Just as we are reluctant to discuss death, we have a predilection to push back against discussions concerning life insurance. Too morbid. Too complicated. But in "10 Things You Absolutely Need To Know about Life Insurance," Forbes presents a compelling argument to get past any preconceived notions that cause anyone to avoid this important personal finance tool.
With the proper information, you can simplify the decision-making process and arrive at the right choice for you and your family.
Here are some of the things you absolutely need to know about life insurance:
You really need it if you are someone's spouse or the parent of dependent children. If you are retired or financially independent and no one would suffer financially if you weren't around—OK, you might not need life insurance.
Life insurance doesn't just slap a monetary value on your life. Rather, it helps compensate for the financial consequences that accompany the loss of a wage earner's life. It can help those left behind cover the costs of final expenses, outstanding debts and lost income. After an unexpected death, life insurance can lessen financial burdens at a time when surviving family members are dealing with great loss. It can also give peace of mind to the policy holder.
Life insurance is a risk management tool, not an investment. There are some life insurance policies that have an investment feature, but they may not be an optimal investment. There are often better and more efficient strategies.
There are two kinds of life insurance—term and permanent, also known as whole life insurance. Term life is the simplest, the least expensive, and the most widely applicable. The life insurance company bases the policy premium on the probability that the insured will die within a stated term—typically 10, 20 or 30 years. The premiums are guaranteed for the length of the term, then the policy becomes cost-prohibitive to maintain—or you can decide to let it lapse. This means that you could pay premiums for decades and "get nothing out of it." That's good news because it means you were protected during that time and didn’t die prematurely.
Permanent life insurance includes the same probability-of-death calculations but also includes a savings mechanism, often referred to as "cash value." It's designed to help the policy exist into perpetuity. Whole life has an investment component, and variable life has investment options more like mutual funds. Universal life is a less expensive permanent life insurance alternative with added flexibility but increased interest rate risk for the owner.
Choosing the right life insurance policy doesn't have to be complicated. It's better to set up something you can work with and understand than to postpone such an important decision due to the policy's intimidating complexity. In many circumstances, a good rule of thumb is to purchase enough life insurance to replicate all or most of the insured's income for a term as long as the household expects to need that income.
We can't say it enough – it's better to discuss with your loved ones what would happen in the event of an untimely demise than it is to let them struggle through a terrible time with no planning or advance discussion. By meeting with an estate planning attorney and purchasing the appropriate life insurance plans, your loved ones will be prepared in some way – and they will be grateful to you for looking out for them. To learn more about creating your own estate plan, please visit our website.
Reference: Forbes (January 5, 2016) "10 Things You Absolutely Need To Know About Life Insurance"