You have probably seen or heard many of the recent tv ads and radio commercials touting the low cost benefits of term life insurance. As the ads profess....life insurance is not for you (the insured) but for the people you leave behind (your family). There are many options in the life insurance universe, but which policy is best for you and your family?
Unfortunately, the unthinkable could happen. The loss of a loved one would be devastating to you and your children, but could also become an incredible financial hardship if your family is not provided with enough money, through a life insurance policy, to pay off the mortgage, provide college tuition for your children, pay off your debt and maintain their quality of life.
Life insurance is purchased for the long term. You buy it today to protect your family tomorrow. How much you need to buy and what kind of policy you should purchase depends on many factors. Generally speaking, people need to consider the needs of the surviving loved one: amount of outstanding debt, mortgage, childrens' college education and the cost of taking care of the kids in the absence of a parent. Other elements must be taken into account, such as whether or not a surviving spouse will be working and how much income is estimated from Social Security, retirement accounts and/or other investments.
The type of life insurance policy can also make a big difference in your long term plans - permanent whole life insurance versus term life insurance. Term life pays a death benefit if the insured passes away within a defined period but does not accumulate any cash value. Because it is comparatively one dimensional, term insurance is more affordable, which makes it a low cost solution for many families on a tight budget.
Permanent whole life, on the other hand, combines a death benefit with an accumulation of cash value for as long as the premiums continue to be paid. This investment component drives up the premium. The cash value, however, grows tax-deferred and is largely accessible to the owner of the policy, which can come in handy at retirement or for short term cash needs.
Either of these policies could complement your overall financial plan, but policies should be revisited and revised as your needs and situations change. For example, kids growing up, going to college and beginning their own lives would cause a policyowner to shift focus away from protecting the kids and more toward retirement, preserving the estate and providing for an aging surviving spouse. Whichever policy you purchase now must consider possible changes tomorrow.
Life insurance can be an effective income protector for many people, such as a young family impacted by an untimely death, a couple who would like to protect an estate from taxes, anyone who would like to leave money to a charity and a couple who may need to draw an income in retirement.
Your advisor can help you calculate an appropriate amount of death benefit and recommend a policy that bets fits your needs.