Including family protection and risk management in a financial plan can help ensure your family is secure and help you achieve your vision for the future.
Including risk protection steps in your financial plan will help ensure you can:
- Provide for your family in the event of death.
- Provide for you and your family in the event of a disability.
- Provide for long-term care.
- Protect your retirement plan from a savings shortfall.
- Prevent estate erosion due to unexpected expenses.
A well-designed and customized family protection plan takes into account the individual needs of each family member. It may include life insurance, disability income insurance and long-term care insurance. Financial vehicles such as annuities or life insurances can also be utilized to establish a contingency fund. To protect and provide for your family while minimizing your premiums and the tax consequences, you must carefully determine your insurance needs and then obtain the appropriate coverage from a financially strong insurance company.
How Life Insurance Needs Can Change Over Time
You need an approach that helps you avoid buying insurance that does not last long enough and buying permanent insurance for temporary needs.
Family Protections with Life Insurance
Why Life Insurance?
In the event of a tragedy, life insurance proceeds can help cover everyday expenses, like the mortgage and household bills. The cash received from a policy (the death benefit) can help protect your family from being burdened with debt. In addition to helping meet your family’s immediate financial needs, life insurance can also be used to help keep a business thriving, help finance future needs like your children’s education, or supplement your retirement funds.
You may know the distinct pride you get in purchasing your own home or car. Ownership can give a certain comfort, a certain satisfaction that your financial stability is solid, secure, and even permanent. Wouldn’t you like to feel that way about your family’s financial future – even if you weren’t around to provide for them? When you purchase life insurance, you select a plan that provides the right kind of protection for your family.
Types of Life Insurance
When deciding which type and amount of life insurance are right for you, you’ll need to answer these important questions:
- What do you want the insurance to cover?
- What amount of coverage do you need?
- How long will you need the coverage for?
- What’s your budget?
What’s the difference between term and permanent insurance?
There are two main types of life insurance: term and permanent.
Term life provides financial protection for a specific period of time, called a term. The typical term periods offered are 10, 15, 20, and 30 years. If you die during your policy’s term period, your beneficiaries will receive a payout known as a death benefit.
These are some of the characteristics of a term life insurance policy:
- Lower premium payments.
- Ability to convert into a permanent life insurance policy.
- Ability to renew or extend the policy.
- Does not have a cash value component.
Permanent life insurance, such as whole and universal, provides your family with life insurance protection for the rest of your life. Like term life insurance, it pays a federal income tax-free death benefit to your loved ones.
These are some key features of a permanent life insurance policy:
- Potential for flexible premium payments.
- Tax-deferred cash value component.
One of the benefits to choosing term coverage over a permanent life policy is the cost. Term life insurance is usually less expensive than permanent life insurance. Term life policies also possess the ability to convert into permanent life insurance. You also have the option to renew your coverage after the initial term period is reached.
The main benefit of permanent life insurance is the cash value component that grows over time. Term life policies do not include an accumulating cash value aspect. In addition, some types of permanent life insurance, such as universal life, offer flexible premiums. Your premiums can adjust to your evolving needs.
Term Life Insurance
Term insurance is often a good choice for your family in earlier years, especially if the budget is tight because it allows for affordable, yet high levels of coverage when the need for protection is often greatest. Term insurance is also a good option for covering needs that aren’t permanent. For instance, paying for college is a major financial concern for many families, but if you don’t need life insurance coverage after the kids graduate, then it might make sense to buy a term policy that’ll get you through the college years.
Term insurance can provide low-cost coverage for a specific period of time (the “term”)—most likely during an individual’s peak earning years when death can cause the greatest financial hardship. Generally, the most affordable type of insurance when initially purchased, term insurance is designed to meet temporary needs. It provides protection for a specific period of time (the “term”) and generally pays a benefit only if you die during the term. This type of insurance often makes sense when you have a need for coverage that will disappear at a specific point in time. For instance, you may decide that you only need coverage until your children graduate from college or a particular debt is paid off, such as your mortgage.
If you buy a term policy and then later realize that you still have a need for life insurance, you can either renew your term policy or (depending on the insurance policy’s rules about conversion) convert it to a different type of policy. If, in 10, 15 or 20 years you’re still healthy according to the company’s standards, you might re-qualify at a reasonable rate. But if your health has deteriorated, you may find that it’s too expensive to renew your policy or you may not even re-qualify.
So, when considering a term policy, be sure you carefully consider your needs and how they may evolve, financially, down the road. If your needs will remain temporary, then term insurance may be right for you. But, if you think there’s a possibility that you might need the coverage for a long time, then remember that renewing your term policy after it expires or buying a new term policy at that time, may make coverage more expensive due to your age, health status or other factors.
