Buying life insurance is one of the most important, and personal, financial decisions a person can make. Not only will your policy choice impact your finances during your lifetime through premiums, tax benefits, and payouts, but whether or not you choose to purchase life insurance can affect the financial lives of loved ones long after you’re gone. Before making a decision, there are three key things you will need to consider.
Term vs. Permanent Life Insurance
There are two different types of life insurance, term and permanent. Term policies tend to be simpler and less expensive. Their coverage only lasts for a set period of time, typically 10-20 years. If you pass away during that time, your beneficiaries will receive a lump-sum payment, called a death benefit. Some people choose term policies that will last until they reach retirement or until their children hit a certain age.
Permanent policies cover you for life and are usually more expensive. Unlike term policies, permanent policies invest a portion of the premium, allowing it to grow tax-free.
Value
There are three major benefits to owning life insurance, although certain policies may have more. They are:
Protection
If you have dependents, children, or a spouse, life insurance is the best way to ensure their financial security after you are gone. Death benefits can help pay off funeral costs, bills, or debt. They can also keep a family business afloat or finance a child’s education. Specifically, if your child has student loan debt, life insurance may offer a solution. Depending on the type of loan, you might be the one stuck with the bill, and a life insurance policy can cover those costs.
Tax Benefit
Most life insurance policies are shielded from taxation. These tax benefits apply to living benefits as well as death benefits. If the policyholder dies, their beneficiary does not pay taxes on the money, which is considered income replacement. Some policies allow your money to grow faster, tax-deferred. Most of the time, if you withdraw money, the money isn’t taxed. However, using life insurance to reduce your taxes is often complex. Consult a financial professional to help you figure out the best options.
Cash Value
Certain life insurance policies allow you to use the cash value during your lifetime, while still providing a benefit after you die. You control when and how you take payments from your policy. Life insurance can help pay your medical expenses or your kids’ college expenses. You can even use it to supplement your retirement savings without lowering your Social Security benefit.
Cost & Coverage
When it comes to cost and extent of coverage, policies vary wildly. As a rule of thumb, a life insurance plan should guarantee you 10 to 15 times what you earn annually. However, according to Nationwide, the average American household has only enough insurance to cover 3 1/2 years of income. Use this life insurance calculator to determine how much coverage you actually need.
A variety of factors affects the cost of life insurance, including your age, health, and gender. For example, the cost for a 30-year-old male smoker is much different (read: higher) than a 30-year-old healthy female with the same policy. Even your occupation can impact your premium! Cost is also dependent on the size of the benefit and the length of the policy. The good news: life insurance premiums have been falling for the last few years, and it’s more affordable than you may think.
Once you have a policy, it’s important to re-evaluate it every 2-3 or after any major life event, such as a wedding, divorce, birth, or death. Your financial needs will change over time, and you may be paying more for your policy than you need to.
Sara McKinney
saractag@gmail.com
Sara is a recent graduate of Kalamazoo College and a new addition to the Cowen Team. Her responsibilities include IT support, event planning, and general administrative assistance.
