permanent (as long as you pay the premium). It pays upon death regardless of when that is (vs. term insurance only pays if you die during the “term”). Permanent coverage is typically more expensive, and there are a few options on how you can pay the premium. For example, you can choose a “short pay” option where you pay the premium over a designated time frame (i.e. 10 or 20 years). Typically, our clients use this option to finish paying the premium by the time they retire. Two common permanent life insurance products are universal life insurance and whole life insurance.
Universal Life Insurance
Think about this as “permanent term insurance”. Typically, there isn’t a cash value. Universal life insurance is more expensive than term life insurance, but there is a guaranteed death benefit.
Here is an example for a 40 year-old male (non-smoker in Kansas) using a “short pay” option over 20 years… paying $5,531.54 per year for 20 years. This guarantees a $500,000 death benefit that is tax-free when he passes away.
| Guaranteed | |||
| Year | Total Premiums | Death Benefit | Guaranteed Cash out Rider Benefit* |
| 15 | $82,973 | $500,000 | $53,933 |
| 20 | $110,631 | $500,000 | $110,631 |
| 25 | $110,631 | $500,000 | $110,631 |
| Age 121 | $110,631 | $500,000 | 0 |
*If you decide you don’t want the coverage, you can liquidate your policy.
Do you want to discuss how universal life insurance might fit into your overall plan? Make an appointment with our team, or just cut to the chase and get a quote by emailing connect@financialdesignsinc.com.
Whole Life Insurance
Whole life insurance is the most common type of permanent insurance*. This kind of permanent life insurance is similar to universal life insurance (as described above), but there is a cash value component and a guaranteed rate of return (which is guaranteed by the life insurance company). Additionally, many whole life insurance policies pay dividends. Here is an example for a 40-year old male (non-smoker in Kansas) who pays $11,405/year over 20 years.
| Guaranteed Values | Current Assumptions | ||||
| Year | Contract Premium | Total Cash Value | Death Benefit | Total Cash Value | Death Benefit |
| 5 | $11,405/yr | $30,315 | $500,000 | $38,025 | $529,212 |
| 10 | $11,405/yr | $80,850 | $500,000 | $103,326 | $572,369 |
| 20 | $11,405/yr | $214,520 | $500,000 | $306,931 | $715,391 |
| Age 80 | $0/yr | $364,245 | $500,000 | $828,283 | $1,136,986 |
In 20 years, this man has almost made-up 100% of his premiums in the guaranteed total cash value (plus he has the guaranteed death benefit of $500,000). The added benefit of a whole life insurance policy is that generally the cash value and death benefit increase over time beyond the guaranteed payouts. You can see the values in this example under the “Current Assumptions” column. One of the attractive things about whole life insurance is that the values paid-out generally have no relation to the stock market. In this example, when the man turns 80, he hasn’t paid premiums for 20 years and using the “Current Assumptions” numbers he now has $828,283 in cash value and over a million for the death benefit.
Do you want to discuss how whole life insurance might fit into your overall plan? Make an appointment with our team, or just cut to the chase and get a quote by emailing connect@financialdesignsinc.com.
Life insurance is never a fun topic, but it is important you consider if it is a relevant strategy to your overall financial plan. Working with a broker ensures you receive competitive quotes across various carriers, and you can also tap into the knowledge of the broker on what type of insurance (and what riders) fit your specific needs. We are here to help educate you on options.
*Insurance Information Institute (https://www.iii.org/article/what-are-different-types-permanent-life-insurance-policies)
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