September is Life Insurance Awareness Month. We would like to discuss some of the thought processes behind such coverage, while focusing on one of the more popular options, term life coverage. Benjamin Franklin once said, “A policy of life insurance is the cheapest and safest mode of making a certain provision for one’s family.” Let’s first look at some of the situations in which it is beneficial.
Life Insurance’s Capabilities
One common reason to have life insurance is to cover final expenses and funeral costs so as to not burden the family with such. It is also useful in covering a breadwinner for the purpose of replacing income – to ensure the surviving spouse and children can maintain their home, lifestyle, bills and debts, and more. That is perhaps the single most attractive reason to have life insurance.
Life coverage is advantageous for the wealthy who are subject to estate tax bills. Anything above a certain threshold (which is adjusted for inflation periodically) is taxable, so a policy can greatly mitigate the inheritance tax impact. Two other reasons are for a business owner to protect the future of the business and the staff should something happen, and to diversify an investment portfolio using a cash value-based permanent policy with returns within.
How Much Coverage?
The question naturally comes, “How much coverage do I need?” The answer is unique to each person’s situation. It involves variables like age, health, amount of debt, income and spouse’s income, savings and assets, presence of children and/or spouse, and much more. Generally, people want to make sure their debts are covered, and their family’s lifestyle will continue if the worst were to occur. A general rule of thumb is to obtain 10-15x your income in life coverage, and then to make sure any final bills, debts, college savings needs, and any other personal interests are covered.
Generally, if you have life coverage offered – or provided – through an employer, you should take advantage of it! The premium rates are generally much cheaper, and it is much easier to obtain compared to an individual policy. These employer-sponsored group life plans often have “guaranteed issue” provisions where staff can purchase coverage up to a certain limit with zero health questions or underwriting – this is a huge advantage. Many group plans allow an individual to transfer their coverage to an individual policy should they leave the employer for any reason. However, employer life plans typically only cover a small portion of the financial goals mentioned above. An individual policy is usually needed as well.
Term Life Insurance
Finally, let’s dive into term life coverage specifically, for it can be a fantastic strategy for many situations. Compared to permanent policies, term coverage differs in that it provides a static coverage amount for a fixed period of time (i.e. 10, 20, 30 years) with a set premium. Thus, these policies are typically 5 to 15 times cheaper than a cash value-based permanent policy. Term life coverage is common for young professionals, those with young children, those needing to cover a personal or business debt, and more. Since premiums are heavily influenced by age, many people lock in their term policies sooner rather than later.
Although term life insurance is mostly considered “pure” insurance, there are some optional items that can be included on these policies for additional benefits. For example, there can be a waiver of premium rider where premiums do not need to be paid while an insured person is disabled. A return of premium rider is a provision that quite literally returns the premium to the insured person at the end of a term period. Another common one is an accelerated death benefit/LTC rider whereby an insured person could pull out portions of the benefit amount to help cover the cost of a terminal illness or long-term care services.
One of the most common and one of my personal favorites is the conversion option on many term life policies. This gives the insured person the option of converting their temporary term coverage into a permanent policy. This has to be done before the term period runs out. The primary advantage of this is that the insured person will not have to answer any health questions, provide any medical records, or go through any health screening. The individual would retain the initial health class rating they received at the onset of their term policy. (For instance, if John Q. purchases term coverage with a conversion option and receives “Preferred Plus” rates as a 30-year-old — regardless of what happens with John Q.’s health including chronic or terminal illness – he would be able to convert it to a permanent policy at “Preferred Plus” rates to ensure he has coverage for the long run.) The term conversion strategy can thus protect a person’s insurability for the long term regardless of what life may bring, while also keeping their premium costs low.
Feel free to reach out to us if you have any questions or if you would like to connect with our advisors.