Life insurance is essential for people with dependents, especially small children.
When a policy is purchased this way the goal is to preserve your current lifestyle and the lifestyle of your children to make sure they are cared for if the breadwinner dies.
The goal would be income replacement.
However, a life insurance policy can also factor heavily in your estate planning and charitable giving.
For example, many wealthier people depend on insurance policies to cover estate taxes. For those with substantial estates this may preserve assets that otherwise might have to be liquidated at a loss.
So, life insurance is not only a product for the middle class.
And if you have had a policy for awhile it can become a good fixed income investment strategy as it builds tax-deferred cash value. You should consider life insurance within an overall investment and retirement plan and decide if — and how much — is right for you.
Life insurance policy options
Educate yourself about the basic options.
Policies generally fall into two basic categories: whole life and term policies.
Whole life insurance, as the name implies, provides coverage the life of the person insured. It is a policy that remains in force for the insured’s whole life and requires that premium payments be paid every year that the policy is in effect. Additionally, it is a type of investment product because it builds cash value over time.
Future returns on whole life policies depend on the type of policy.
Variable policies depend on the stock market and are estimated, not guaranteed. Universal policies are usually tied to a stock index yet have their interest rate capped at a certain level. However, they provide “downside” risk by guaranteeing some set percentage rate (typically 3 or 4%) for eyars when the market is down.
If you decide not to opt for whole life, you may want to consider term insurance, especially if you are young.
Term insurance provides coverage at a fixed rate over a limited period of time. After the specified term expires, the coverage at that rate is no longer guaranteed. The rates will be much lower if you are young and healthy, so don’t skimp on potential benefits for dependents.
Dollar for dollar term insurance is the least expensive way to purchase substantial benefits. In fact, many CPAs use the expression “term and invest the rest,” meaning that the cost for this type of insurance is low enough (i.e. budget friendly) that you can invest the remainder in an IRA or other retirement vehicle.
For term length 20 years is pretty much standard.
However, you want the term to last long enough for the dependents to become “independent”, or for when your retirement income starts to kick in.
And the rule for buying insurance, as always, is to purchase insurance when you are young, healthy and don’t need it — premiums will be low since the cost of life insurance is primarily based on:
And be sure to speak with an independent insurance agent who can best advise you regarding the type and amount on insurance suited for your unique situation.
Does that make sense to you?
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