Assess Your Life Insurance Needs
Life insurance is an important consideration when developing your financial plan. Your Wealth Alliance Advisor can discuss life insurance with you and how it applies to your overall financial plan.
If your family relies on your income, it’s critical to consider having enough life insurance to provide for them after you pass away. But too often, life insurance is an overlooked aspect of personal finances.
In fact, according to a study conducted by LIMRA, which closely follows life insurance trends, less than half of U.S. households say they have individual life insurance coverage, and 40% of Americans say they need more coverage.LIMRA, 2016
Recognizing the role life insurance can play in your family finances is an important first step. A critical second step is determining how much life insurance you may need.
Final Cost Tip
Paying for a funeral can be a financial burden on a family. Make sure your estate management will provide your loved ones with sufficient funds to cover this important cost.
Rule of Thumb
One widely followed rule of thumb for estimating a person’s insurance needs is based on income. Some will say a person needs a life insurance policy that is five times his or her annual income. Others recommend up to ten times annual income.
But if you are looking for a more accurate estimate, consider completing a “DNA test.” A DNA test is a Detailed Needs Analysis that takes into account a wide range of financial commitments to help better estimate insurance needs.
The first step is to add up needs and obligations.
Which funds will need to be available for final expenses, such as a funeral, final medical bills, and any outstanding debts, such as credit cards or personal loans? How much to make available for short-term needs will depend on your individual situation.
Next, subtract all current assets available.
Your Life Insurance Needs
Needs and obligations, minus liquid assets, can help you get a better idea about the amount of life insurance coverage you may need. While this exercise is a good start to understanding your insurance needs, a more detailed review may be necessary to better assess your situation.
1. LIMRA, 2016
Is Term Life Insurance for You?
Term insurance is the simplest form of life insurance. It provides temporary life insurance protection on a limited budget. When a policyholder buys term insurance, he or she buys coverage for a specific period and pays a specific price for that coverage.
If the policyholder dies during that time, his or her beneficiaries receive the benefit from the policy. If he or she outlives the term of the policy, it is no longer in effect. The person would have to reapply to receive any future benefit.
Unlike permanent insurance, term insurance only pays a death benefit. That’s one of the reasons term insurance tends to be less expensive than permanent insurance.
Many find term life insurance useful for covering specific financial responsibilities if they were to die unexpectedly. Term life insurance is often used to provide funds to cover:
- Dependent care
- College education for dependents
Would term life insurance be the best coverage for you and your family? That depends on your unique goals, needs, and circumstances. You may want to carefully examine the pros and cons of each type of life insurance before deciding what type of policy will be the best fit for you.
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Variable Universal Life Insurance
Variable universal life insurance is permanent life insurance—it remains in force for the policyholder’s whole life. And, as with universal life insurance, it provides a flexible premium and an adjustable benefit—meaning the policyholder decides how much to put in the policy above a set minimum. By extension, the policyholder also determines the face amount of the policy.
The Key Differentiator
The difference between variable universal life insurance and other types of permanent insurance is that the policyholder directs how premiums are invested. This provides access to the potentially higher returns provided by the financial markets. It also means returns could underperform those provided by other life insurance products.
Generally, there are several subaccounts in which the policyholder may choose to invest. There may be a fixed-interest option as well as various stock, bond, or money-market choices. Guarantees are based on the claims-paying ability of the issuing company.
Like other types of permanent life insurance, policyholders can even borrow a portion of their policy’s cash value under fairly favorable terms. And interest payments on policy loans go directly back into the policy’s cash value.*
When the policyholder dies, his or her beneficiaries receive the benefit from the policy. Depending on how the policy is structured, benefits may or may not be taxable.
Variable universal life insurance has unique features that may be attractive to some insurance buyers. However, a variable universal life insurance policy also has options that must be clearly understood before an individual commits to a policy.
*Generally, loans taken from a policy will be free of current income taxes provided certain conditions are met, such as the policy does not lapse or mature. Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit. Loans also increase the possibility that the policy may lapse. If the policy lapses, matures, or is surrendered, the loan balance will be considered a distribution and will be taxable.
Accessing the cash value in your insurance policy through borrowing—or partial surrenders—has the potential to reduce the policy’s cash value and benefit. Accessing the cash value may also increase the chance that the policy will lapse and may result in a tax liability if the policy terminates before your death.
Variable universal life insurance can be structured so that the cash value that accumulates will eventually cover the premiums. However, additional out-of-pocket payments may be required if the policy’s dividend decreases or if investment returns underperform.
The Cost and Availability of Life Insurance
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may be subject to surrender charges and assessed a 10% federal income tax penalty. Also, withdrawals will reduce the benefits and value of the contract. Life insurance is not FDIC insured. It is not insured by any federal government agency or bank or savings association. Depending on the performance of variable life and variable universal life insurance, the account value will fluctuate with changes in market conditions. At any time, the account value may be worth more or less than the original amount invested in the policy.
Please consider the investment objectives, risks, charges, and expenses before investing. Variable life and variable universal life insurance are sold by prospectus only. Information on fees and expenses can be found in the prospectus or obtained from your financial professional. Please read the prospectus carefully before you invest or send money.