Life insurance is often that elephant in the room we'd rather not discuss. But, as uncomfortable as it might be, having this conversation is vital. September is National Life Insurance Awareness Month, which makes it the perfect time to start the conversation about this underdiscussed, underappreciated, and underutilized financial tool. We will demystify life insurance, explore the different types, and explain how it can safeguard your family's future.
What is Life Insurance?
At its core, life insurance is a contract designed to provide your loved ones with financial security in the event of your passing. It's a safety net that delivers a lump sum of money, known as the "death benefit," to your beneficiaries – it’s also tax free by the way! This money can be used for various purposes, including funeral expenses, paying off debt, ensuring mortgage payments, or funding education or anything else you can think of.
Are There Different Types of Life Insurance?
The short answer is Yes. There are primarily two types of life insurance: term life insurance and permanent life insurance, each with its own unique characteristics.
Term Life Insurance
Term life insurance offers coverage for a pre-determined amount of time, typically between 5 and 30 years. It pays a death benefit only if you pass away during the coverage term, making it a pure protection tool. Because it focuses on maximizing the death benefit, the cost is usually lower, but it lacks cash value or any investment features.
Permanent Life Insurance
Permanent life insurance, as the name suggests, covers your entire life. Most policies come with a savings known as "cash value." The cash value grows tax-deferred, and you can also take a tax free – interest free loan from the policy, if designed correctly. However, withdrawing these funds may reduce the policy's death benefit unless they are repaid. The variety of permanent life insurance policies allows you to tailor your coverage to your specific needs.
There are more than a few options when it comes to permanent life insurance, to learn more about them in some detail read our previous blog “How to Use Life Insurance and Protect Your Family”. Each of these policies has its pros and cons.
Choosing the Right Policy for You
When selecting a life insurance policy, consider these key factors:
1. Coverage Duration: Do you need the insurance forever? Just a few years? If it's temporary, term life insurance might suffice. For lifelong protection, consider permanent life insurance.
2. Coverage Amount: Calculate the sum needed to cover your family's financial obligations, such as debts, income replacement, mortgage, and education expenses. How much would your family need to live a comfortable life if you passed away?
3. Premiums: Compare the costs of different policies. Term life insurance generally has lower premiums than permanent policies. Maybe it makes sense to blend the two types together.
4. Flexibility: Life is unpredictable – would you be able to modify your policy as your circumstances change? Is this important to you?
5. Cash Value: Do you want a policy with a cash value component? How would it impact your coverage?
Do You Need Life Insurance?
In most cases, the answer is a resounding "yes." Life insurance is one of the most efficient safety nets available to you and your loved ones. It provides crucial resources to cover expenses and make arrangements if you're no longer there. To determine how much coverage you need, Forbes recommends using the DIME method: assess your debts, calculate your income replacement needs, consider your mortgage, and account for education expenses.
National Life Insurance Awareness Month serves as a timely reminder to review or initiate your life insurance policy. Don't let discomfort or procrastination prevent you from securing your family's future. As a person who has delivered a “Death Benefit” to a family who recently lost their father, breadwinner, and family leader, I can tell you how powerful this tool is. The peace of mind, knowing your loved ones will be financially protected when they need it most is priceless. Reach out to us for guidance; we're here to help you make the right choices for your family's future.
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 | About the Author James M. Comblo, CFF is the President & CEO of FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients live the life they want, not the life they are forced to. To learn more about him click here. |