There is no debate—most everyone needs life insurance regardless of the economic climate. Just like health insurance or automobile insurance, life insurance is a necessity of daily life. You want to feel secure in the reality that your family will financially be taken care of in the event of premature death.
The amount of life insurance, the type of life insurance and your life insurance needs cannot be easily categorized. That is why it is necessary to speak with a credible financial planner and an insurance agent whose main goal is to guide you toward the right plan for your future, and help you find the best coverage for the least amount of money. That is true whether the economy is thriving or in recession.
Reasons to Buy Life Insurance
Good times or bad, life events continue to happen.
- The bread winner suddenly falls ill and funds are needed to pay medical bills
- The economy dips and money is needed to pay bills
- Your child is going off to college and tuition costs have increased
- The bread winner has suddenly passed away and money is needed to cover the cost of the funeral
- The bread winner has passed away and replacement income is needed
- The bread winner has passed away and money is needed to pay estate taxes
These are just a few scenarios (there are many more) one might rely upon to utilize the pay out from either a Term Life insurance policy or a Permanent Life insurance policy. Sometimes, borrowing against the savings account from a Permanent Life insurance policy is a better idea than dipping into one’s 401K. Deciding one’s needs and the cost effectiveness of one policy over another can only be determined by your personal finances and your family’s projected financial needs. This also remains true in any economic climate.
Term Life Insurance vs Permanent Life Insurance
In general, Term Life insurance offers the insured coverage for a specified period of time and the advantage of lower premium rates. At the end of the Term, with certain riders, the insured may renew the policy for another specified period of time or the policy can be converted to a Permanent Life insurance policy.
Term Life insurance can be purchased for 1-30 years depending upon the insurance company’s policy. Generally, one can purchase Term Insurance up to the age of 80, though the premiums will be higher for an elderly person. Term Life insurance is affordable and can provide much needed security against financial loss for a young family should the main bread winner prematurely die.
There are two types of Term Life insurance: annual renewable term in which the premiums start very low and rise as the insure ages, and level premium term in which the premium stays fixed throughout the life of the policy. Term Life insurance therefore, allows a family to buy protection, pay lower monthly premiums and either invest or utilize the rest of the disposable income.
Permanent Life insurance is quite different from Term Life insurance as such policies last for the duration of your life and have cash value accumulation attached as long as the premiums are paid. The cash value accumulation grows as the policy ages and allows you to borrow funds up to the amount paid in premium.
This money can be borrowed without being taxed. There are variations of Permanent Life insurance such as whole, universal, and variable. Each one offers it own advantages and drawbacks depending upon your needs. There are also fees and surrender charges attached to Permanent Life insurance policies. Consult a trained insurance agent to help you determine the best policy type for your needs.
Using Life Insurance Policies during Good Economic Times
Good economic times generally benefit everyone. That means there is more disposable income. Life insurance may function as a financial protection (death benefit and/or cash value accumulation) as well as a tax benefit depending upon your tax bracket. For example, under federal law, a certain amount of death benefit distributions are tax- exempt. Exclusion may be valid depending upon many things including the state residence of the insured and the state residence of the beneficiary.
Questions related to tax benefits are not simple. For example, death benefits are generally not taxable income when assigned to a specific beneficiary, instead of to an Estate. However, with Permanent (Cash Value) Life Insurance, during the time between the death of the insured and the disbursement of the death benefit the savings account earns interest. Those additional funds are taxable. The best way to determine what is right for your financial needs and what is or is not taxable is to seek advice from a knowledgeable financial planner.
Make sure you understand the fee structure and commission pay out for Permanent Life insurance policies before you sign up as those can significantly impact the death benefit and the cash value accumulation. Consult a qualified insurance agent about this information as it varies from policy to policy and company to company.
An Alternative: Blended Life Insurance
There is another creative form of insurance that is growing in popularity: blended policies. This product provides the insured with the best of both worlds: Term Life insurance and Permanent Life insurance. For example, in a blended policy, you may purchase $300,000 of life insurance. You can divide that into $150,000 in Term and $150,000 in Permanent Life insurance. There are advantages as the monthly premiums for the $300,000 tend to be lower and they generally do not have the fees and commissions attached to the policy.
The dividends paid on the policy help to convert the policy to Permanent Life insurance. It is a financially sound way of obtaining Permanent Life insurance without paying the higher premiums. Sometimes the difference in premiums is significant. But, there are risks in the conversion process. It is important to fully investigate the company offering the blended policy. You don’t want to buy a policy to learn later that the company was unable to pay the dividends.
Whatever your reasons for buying life insurance, make sure that you consult a knowledgeable financial planner to determine your needs and tax consequences and then speak with a trained insurance agent.
LifeQuote offers simple and easy information to help you determine the best policy and rate for your needs. You can connect to a knowledgeable representative now. It is free, easy and quick.