First, let's discuss what life insurance is.
Life insurance provides a payout to beneficiaries of the deceased upon their death. But wait: there is so much more!
At Allgen, we take a look at the individual or family's whole financial picture, and we guide them on the path to Financial Freedom. One element that is essential to the journey, regardless of life stage, is reviewing life insurance needs.
While life insurance may not be a fun or exciting item to talk about, there are many ways life insurance can improve your financial picture. Here are the top 3 reasons to consider acquiring life insurance for the individual or family:
1. Income replacement – Life insurance can be instrumental in insuring that dependents are financially secure in the event of an unexpected death. For the majority of the population this is the most important consideration.
2. Estate taxes – These are taxes sometimes paid to the state or federal government in the event of death. This only applies to a small percentage of the population as your individual estate has to be worth over $5,490,000 as of 2017. Of those that are, it may be helpful to have a life insurance policy that could pay the tax instead of depleting the estate. This could be especially helpful if the estate is made up of illiquid assets, like a business or real estate.
3. Legacy – Perhaps there hasn't been time to invest and grow assets. Under that scenario one may still wish to leave a legacy or inheritance to loved ones or an organization dear to one's heart. Life insurance can assist in making this happen. However, one needs to consider if the premium payments will negatively affect their current lifestyle.
Next, let's look at some common questions we hear about life insurance.
"Is it true that only the working spouse needs life insurance?"
Even though the non-working spouse may not be bringing home a paycheck, he or she is still a huge contributor to the family unit. If this person was no longer around, would there be childcare needs, tutoring, cooking, shopping, housecleaning, appointment scheduling, or other activities that the spouse is instrumental in managing. If these items would cause a financial hardship to the household by he or she not being around, then life insurance is needed on this spouse as well.
"Do I need life insurance to cover my whole life?"
Ideally no. As mentioned above the primary reason to have life insurance is to take care of income needs of the surviving dependents. But, if you are debt free, your children are out of the house, and you have accumulated a substantial portfolio (as is the goal of Allgen’s Path to Financial Freedom) then you may no longer need life insurance.
"Does everyone need life insurance?"
It depends. If the three reasons above don't apply, then there may not be a need. However, if it is being used as an income replacement, it is often used to bridge the gap until enough assets are accumulated. Once there is enough wealth that dependents could draw from OR there are no longer dependents (example: kids are now adults), there may no longer be a need for life insurance. Typically, as people near retirement, there is less and less of a need for it.
"How much does one need? "
You may hear a general rule of thumb of 10-12 times your salary in response to this question. So, if you make $50,000, then you need approximately $500,000 in life insurance.
While this is a general rule, we like to delve a little deeper. The actual amount you need depends on several factors including, but not limited to, household expenditures throughout the year, total debt, whether there is an inheritance, passive income, only one partner is working, or income disparity among household earners.
It is best to discuss this with your financial advisor who knows your situation best and can help determine a more specific number.
"I hear a lot about Whole Life and Term Life insurance. What is the difference? "
Term life insurance is where you pay a premium for a specific "term," or period of time, in exchange for a guaranteed death benefit. Terms are typically 10, 15, 20, or 30 years. The premium usually remains the same until that term expires. This is the least expensive type of life insurance to have. This is usually what we recommend if there is a need.
Permanent life insurance (aka Whole Life, Universal Life, Variable Life) is a combination of death benefit and savings. Part of the premium covers the insurance cost and the remaining premium accumulates in a savings or separate investment account called “cash value”.
The premiums are typically much higher than term insurance for less death benefit. There are usually many fees and hidden costs associated with this, meaning it may take many years before the cash value (the amount accumulated in the separate account) breaks even with the amount invested. It can also be difficult to take receipt of the 'cash value' in the account due to surrender charges and other costs.
While there are some instances where this makes sense, it is generally not the most efficient or effective way to provide life insurance, in our opinion.
At Allgen, we generally believe in keeping insurance separate from investments. If there is a need for life insurance it should be covered to protect your family. Our basic philosophy in the pursuit of financial freedom is to keep insurance costs low in order to direct cashflow to the most appropriate places. More discretionary income could allow you to knock out consumer debt quicker or save faster.
We look forward to assisting you with any questions you may have. We also invite you to stay connected with Allgen’s market viewpoints and financial education. Our weekly “Money Minute” video series answers your financial questions and helps guide you on your path to financial freedom. You can find us via www.allgenfinancial.com, Facebook, LinkedIn, Twitter and YouTube.
Written by Paul Roldan, Ana Fernandez, CFP® and Teresa Talton, CFP®, with Allgen Financial Advisors, Inc.
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