Life insurance is vital in securing your family's financial future, especially for younger and middle-aged married couples. Knowing the types of life insurance available, their pros and cons, and the associated costs can help you make an informed decision.
There are two primary types of life insurance: term and permanent.
Many younger and middle-aged couples choose term life insurance due to its affordability and practicality.
Margot Robbie best explains what most should think when you hear about any type of life insurance other than term life insurance...
Margot's sentiments go for...
Whole Life Insurance
Universal Life Insurance
(UIL) Indexed Universal Life Insurance
Variable Universal Life
Variable Life
It's easy to be blunt when you're unbiased. I've seen far too many folks ripped off by con artists posing as insurance salesman.
Are all insurance folks con artists? No! Some are wonderful people who change lives by providing the insurance products in the best interest of their customers, which help families at a time they most need it.
The purpose of this post is to empower you to ask the right questions and select the best insurance for your specific needs.
Why Life Insurance is Important
The importance of life insurance lies in the provision of financial security and peace of mind to loved ones in the face of life's uncertainties. A life insurance policy serves as a vital safety net, providing a tax-free lump sum to beneficiaries upon death. In addition to covering immediate expenses like funeral costs and outstanding debts, purchasing the right amount ensures the continued financial stability of the family left behind.
The appropriate amount of life insurance alleviates the burden of financial hardships during an emotionally challenging time, allowing families to grieve without the added stress of financial instability.
What Life Insurance is Best?
Most younger and middle-aged couples only require a simple, low-cost term life insurance policy that replaces an income stream to maintain a particular lifestyle.
Myth: Insurance is only used to cover the cost of a funeral.
Social media is full of obnoxious gold-chained con artists claiming that certain insurance products are better than a 401k. Nonsense. Buy insurance for insurance. Use investment products to invest.
Here are the bullet point considerations.
Assessing Needs: Consider current debts, future expenses (like children's education), income replacement for the surviving spouse, and long-term financial goals.
Budget Considerations: Evaluate what premium amounts are feasible within your budget while ensuring adequate coverage.
Understanding Policy Features: Read policy details carefully, understanding premiums, death benefits, cash value accumulation, and any riders or additional features.
Planning as a Couple
Joint or Separate Policies: Decide whether joint policies (covering both spouses) or separate policies best suit your needs based on individual financial situations.
Beneficiary Designations: Clearly designate beneficiaries, ensuring they align with your wishes and any potential changes in life circumstances.
Regular Policy Reviews: Schedule periodic reviews to reassess coverage needs, especially after major life events like marriage, childbirth, or career changes.
Where to get Life Insurance
Employer
Employer-sponsored life insurance offers a range of advantages, including simplified enrollment processes, affordable premiums, and broader financial protection.
Insurance Agent
Licensed insurance agents sell consumers insurance products like life insurance, auto insurance, and home insurance. They can be captive agents, which represents a single insurance company, or independent agents, which represent multiple companies.
Insurance Broker
Instead of representing one or more insurance companies, brokers act as middlemen between clients and the insurance market. By comparing insurance policies from multiple companies, insurance brokers assist individuals in finding, reviewing, and comparing policies. They do not underwrite or bind policies.
Trade Association / Union
Purchasing life insurance through a trade association, such as a teachers union, offers a multitude of advantages, including affordable premiums, a streamlined application process, and tailored coverage options that address the unique risks within the industry.
Here is a detailed explanation of this essential financial product.
Term Life Insurance
Term life insurance guarantees payment of a death benefit to the insured's beneficiaries. The premiums, which is the cost of the policy, are based on a person's age, health, and life expectancy. You can usually renew a term life policy.
Term life insurance policies are commonly recommended for most folks by financial professionals.
If you die during the policy term, the insurer will pay your beneficiaries the policy's face value. The beneficiaries are not required to use the money to settle the deceased's debts. Term life insurance is typically purchased to replace an income to maintain a lifestyle.
Term life insurance is attractive to young people with children because they can obtain substantial coverage for a low cost, and the policy can be maintained until their children reach adulthood and become self-sufficient.
When you buy term life insurance, the company determines your premium based on factors such as your age, gender, and health.
As an example, a healthy, non-smoking man aged 30 could get a 30-year term life insurance policy with a $500,000 death benefit for an average of $30 per month as of February 2023.
Most term life insurance policies expire without paying a death benefit, which lowers the overall risk to the insurer. This allows insurers to charge lower premiums compared to permanent life insurance.
Permanent Life Insurance [Beware]
For these policy types, refer back to Margot Robbie's advice.
Couples seeking a more permanent financial safety net may find permanent life insurance policies appealing. In contrast to term life insurance policies, permanent policies build cash value over time, serving as a long-term savings vehicle. However, the fees associated with these "investment options" are typically much higher than simply investing in an investment plan such as a 401k.
