From the Desk of Sarah Emery and Rich Clark:
Purchasing a life insurance policy is an investment many people evaluate during the estate planning process. In the event of one’s death, a life insurance policy is a safety net that ensures their loved one’s future financial obligations will be met, covering items such as funeral costs, outstanding debt, estate taxes and everyday living expenses. It can also help alleviate the extra child care and other domestic expenses that can occur if a stay-at-home parent should pass away.
There are two basic types of life insurance: term life insurance and permanent life insurance. The type of life insurance policy that best suits you will depend on your unique needs.
Option #1: Term Life Insurance
Just as its name implies, term life insurance covers you for a specific period of time, or term, that you choose. Since it offers a death benefit but no cash value, term life insurance is an inexpensive way to protect your beneficiaries for a specified period of time. Term life insurance is best suited for:
•People who have a temporary need for life insurance protection
•Individuals who need a large amount of insurance protection but have limited cash
•Those with specific business needs, such as additional coverage for a key employee
At the option of the policyholder and without evidence of insurability, term life insurance can be renewed at the end of the term for a limited number of successive terms. It can also be converted or exchanged for a permanent insurance policy without evidence of insurability down the road.
Once the term expires, coverage ceases and the policy has no further value. It’s important to note that rates generally increase along with the insured’s age.
Option #2: Permanent Life Insurance
Permanent life insurance is any form of life insurance other than term. Examples are whole life, universal life and variable life. These policies combine term life insurance with a long-term, tax-sheltered savings plan.
Whole life is the most basic type of permanent life insurance. It provides coverage that lasts a lifetime and also builds up cash value that you can borrow against, withdraw or use to pay future premiums. A life insurance policy with a cash value is ideal for:
•Those who have a lifetime need for insurance protection
•Individuals who prefer stable premiums over the life of the policy
•People who want a policy that allows them to build tax-deferred values
•Those who value the high degree of coverage the policy affords
While rates for a whole life insurance policy remain stable over the life of the policy, premiums are initially more costly than those of term insurance policies.
Many people think that adequate insurance is as simple as checking off a list of insurance types: Health? Check. Car? Check. Homeowners? Check. Life? Check. But, if you don’t have the right amount of coverage, you may have a dangerously false sense of security when it comes to your life insurance. You should review your policy at least annually with a financial professional to make sure that your coverage is keeping up with your life.
You should also consider reviewing your life insurance policy if any of the following events occur:
- You get married or divorced
- You have a child or grandchild
- You buy a new house or make another large investment
- You start a business
- You or your spouse has a significant health change or become disabled
- A loved one needs long-term care
- You or your spouse receives a large inheritance
- You or your spouse has a significant change in income
- You or your spouse takes on more debt
- Your children move out or leave for college
- One of your children gets married
A general rule of thumb is that your death benefit should equal 7-10 times the amount of your annual salary, but you’ll have to estimate your beneficiaries’ needs for yourself. The amount of coverage you need will depend on your annual salary, the number of years until you retire, how much debt you carry and any other short-term or long-term expenses you and your family may have.
Keep in mind that if you’re married, both you and your spouse should have life insurance to ensure comprehensive coverage.
A financial professional can help you determine how much your beneficiaries would realistically need to live. You should then assess any other sources of income they may have, such as retirement accounts, Social Security or other savings, and use life insurance to cover any gap between the two amounts.
No one wants to plan for the worst, but a gap in life insurance coverage can make a worst-case scenario even more terrible. Don’t leave your loved ones without a safety net – make sure you have sufficient life insurance coverage today.
Securities and insurance products are provided by Cetera Investment Services LLC., Member FINRA/SPIC. Advisory services are offered by Cetera Investment Advisors LLC. Neither firm is affiliated with The State Bank or its related companies. Investments are: Not FDIC insured – May go down in value – Not financial institution guaranteed – Not a deposit – Not insured by any federal government agency. Advisory services may only be offered by Investment Advisor Representatives. Located at: 1401 E Hill Rd, Grand Blanc, MI 48439. (810) 714-3900.