Is life insurance considered financial protection or an investment?
What type is best for you: term or permanent? What does “permanent” really mean?
How much coverage do you need, and what’s the cost?
These are just a few questions that arise when discussing life insurance.
Start here.
There are two general categories of life insurance:
Term Life Insurance – use it or lose it.
It provides a death benefit for a set number of years (the term) and expires if you are alive at the end of the term. The premium (cost) is less than permanent insurance.
The most common types of term insurance include:
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Annual Renewable Term
- This has a set term and insurance benefit.
- The premium resets annually and increases as you age.
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Level
- This has a set term and insurance benefit.
- The premium is level for the entire term.
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Permanent – use it and keep it.
It provides both a death benefit and cash value. The cash value accumulates over the life of the policy, and if you don’t use the death benefit, you can access the cash value. The premium is more than term insurance.
The most common types of permanent insurance include:
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Whole Life
- The cash value increases at a rate based on the insurer’s “divisible surplus” (which isn’t always clear).
- The death benefit increases with premium payments and reinvested dividends.
- It has limited flexibility and is usually expensive.
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Universal Life
- The cash value increases based on a stated interest rate (guaranteed).
- The death benefit is deemed to be level or increasing.
- It has flexibility in premiums compared to Whole Life.
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Variable Universal Life
- The cash value adjusts based on market returns.
- The death benefit is deemed to be level or increasing.
- It can be considered an investment vehicle.
- It has premium flexibility.
- It’s more cost-efficient than Whole/Universal Life (no guarantees offered).
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Indexed Universal Life
- The cash value adjusts based on a market index (upside cap and downside protection).
- The death benefit is deemed to be level or increasing.
- It can be considered an investment vehicle.
- It has premium flexibility.
- It’s more cost-efficient than Whole/Universal Life (no guarantees offered).
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How much coverage do you need?
These are the primary variables to consider:
- Human life value – What is the Net Present Value of your projected lifetime earnings? In other words, how much are you worth?
- Mortgage – What’s the cost to pay it off?
- Projected education cost – Quantify the present value of education, if applicable.
- Flexibility – How much “income” do you want to provide to your family, and for how long? Give your survivors the ability to choose.
What type of policy is best for you?
Term Life Insurance – For most, term coverage is the best option.
It’s affordable and provides the protection required should the worst thing happen. Think of it as creating an immediate estate for your family. Lower premiums provide cash flow flexibility and allow families to focus on investing elsewhere in their portfolio.
Permanent Insurance – Permanent coverage may be appropriate if you max out all available investment vehicles (retirement, brokerage, HSA, and 529s) and are free of high-interest-bearing debt.
Although permanent insurance is first thought of as insurance protection, we also view it as an estate planning tool and/or a source of tax-free income in retirement.
If there’s a disruption in an individual’s income (i.e., job loss), the higher premiums associated with permanent insurance don’t cease, so liquidity is paramount.
Before purchasing any policy (especially permanent), ensure the policy addresses precisely what you want to protect, the cost is transparent, and the mechanics are straightforward.
Connect with us to discuss these life insurance strategies and understand how our fee-only services impact an insurance review.
Please consult with your financial advisor and/or tax professional to determine the suitability of these strategies. All views, expressions, and opinions in this communication are subject to change. This communication is not an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.