Whole Life Insurance
Whole life insurance lasts for an insured's lifetime and has a cash savings component, known as the cash value, which the policy owner can draw on or borrow from. The fees associated with whole life insurance policies are often significantly higher than term life insurance policies.
Whole life insurance policies are rarely the recommended primary option by financial planners who put the best interests of their clients ahead of their own.
Whole life insurance requires significantly higher premiums than term life insurance policies. For example, average monthly premiums in 2023 ranged from $247 for a 30-year-old female to $887 for a 60-year-old male.
The policies can build cash value by reinvesting policy dividends and remitting payments greater than the scheduled premium.
A cash-value life insurance policy allows investments to accumulate tax-deferred interest, which can be withdrawn or borrowed later in life. The cash value grows more slowly as the insured gets older.
Interest rates on policy loans are generally lower than personal loans or home equity loans, but withdrawals and unpaid loans reduce the cash value of the policy.
Certain policy provisions or events can affect the death benefit, including unpaid policy loans and accrued interest. Some insurers offer voluntary riders that secure or guarantee coverage, including the stated death benefit.
Universal Life Insurance
Universal life (UL) insurance is a form of permanent life insurance with an investment savings element plus premiums and a death benefit that are flexible. The cash value earns an interest rate set by the insurer, and it can change frequently, although there is usually a minimum rate that the policy can earn.
Universal life insurance policies are rarely the recommended primary option by financial planners who put the best interests of their clients ahead of their own.
A decline in the cash value of your investments may ultimately lead to an increase in your premiums if the investments underperform. There are no tax implications for policyholders who borrow against the accumulated cash value of their UL policy, although some withdrawals may be taxed.
Although Universal Life is a very flexible insurance type due to its ability to lower premiums and withdraw when needed, you must monitor your account carefully. Your policy can lapse if your cash value falls to zero and your premiums do not cover the cost of insurance.
Additionally, if interest rates drop, your cash value may suffer. In contrast to whole life, universal life cash value does not earn a guaranteed rate of return.
Your withdrawals, however, will be taxed if you withdraw more than you paid into the policy.
In the event of a policyholder's death, the insurance company keeps the account's cash value. Since the policyholder can only use the cash value while alive, your beneficiaries will receive only the death benefit.
(IUL) Indexed Universal Life Insurance
Indexed universal life (IUL) insurance is a type of permanent life insurance with a cash value component and a death benefit. Policyholders can earn interest by tracking stock market indexes their insurer selects, such as Nasdaq-100 or Standard & Poor's 500.
Indexed universal life insurance policies are rarely the recommended primary option by financial planners who put the best interests of their clients ahead of their own.
The interest rate derived from the equity index account can fluctuate, but the policy offers an interest rate guarantee, limiting your losses and gains. These policies are more volatile than fixed universal life policies but less risky than variable UL insurance policies because no investment is made in equity positions.
Variable Universal Life
IULs are typically accompanied with very high fees.
Variable universal life (VUL) insurance allows the cash component to be invested. VUL insurance policies are built like traditional universal life insurance policies but let you invest the cash value in the market through subaccounts.
Variable universal insurance policies are rarely the recommended primary option by financial planners who put the best interests of their clients ahead of their own.
The return to the cash component is not guaranteed year after year. You can even lose money.
If your cash value balance is too low, you could pay higher premiums to keep your VUL.
Variable Life
Variable life insurance is a permanent policy with an investment component. Typically, the policy has a cash-value account with mutual fund investments.
Your beneficiaries receive a death benefit when you die when you have variable life insurance. As opposed to a term policy, which has a fixed term, the coverage lasts until your death.
The cash value component of variable life insurance may rise or fall in value because it is invested in assets such as mutual funds. So, these policies carry more risk compared to other life insurance policies.
A variable life insurance policy is considered more volatile than a standard life insurance policy.
Variable life insurance policies are rarely the recommended primary option by financial planners who put the best interests of their clients ahead of their own.
A variable life policy is often sold as a "good choice" for investors who are willing to take on additional risk because of its tax advantages. Returns on variable policies can provide tax-free income.
FAQs
Are life insurance proceeds taxable?
In general, life insurance proceeds you receive as a beneficiary are not taxable and do not have to be reported.
Are life insurance premiums tax deductible?
In most cases, life insurance premiums are not tax deductible. Business owners may be able to deduct employee insurance premiums if they are business expenses.
What life insurance can you borrow from?
Permanent life insurance policies with a cash value component, such as whole life and universal life, are eligible for life insurance loans. A term life insurance policy probably doesn't have a cash value, so you can't borrow against it.
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