By Richard A. McGrath, CIC, LIA
Death is a subject that makes most people uncomfortable, but have you ever stopped to think about what will happen to your family when you die? How will your family manage financially? Life insurance is a simple solution to this difficult question, yet more than 40 percent of Americans don’t have it, according to the 2015 Insurance Barometer Study by Life Happens and LIMRA.
Life insurance is the ultimate way to show your loved ones how much you care by providing them with the financial security they’ll need to continue living when the unthinkable happens. September is Life Insurance Awareness Month (LIAM), which means it’s time to start getting serious about protecting your family’s future.
A common misconception about life insurance is that it’s too expensive. However, it might be cheaper than you think. For example, a healthy 30 year old can get $250,000 of coverage for around $12 a month, according to Life Happens. The trick is in knowing how much coverage you’ll need. Typically, it’s recommended to have eight to 10 times your salary, but this amount could be too much or too little, depending on your specific needs.
When considering how much coverage to purchase, it’s important to remember that you’re planning for future expenses. Make sure to speak with a trusted independent insurance agent to ensure that your needs align with what you can afford. You can jump start the planning process by asking yourself these six questions:
- How much of the household income do I provide, and if I were to die, how would my family survive?
- Do I want to set aside money so my children can finish their education?
- How will my family pay final expenses and debts after my death?
- Do I want to leave money to any family members, a charitable organization or my alma mater?
- Will there be estate taxes to pay after my death?
- How will inflation affect the future needs of my loved ones?
When you die, life insurance provides your family with income, called a death benefit. Oftentimes, there is no federal income tax on life insurance benefits. This protection allows your loved ones to remain financially secure by helping to pay for funeral costs; pay monthly bills and daily living expenses; pay off any outstanding debt, such as medical bills, credit cards and mortgage payments; finance future needs, like your children’s education; and protect your spouse’s retirement plans.
Who Needs Life Insurance?
Married couples. Most households depend on two incomes to make ends meet. If you are married or getting married, it’s important that you consider your coverage needs. Remember, protection from life insurance isn’t just for people with kids. In the event of your death, how would your surviving spouse cover funeral costs, daily living expenses, or debt?
Parents. Raising a child, though rewarding in itself, can also be very expensive. Imagine having to suddenly raise your kids on half of the household income. If you died tomorrow, would your spouse be able to pay for daycare, a college education and everything else in between? It’s also important for stay-at-home parents and single parents to have life insurance protection.
Homeowners. Your home is probably your most significant financial asset. The benefits from life insurance can be used to help pay off the mortgage so that your family members won’t have to move to a less expensive place.
Singles. Most people who are single don’t have a pressing need for life insurance because nobody depends on them financially. However, if you are providing financial support to your parents or siblings, or have significant debt that you don’t want to pass onto family members, you should strongly consider it. Additionally, purchasing coverage when you are young and healthy can lock in your premiums at a lower rate.
Retirees. If you are retired or planning for your retirement, you might feel that your need for life protection has passed. But if you died tomorrow, would your spouse have to change his or her lifestyle? Life insurance can help your spouse avoid financial struggles in retirement and it can also help take care of estate taxes. Depending on the size of your estate, you may be hit with an estate-tax payment of up to 45 percent after you die, according to Life Happens.
Business owners. As a small business owner, life insurance can take care of the needs of both your family and business. A life policy can be structured as a buy-sell agreement, so that the surviving business owners have the funds to buy out company interests at a previously agreed upon price. This ensures that your business partners get the company and your family gets the money. Additionally, small business owners will need key person insurance in order to have funds to either hire a replacement or work out alternative arrangements following the death of a key employee.
What Type of Coverage Should I Buy?
When considering your coverage options, be sure to review the differences between term life policies and permanent life policies.
Term life insurance. This provides protection for a specified period of time; the average term is 20 years, but can run anywhere from one year to 30 years or even longer. Term policies are best used for needs that will eventually disappear over time, such as a mortgage, college education expenses, and any loans or debt.
Although premiums for term insurance are low when you are young, they increase with age. Keep in mind that there is always the potential for the application to be rejected due to any deteriorating health conditions. Additionally, the policy will only pay the death benefit if you die during the designated term, and there is no accumulation of cash value on term policies.
Permanent life insurance. Also known as cash value life insurance, this provides lifelong protection. Although the initial premiums are higher, a permanent policy can accumulate cash value on a tax-deferred basis. This cash value can be used in a variety of ways, including borrowing against the policy’s cash value, buying a reduced amount of protection without having to pay more in premiums, increasing your income for retirement, or helping to pay for your children’s education.
Whole life insurance is the most common type of permanent coverage. Your premiums will remain the same for life, and the death benefit and cash value are guaranteed. Universal life insurance is another permanent life option, and is the least expensive. Your premiums are flexible, and it offers the certainty of a guaranteed death benefit as long as your premiums are sufficient to sustain it.
Take some time during Life Insurance Awareness Month (LIAM) to talk to an expert about your insurance needs. Purchasing a policy today can help ensure the financial security of your loved ones for a brighter tomorrow.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at firstname.lastname@example.org.
This article is written for informational purposes only and should not be construed as providing legal advice.