Life Insurance – Protecting Against the Unexpected

Brian Burton

Coming in at number two (just behind estate planning) on the list of dreaded-but-necessary financial to-do’s is life insurance, because, let’s be honest, no one wants to reflect on the circumstances in which life insurance would come in handy.  We’ve heard nearly every reason in the book as to what keeps people from getting the life insurance they need, like, “the insurance I have through my employer is sufficient” or “I just don’t have the time”.  The list goes on and on, but let’s face it, there are certain things in our financial lives that need to be brought to the top of the to-do list and life insurance should be one of them.

There are two general categories of life insurance:  term and permanent.  Often referred to as “pure life insurance”, term life provides coverage for a specific period of time, such as 10, 20 or 30 years.  At the end of the chosen period, premiums and coverage will typically end and ideally, so too will your need for life insurance.  Compared to permanent life insurance, term will generally have lower premiums (because it’s temporary and has no cash value) that remain constant throughout the life of the policy.  Let’s look at a few scenarios where term life insurance can help:

  • Income replacement – term life can cover your working years so that everyday expenses can continue to be met.
  • Mortgage or other debt – a term policy can cover the cost of the debt by matching the years of a mortgage or other debt obligation.
  • Business owner – term life can provide funding for the continuation of a business through a buy-sell agreement.
  • Providing for your family – a term policy can provide large amounts of cash at death for children’s college expenses or other needs.

While term insurance is primarily used for replacing lost income in the event of an early death, permanent insurance is most often used for estate planning purposes and wealth transfer.  With permanent life insurance, so long as premium payments are up to date the policy typically covers you until your death, regardless of your age.  There are various kinds of permanent life insurance policies including universal, variable and variable universal, but the simplest and most well-known form is whole life.  Compared with term, whole life premiums tend to be more expensive but they do provide some additional benefits like a guaranteed death benefit and a cash value component that grows at a guaranteed rate.  Here are a few scenarios where permanent insurance may be worth considering:

  • Estate tax concerns – life insurance (permanent is likely the best option here) can provide funds for heirs to help cover any taxes associated with your estate.
  • Desire to provide an inheritance – your beneficiaries will receive an inheritance no matter your level of wealth.
  • Specialneeds child – proceeds from a life insurance policy can provide funding for a special needs trust that can provide care for your child after you pass.
  • Charitable giving — life insurance may allow you to make a substantial gift to charity at relatively little cost while possibly providing an income tax deduction.

Life insurance is certainly not necessary for everyone, however, the vast majority of people do have a need and could ultimately benefit from having coverage.  Not only can life insurance help support dependents, but can also provide immediate cash to assist heirs with paying off any outstanding debts of the deceased, funeral expenses and/or estate taxes.  Here are a few things to consider when assessing whether or not you need life insurance:

  • Does anyone depend on your income and how much money would they need if you were gone?
  • What assets would be available to take care of your dependents?
  • Will your estate owe taxes or other debts at your death?
  • If you own a business, will there be a cash need upon your death?
  • Do you have a mortgage or other debt obligation?

If you answered yes to any of these questions, chances are you need some type of life insurance coverage.  If you need help determining whether you need coverage and/or how much coverage, please don’t hesitate to reach out to us at Ballast.

 

Atheneum