By Joe Globensky, RFC®
Some of you may be familiar with the phrase, “Life insurance is sold, not bought.” A primary reason for this is people do not want to think about, let alone plan for, their ultimate demise. However, life insurance can be a tremendous asset to you and your family.
September is Life Insurance Awareness Month, so I want to share 5 popular uses of life insurance that can provide peace of mind. One or two of these may apply to you or someone you know at some stage in your life.
New Home Purchase
You, and maybe a significant other, have just acquired a new home and a sizeable mortgage to go along with it. Congratulations! Home ownership is a very popular goal and a huge achievement. You should be proud of yourself. Now you may be asking, “I just took on this huge debt. Why do I need, and more importantly, how can I afford, life insurance?”
As a financial advisor, I hear this question a lot, frequently from first-time homeowners. Life insurance can provide the needed funds to pay off the mortgage, eliminating the monthly payment burden from your significant other or family, or provide them time to sell if desired.
In this situation, I typically recommend term insurance on all owners, in an amount that will cover the mortgage debt. Your mortgage company may even require it. Term insurance is the most common and your least expensive option of all types of life insurance. It’s a policy that provides a death benefit during the period of time you choose to pay for, such as 10, 20, or 30 years. With the cost of life insurance dropping in recent years, you might be surprised how affordable a term policy can be. And with premiums that don’t change during the term of the policy, that will help you budget with no surprises.
If you decide to start a family, additional life insurance may be necessary for both parents to not only replace a lost income but also to provide for future childcare and/or education expenses. This is where a financial advisor can be helpful as there will be some calculations required to determine the appropriate amount of insurance protection to obtain.
In this situation, I usually recommend term insurance since a large portion of the family need will expire at the end of the children’s schooling. However, you may wish to use permanent insurance. A permanent policy stays with you for your whole life, as long as you pay the premiums. It allows for more flexibility, but usually comes with a higher premium than term. Unlike term insurance, this type of policy can also build cash value that can be used later in life, possibly to supplement your retirement savings. See more on this in the next section.
There are numerous ways to save for retirement such as an employer-sponsored plan like a 401(k) or 403(b), a SEP IRA for the self-employed, a SIMPLE IRA for small businesses, and even traditional or Roth individual retirement accounts (IRAs).
If you have maximized your retirement contributions through work and on your own, but also want to accumulate additional retirement assets to supplement future retirement income, a permanent life insurance policy may fit the bill. But it requires a well-informed decision.
The biggest advantage of this type of plan is that funds may be accessed through the life insurance policy in a tax-advantaged manner, potentially tax-free when accessing the cash value via partial withdrawals or loan provisions.1 The biggest drawback is that the cost of the policy, including the cost of insurance and administrative fees, can cause this form of potential retirement savings to be more expensive in the long-term.
Buy/Sell Agreements for Small Businesses
Business succession is a hot topic among financial advisors these days because we want to make sure our clients are taken care of should something happen to us. But most small businesses, especially those with multiple owners, should address business succession during the start-up phase.
A small business may be the only source of income for you and your family. And it may be the same situation for your business partner(s). No one wants to see their hard work erased by an unfortunate event. Constructing a well-rounded business succession plan, with the assistance of legal, accounting, and insurance experts, can provide for a smooth ownership transfer to the remaining business partners, and provide your family with a pre-determined value at what could be a very uncertain time in their life.
Long-Term Care Benefits
For those concerned about the potential cost of a long-term care event, and the corresponding outlay that is required for a traditional long-term care insurance policy, you now have some viable alternatives. One alternative is via a life insurance policy offering a rider that makes a portion of the policy’s death benefit available, should you need to access it, to pay for long-term care expenses.2
If you don’t want to experience the premium increases that can potentially occur occurred in traditional long-term care policies, life insurance policies can keep your premiums constant throughout the life of the policy. Also, with traditional long-term care insurance, each spouse or partner has a separate policy but may enjoy a discount for two applicants. But a life insurance policy can be purchased jointly, thereby spreading the insurance risk over two lives, and potentially saving on premium costs.
There are many reasons you might want or need a life insurance policy, and I’ve highlighted five popular uses of life insurance I commonly see at our office. If any of these scenarios apply to you and your family, I invite you to contact me to discuss your options.
As an independent financial advisor, I have access to a wide assortment of policy types from dozens of insurance carriers and provide you with guidance on what will be a good fit for your situation. I can be reached at (217) 605-8130, via e-mail, or you can click here to schedule a meeting or phone call.
1 Insurance loans are subject to interest. If loans are not repaid, cash surrender value and death benefits are reduced by the amount of the loan outstanding plus unpaid interest. Unpaid loans with interest may cause the policy to terminate. Policy loans can lead to adverse tax ramifications if the policy lapses because too much of the cash value was withdrawn or the loan balance exceeded the cash left inside the policy and wasn’t repaid. Additional premium payments may be required to keep the policy in force.
2 Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details. Guarantees are based on the claims paying ability of the issuing company.