Permanent Life Insurance
Unlike Term Life Insurance, which addresses more temporary needs, permanent life insurance is designed to provide life-long financial protection. Because permanent life insurance policies are designed and priced to keep over a long period of time, this may be the right type of insurance for you if you have a long-term need for life insurance coverage. “Permanent insurance” is generally a catchall phrase for a wide variety of life insurance products many of which include a cash-value feature. Within this class of life insurance, there are many different products, including universal life insurance and indexed universal life insurance.
Despite what many people may think, the need for life insurance often remains long after the kids have graduated from college or the mortgage has been paid off. If you died, your spouse would still be faced with daily living expenses. And if your spouse outlives you by ten, 20, or even 30 years—would your spouse be able to maintain the lifestyle you worked so hard to achieve, without the death benefit of life insurance? Would you be able to pass an inheritance on to your children or grandchildren? These are questions to consider carefully when determining what type of life insurance fits your needs.
Life Insurance
In its simplest form, life insurance is a promise between an insurance company and you, the policy owner. If you pay a certain amount of money (premium) to the insurance company, the insurance company will pay a certain amount of money (death benefit) to the person (beneficiary) you tell us when the person whose life is being insured dies.
There are many types of life insurance. Term insurance only provides a death benefit for a limited period of time. By contrast, permanent insurance can provide a death benefit and the potential to build policy cash value that you can access during your lifetime using policy loans and withdrawals. (1) Permanent insurance can also offer the flexibility to increase or decrease your death benefit as your needs change, as well as the potential to reduce or skip premium payments. (2)
There are five different types of life insurances:
There are five different types of life insurances:
May be ideal for those who need death benefit protection but are focused on cash value accumulation for lifetime needs such as supplementing retirement income.
Increasing the death benefit may be subject to additional underwriting approval.
IUL offers;
- Flexible death benefit
- Flexible premium
- Cash value grows based on an interest crediting strategy that is tied to changes in a market index such as the S&P 500. (3)
- Downside protection through minimum guarantees(4) to ensure that your cash value will not decline due to decreases in the Index.
Variable Universal Life Insurance (VUL)
This policy design is for the customer who needs life insurance but would like to have the ability to choose how their cash value is invested.
Guarantees are dependent upon the claims-paying ability of the insurer and do not protect the value of the variable product portfolios, which may fluctuate. Variable policy holders are subject to investment risks, including the possible loss of principal invested.
VUL offers;
- Flexible death benefit
- Flexible premium
- Cash value grows based on the performance of the professionally managed stock, bond and money market sub-accounts that you choose. You can design a portfolio to match your comfort level and risk tolerance. Policy cash values fluctuate based on the sub accounts in which you are invested and may lose value, including principal.
Whole Life Insurance (WL)
These policies are designed for individuals who want guarantees and who are focused on providing death benefit protection over cash value accumulation.
WL offers;
- Guaranteed death benefit (4)
- Guaranteed cash value
- Potential additional cash value by the receipt of any dividends declared by the company. Although not guaranteed, dividend payments are generally declared annually by the company.
- Level premiums are guaranteed to never change.
Universal Life Insurance (UL)
May be ideal for the consumer who has a need for life insurance, is somewhat conservative, and wants the guarantees of a fixed, minimum interest rate with the potential for additional interest credits.
Increasing the death benefit may be subject to additional underwriting approval.
UL offers;
- Flexible death benefit
- Flexible premium
- Policy cash values are credited to a current interest rate that is set by the insurance company, which is subject to change but will never be lower than a guaranteed minimum interest rate. (4)
Term Life Insurance (TERM)
May make sense for those who have budget limitations, large protection needs or temporary need.
TERM offers;
- Guaranteed death benefit for a fixed period (4)
- Fixed premium.
- No cash value.
- Coverage is for a certain period of time (term), usually for a specified number of years or to a specific age of the insured.
- Initial premiums tend to be lower but will eventually increase.
| Term life | Whole life | Universal life insurance | Variable Universal life insurance | Index universal life insurance | |
|---|---|---|---|---|---|
| Temporary coverage | |||||
| Permanent coverage | |||||
| Provides a guaranteed death benefit | |||||
| Focuses on affordability | |||||
| Can provide coverage for your lifetime | |||||
| Has the potential to build cash value | |||||
| Offer growth potential based on performance of index | |||||
| Offer growth potential based on market performance | |||||
| Features a tax –advantaged death benefit | |||||
| Includes the ability to access money in your policy | |||||
| Offers riders to customize your policy |
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Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy’s cash value in early years.
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It is possible that coverage will expire when either no premiums are paid following the initial premium, or subsequent premiums are insufficient to continue coverage.
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“Standard and Poor’s®,” “S&P®,” “Standard and Poor’s 500,” and “500” are trademarks of Standard & Poor’s. The product is not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in this Product. The S&P Composite Index of 500 stocks (S&P 500®) is a group of unmanaged securities widely regarded by investors to be representative of large-company stocks in general. An investment cannot be made directly into an index.
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Guarantees are dependent upon the claims-paying ability of the issuing company.