It’s considered the cornerstone of sound financial planning.
Despite recent reports about sharp increases in some life insurance premiums, financial experts say life insurance is a vital part of a family’s financial stability and a smart investment.
Experts cite several reasons why people should buy life insurance:
- Replaces income following a person’s death. For those who depend on someone else’s income, life insurance replaces that income if that individual dies. This is especially important for parents with young children, but also for couples who would be financially devastated by the loss of income following their partner’s death.
- Pays funeral costs. Life insurance pays for funeral and burial costs, probate and estate administration expenses, medical expenses not covered by health insurance and debts.
- Funds an inheritance. By purchasing a policy and designating beneficiaries, life insurance creates an inheritance that can be passed onto heirs.
- Pays taxes. Following someone’s death, life insurance benefits can be used to pay estate taxes.
- Funds donations to charity. By designating a charity as the beneficiary, a life insurance policy can be used to make a large contribution to a charity.
- Provides a source of savings. A cash-value life insurance policy can create a type of savings plan that can be borrowed or withdrawn at the owner’s request.
The Basics of Life Insurance
The most common type of life insurance policy is known as a term policy. These are relatively inexpensive compared to other types of life insurance. Term policies pay a set amount if the policy owner dies during the term—usually somewhere between 10-30 years. The other main types of policies are permanent insurance policies, including whole life or universal life insurance. These cash-value policies are more expensive, but offer a wide variety of benefits.
If life insurance is only needed for a specific period of time, or if the person has a limited budget, a term policy may be a good fit. However, if someone needs insurance for as long as they live and wants to accumulate savings, a universal or whole life policy would be a better choice.
The next step in buying life insurance is calculating how much is needed. A typical rule of thumb is to buy coverage worth 10 times the policyholder’s salary. In general, to create an inheritance or make a charitable contribution, buy enough life insurance to accomplish those goals. For those with dependents, buy enough, when combined with other sources of income, to replace current income.
A few questions can help determine the amount: What financial resources will be available to survivors after the policyholder’s death? This usually involves Social Security and other survivor benefits, assets and group life insurance. Also, what will be the financial needs of the survivors? Typically, this includes the funeral expenses, debts and income needs. Once you have these answers, subtract the survivor’s financial resources from their financial needs to determine how large of a policy to buy.
It’s also a good idea to find out if there are any “riders” on the policy. These policy additions can add valuable coverages or benefits to the base policy. The two main ones are waivers of premium and guaranteed insurability. The waiver of premium pays the premiums if the policyholder becomes disabled. The guaranteed insurability rider allows the policyholder to add to the death benefit without providing additional evidence of acceptable health.
As far as how often to pay a policy, it’s better in most cases to pay annually because installment plans usually have hefty charges tacked onto them.
Finally, it’s important to tell beneficiaries about the policy. Let them know the name of the company that issued it, where to locate a paper copy of the policy and any specifics about what the policyholder would like them to do with the death benefit. The documents should be stored where they are easily accessible to the beneficiaries.
Where to Buy Life Insurance
When it comes to buying life insurance, employer-sponsored plans have many advantages. First, a true group plan will provide a minimum level of coverage to any member of the group, regardless of their health. Employer-sponsored plans therefore can provide valuable coverage to some individuals who might not qualify for a plan on the individual market.
Second, employer-sponsored plans often allow participants to pay through payroll deduction. This form of payment offers convenience and allows for smaller payments, which can encourage plan participants to keep their coverage in force.
Life insurance is the most commonly offered—and one of the most desired—employee benefits. Today’s life insurance programs offer a variety of features that weren’t available just a decade or so ago, so if it’s been a while since you’ve reviewed your life insurance benefits, please contact USI for a review.