The moment you become an adult, a spouse, or a parent changes everything. Not only do you need to take care of yourself, but you now have someone else to care for and protect. Planning for the future and the unexpected can give you peace of mind that your loved ones will be protected. Life insurance is one of the ways you can make that happen.
We’ve all heard about the importance of life insurance, but is it really necessary? In general, you should consider life insurance protection if any of the following applies to you:
- You are married and your spouse depends on your income
- You have children
- You have an aging parent or disabled relative who depends on you for support
- Your retirement savings and income won’t be enough for your spouse to live on
- Your estate may be subject to state or federal estate taxes
- You own a business, especially if you have a partner
- You have financial obligations, such as a personal loan which another person would be legally responsible for after your death
What is Life Insurance?
Life insurance is an agreement between you (the insured) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Appropriate life insurance coverage may provide you with reassurance, since you know those you care about should be financially protected in the event of your death.
The Many Uses of Life Insurance
- One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death.
- Life insurance is commonly used to pay any outstanding debts you may leave behind, including: mortgages, car loans, and credit card debts, leaving the remaining assets intact for your family.
- Life insurance can be used to pay for final expenses and estate taxes.
- It can create an estate for your heirs.
How Much Life Insurance Do You Need?
Your life insurance needs will depend on a number of factors, including: the size of your family, the nature of your financial obligations, where you are in your career, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance typically increases.
The questions below can help you start thinking about the amount of life insurance you need:
- What immediate financial expenses (e.g. debt repayment, funeral expenses) would your family face upon your death?
- How much of your salary is devoted to current expenses and future needs?
- How long would your dependents need support if you were to die tomorrow?
- How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities, or an inheritance for your children?
- What other assets or insurance policies do you have?
How Much Life Insurance Can You Afford?
How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage you need, many factors determine the cost of coverage. The type of policy you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well.
Types of Life Insurance Policies
The two basic types of life insurance are: term life and permanent (cash value) life.
Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy’s death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific period of time.
Permanent insurance policies offer protection for your entire life, regardless of your health, provided you pay the premium to keep the policy in effect. As you pay your premiums, a portion of each payment is placed in the cash-value account. During the early years of the policy, the cash-value contribution is a large portion of each premium payment. As you get older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow, tax deferred, as long as the policy is in force. Permanent insurance can be broken down into the following categories:
- Whole life: You generally make equal premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance company). Your only action after purchase of the policy is to pay the fixed premium.
- Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed and the cash value will grow at a declared interest rate, which may vary over time.
- Indexed universal life: This is a form of universal life insurance with excess interest credited to cash values. But unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
- Variable life: As with whole life, you pay a equal premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as sub-accounts. A sub-account is a pool of investor funds professionally managed to pursue a stated investment objective. You select the sub-accounts in which the cash value should be invested.
- Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount in insurance coverage can be changed, and the cash value and death benefit goes up or down based on the performance of investments in the sub-accounts.
Choosing and Changing Beneficiaries
When you purchase life insurance, you must name a primary beneficiary to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. If you name your minor child as a beneficiary, you should also designate an adult as the child’s guardian in your will.
Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person’s permission to adjust any of the policy’s provisions.
Review Your Coverage
Once you purchase a life insurance policy, make sure you periodically review your coverage, as your needs will change over time. An insurance agent or financial professional can help you with your review.
Is Life Insurance Right for You?
Investment Services, provided by CUSO Financial Services, L.P. (CFS),* can review your current situation and help determine the type and amount of life insurance needed for your specific situation and future goals. Contact Investment Services today at: 513.243.6510 or email Todd Blessing at: email@example.com or Erik Waldron at: firstname.lastname@example.org.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a Registered Broker-dealer (Member FINRA/SIPC) and SEC-registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. General Electric Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.