With so many different plans and rates, it's tough to know which to purchase, but life insurance can, and should be, part of your long-term investment strategy. Of course, this is a topic that should be closely reviewed in tandem with your financial advisor. B. Riley Wealth Management offers some guidance on the various forms of life insurance below.
What are the basic types of life insurance?
Life insurance is traditionally looked at as a triggering event. Plans have a cash value and payment is promised to named beneficiaries when the insured dies (a death benefit). There are two major categories of coverage: term life insurance and permanent life insurance. Term life insurance is usually seen as something analogous to paying rent, while permanent life insurance is like owning something. Both coverage types, however, are encouraged as part of your financial plan. You and your financial advisor should analyze your current situation to determine what form of life insurance would be most appropriate in order to maintain your beneficiaries' standard of living in the event of your passing.
Term Life Insurance
Younger investors who are married and working, especially those with children, often take advantage of term life plans, which offer coverage for a specified time period; usually 10, 20 or 30 years. If you pass away while the policy is active, your beneficiaries will receive a predetermined amount of money. Once the policy lapses, however, there is no value and no recoupment of premiums paid, similar to other insurance plans. As such, term life plans are inexpensive, because they are rarely used.
That said, investors are advised not to overlook the importance of a term life plan. For a few hundred dollars per year, term life insurance provides peace of mind, knowing that income replacement will be provided to a family who may lose an income-earner due to sudden death. As an example, if you are earning $250,000 a year, the right plan should account for the capital needed in order to provide for your family in the event of your death. That number would realistically be a few million dollars, which would have to be invested over a lifetime.
Permanent Life Insurance
Permanent life insurance never expires, and each plan is evaluated on a case-by-case basis. Permanent life insurance plans are also expensive, and companies sell multiple policy options, so most investors can find a plan that will meet their needs based on age, income and health.
Generally, the younger and healthier you are, the easier it is to qualify for a life insurance plan. There are countless choices for coverage, and we'll explore a few below. Permanent life insurance can be used as an income supplement and should be part of estate and charitable planning.
Whole Life Insurance
Whole life insurance is the most commonly purchased life insurance policy; it is a conservative, permanent plan for your entire life with a savings component that accumulates cash value and pays out to your beneficiaries upon your death. Premiums remain level for as long as you own the policy. Whole life plans' values can never decline, and investors are paid the same dividend every year regardless of the markets.
Universal or Adjustable Life
This type of plan is a permanent policy at a lower premium payment than some other plans, and it offers flexibility around the type of death benefit, premium payment amount, and the savings and investment vehicle (or cash value account) of the policy. It allows for policyholders to build investment savings at a money market rate of interest while simultaneously having a life insurance policy. Policyholders may have the option to access some of the cash value of a universal life insurance policy in a time of need, but they will have to pay taxes on it, and if a premium payment is missed, coverage ends.
Variable Universal Life
This type of plan combines death protection with a built-in investment account, allowing the policyholder to invest money in stocks, bonds, or money market mutual funds. The premium is more flexible with more growth potential than traditional whole life insurance policies, but there is an element of risk involved based on the performance of the stock markets. While certain policies offer a guarantee that your death benefit will not fall below a certain level, they often depend on the policyholder's risk tolerance and the company providing the plan. Along the same lines, an indexed universal life plan is tied to the markets, but typically has both a minimum and cap investment amount. These plans can be complicated. We suggest seeking guidance from your financial advisor about the plan that best aligns with your overall financial plan and your unique insurance needs.
Guaranteed life insurance is just that: a "guarantee" of up to $25,000 in coverage for people with severe medical issues who would otherwise not qualify for life insurance. No medical exam is required in order to be insured. As such, for the first two years of the plan, a death benefit would not be paid out if the policyholder passes away, unless the death is accidental. If the insured passes during that two-year period, however, the company will return the premiums to the named beneficiaries. It is important to note that most life insurance plans already have what is called a two-year contestability clause, which is designed to prevent fraud. The difference with a guaranteed issue plan is that beneficiaries will receive a refund of the amount already paid into the policy if the owner passes away within that two-year period.
What happens if I purchase a life insurance policy and my needs change?
The most common way to modify an already-purchased life insurance policy is through the purchase of a rider, which is an option to customize a permanent life insurance plan. Riders vary and availability depends on the company providing your plan, but they typically involve additional payment on top of the original life insurance premium.
A few common riders are an accidental death rider, which pays out additional coverage in the event of an accidental death; a disability income rider, which pays monthly income in the event of the holder's incapacitation for several months or more; and a long-term care rider, which can be used to help pay for long-term healthcare needs of the investor, like a nursing home, assisted living or in-home care when the insured needs help with daily activities.
Additional uses for life-insurance plans
For certain types of investors, life insurance plans can provide additional strategic financial planning opportunities, such as funding retirement or borrowing money. Whole life insurance plans place no limit on the amount invested in a policy. Thus, if you have a diversified portfolio and have maxed out contributions to IRA and/or 401(k) accounts, life insurance can complement the overall portfolio.
Because the cost of reallocating assets to a life insurance plan is often front-loaded, and the death benefit of a life insurance plan is usually tax-free, some investors purchase permanent life insurance as a way to offset estate and property taxes that are due upon death. The tax-free transfer of the death benefit can be deducted against income and estate taxes of inherited retirement accounts.
Life insurance plans can be daunting even for the most astute investor, as the solution can vary significantly when considering the numerous plan types and options in conjunction with each investor's unique financial situation. The most prudent way to determine if life insurance is an appropriate addition to your financial plan is to have a conversation with your financial advisor.
For more information, visit www.brileywealth.com