Should Life Insurance Be a Part of Your Wealth Journey?
If the law requires drivers to have car insurance and a bank won’t give you a loan for a house without homeowners’ insurance, then why aren’t we required to carry life insurance?
The whole point of insurance is to protect your assets – and you are your family’s greatest asset. You need life insurance if you are the primary income earner in your household or someone depends on your income. ‘Someone’ could be your parents or siblings or anyone else who depends on your income.
No one knows exactly when they will die, but everyone knows that death is inevitable. So, if you know you are going to die, why not do all you can while you are alive to provide your family with a legacy?
Life insurance helps your family pay for your final expenses, build wealth and survive after the loss of your income. Investing in life insurance should be a part of everyone’s financial plan.
The Benefits of Life Insurance
Immediate Access to Cash
After your death, life insurance gives your family immediate (*dependent on how quickly proof of death is provided) access to cash to cover your final expenses. The cost of a funeral can include embalming or cremation, a burial plot, casket, a space for the repass celebration, food for guests, and more.
When my aunt passed away, we cremated her, and it still cost $3,500. Fortunately, my mother and I had the money in our savings. However, most American families do not have savings or an emergency fund.
More people need to invest in life insurance so the days of Go Fund Me pages for funerals could be a thing of the past. If you are thinking that you have accumulated enough wealth and assets to self-fund your funeral, and your family can use that to pay for your final expenses, think again.
Depending on your state, some laws require your family to go through probate, a local court process, to verify your will before they can access your assets and bank accounts. This process can take time and could put your family in a bind if that is the only money available for them to pay for your burial. If you fail to leave a will, your family’s ability to access your assets could be even further delayed.
Tax-Free Income for Your Family
If you are savvy with your money and finances, you may accumulate a significant amount of wealth. However, when you die, some of the wealth that you pass on may be subject to an estate tax, depending on how much you leave behind. Life insurance is one asset that you can pass on to your family that is completely tax-free.
Just imagine how much your family could do with money that Uncle Sam couldn’t touch? Your survivors could pay for college, pay off debt or invest in businesses. Families that inherit money have the advantage of not starting from zero. This factor alone is a game changer for most people of color.
Pay Off Debts
For some families without access to a life insurance policy, the act of raising money for a funeral is just one of many challenges faced when they lose a family member. What comes next could include settling your debt and making sense of your personal and financial affairs.
Just because you die doesn’t mean your debt dies, too. Creditors may start sending past due bills until someone officially notifies them that you are deceased. Then it is up to the creditors to decide if they want to cancel your debt or require your estate (surviving family members) to pay it.
Debt is not automatically erased when you die. In fact, depending on the laws of your state, your family may be responsible for paying off the debt you owe and filing taxes on your behalf. To make matters worse, in some cases, your family becomes responsible for paying taxes incurred for canceled debt. Life insurance can help pay off your debt and taxes.
Build a Legacy, Close the Wealth Gap
Life insurance creates an instant legacy for your loved ones. As a part of your financial plan, you should invest in enough life insurance to allow your family to survive without your income.
After your death, life insurance could pay for expected major expenses such as college education for your children or paying off the mortgage. A home paid off is one less worry for your surviving spouse. Plus, your family would not have to move or experience a change so close to losing you, too.
Life insurance can also give your surviving spouse the opportunity to grieve and take time off rather than rushing back to work for a paycheck.
The death benefit can change your family’s future. For example, access to a paid-in-full college education can alter what careers your children pursue and allow them to graduate debt free. Life insurance could also be the means to buy your family a house, help them start a business, or have the emergency fund and financial support they never had while you were alive.
How much insurance does one person need?
At a minimum, you should purchase life insurance with a death benefit that is at least ten times your annual salary. So if you make $50,000 a year, like most Americans, you should purchase at least $500,000 in insurance.
However, the calculation does not stop there. Think about how much you owe (balance on your mortgage, credit card debt, student loans) and add that to your death benefit. Then calculate future expenses that you want to pay for such as a college education for your kids or younger siblings or paying your business partner for your half of the business.
A good estimate for college is about $25,000 per year for in state tuition and $50,000 per year for out of state tuition. Take your college estimate number and multiply it by four if you plan for your child to attend a four year college or university. Do this calculation for each child.
Lastly, think about how long you want your family to have this income. Most people, assuming they will die later in life, plan for their spouse to survive ten years after their death.
Another way to calculate your insurance need is to use the D.I.M.E. formula, which stands for debt, income, mortgage and education. The sum of these factors determines how much life insurance you should pursue.
What types of life insurance exist?
Universal life, term, whole life, index universal life, permanent insurance and variable life are just some of the different terms used to refer to life insurance. There are many names for life insurance, but there are essentially only two types–term and permanent.
Term Life Insurance
Term insurance is life insurance that covers you for a specific amount of time, usually one to 30 years. When you have term insurance, you pay an insurance premium for the amount of time you requested coverage. If you die while the policy is in force, your family gets the death benefit.
On the other hand, if you are fortunate enough to live beyond your term, you lose coverage after the term is over. At that point, if you still want insurance, you’ll need to shop around for a new insurance policy. Term insurance policies tend to be less expensive than permanent life insurance policies.
Permanent Life Insurance
Permanent life insurance covers you for your whole life. As long as you pay your premiums to keep the policy in force, your insurance will cover you from the time of your first premium payment to your death, regardless if you die two years after you get insurance or 50 years later. However, permanent insurance, since it is more likely to be paid, is more expensive than term insurance.
When should you get life insurance?
The best time to get life insurance is when you are young and healthy. Make sure it’s also something you can afford in your budget. No one can predict the future and most people who are healthy today could have medical issues tomorrow.
Sometimes, certain health issues can make you uninsurable or cause the cost of your life insurance to be more expensive. Therefore, when you talk with a life insurance producer or financial advisor, make sure to ask about life insurance and what type is best for you.
Insurance tends to be significantly cheaper the younger and healthier you are. As you age and if you need more insurance you can talk to an insurance agent about increasing your current coverage or getting additional policies to meet your family’s needs.
How to Purchase Life Insurance?
You can purchase life insurance directly from an insurance company, through a licensed agent, or from an insurance broker. Brokers can give you quotes from several companies so you can compare coverage and prices. However, you can start your search with an insurance agent you trust. Just note, most agents are associated with one company and may only be able to sell you insurance from that company unless they are independent agents with access to several companies.
Before purchasing insurance, always check out the company first. Five rating agencies exist and rate insurance companies based on their financial strength and record of paying death claims. A top score can be an A or A+ rating.
Whether you decide to invest in permanent or term life insurance, it’s best to seek the advice of a professional. As we strive to do more for our families than our parents did for us, it’s important for you to plan ahead and prepare your family for the inevitable. Life insurance eases the burdens your family may face during what is already a stressful time in their lives. The key is to invest in life insurance early, while you are healthy and insurable.
Do you have any personal stories about how life insurance changed your life? Leave a comment and let the community know.
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