Life insurance: An important piece of the financial puzzle

Don't forget about life insurance when planning your family's financial future.

Life insurance is often a necessary piece to a financial plan. It can ensure your family’s goals are still met, even if you or your spouse are no longer alive to help provide for the family. Life insurance can answer important questionslike such as, “if I were to die prematurely, would my family still be able to afford our mortgage? Would my children’s college educations still be paid for? Will my spouse have to change jobs or return to work? Will someone have to be brought in to help raise our children and how will that be paid for?”. Life insurance can guarantee your family’s goals and lifestyle are still achievable even if you or your spouse are no longer alive.

If you have a life insurance need, there are many different types of policies that may be a good fit. The type of policy you choose, will likely come down to which goals you are trying to insure. Each type of policy has its pros and cons, so let’s look at how some of the more common types of life insurance work:

Whole Life Insurance- This type of insurance is often used to make end of life charitable donations, give an inheritance, or pay for estate taxes. As its name suggests, whole life insurance covers you for your entire life. This insurance has two features to it -, the life insurance coverage, and an internal cash value account. When a premium payment is made, a portion pays for the life insurance and the remainder gets deposited into the cash value account. The cash value account is guaranteed a modest return, so the money continues to grow. The money can be withdrawn from the cash value account at any time, but you will need to pay income taxes on any of the investment growth. You get any money that you contributed back, tax free. You can also take a loan against the cash value or, if the cash value account has a high enough balance, use it to pay your premiums for the remainder of the policy’sies life. Due to the dual purpose of the premium, whole life insurance tends to be among the the most expensive of the life insurance options.

Term Life Insurance- Instead of being in-force for your entire life, term life insurance is only in-force for a set number of years. Many goals that people want to insure only require temporary coverage. For example, if you want to guarantee your children’s college educations, the need for insurance only exists until your child they completes their educations. A mortgage typically has a loan duration of 15, 20, or 30 years. Once the mortgage is paid off or your child completes college, there is no longer a need to carry insurance to cover that goalose goals. Common term lengths for term life insurance are 5, 10, 15, 20, and 30 years. Once the term ends, the coverage typically goes away and you no longer owe any premiums. Term insurance does not have a cash value account. However, because of this and the shorter coverage period, these policies tend to be significantly less expensive than whole life or variable products. Quite simply, you pay your premium, and if you die during that policy year, the death benefit is paid to your beneficiary.

Universal Life Insurance- This type of coverage is designed to work very similarly to whole life insurance, except it provides some flexibility. Universal life insurance is typically used by individuals with uncertain incomes or who are uncertain about future goals. If needed, this insurance allows you to adjust your death benefit or your premiums to fit your circumstances. Like whole life, this type of insurance does have a cash value account, and if the value of this account is significant enough you can lower or eliminate your premium payments. However, there can be negative consequences too. Your coverage may end if you use up the account's cash value to pay for premiums.

There are also indexed universal life policies, which allow you to invest the money in the cash value account. This may allow the money to grow at a faster pace than the guaranteed return in a whole life policy. However, there are often caps on how much you can earn in those investments. For example, the cap on returns may be 8%, where if the market returned 10%, you only get an 8% return, and the insurance company keeps the rest. Another common way these policies may limit returns is by using a participation rate. An 80% participation rate means that if the investment return was 15%, your cash value account is only credited with 80% of the return, 12%.

Variable Life Insurance- This type of coverage also works similarly to a whole life or universal life policy but has a much greater investment focus to it. Variable life is commonly used by individuals who have maxed out their retirement plans contributions and are looking for additional tax-deferred investment growth. In these types of policies, you can choose much more specific investments like an S&P 500 fund, an emerging markets fund, or domestic bond fund. These options typically allow you to tailor the investment strategy, so it aligns with your investment strategy used elsewhere, like such as your retirement accounts. There are no caps on returns like in a universal policy, however the cost is often higher. The individual investments carry their own expense ratios, and the policies themselves tends to have some higher internal fees and administrative expenses than other types of life insurance.

Depending on your goals and what you would like to cover, there are different options available to you. Careful consideration should be given to the type of policy suitable for each goal you want insured. We highly encourage you to work with an insurance professional to navigate which type of policy is right for you.

Jeff Witz, CFP® welcomes readers’ questions.He can be reached at 800-883-8555 or at witz@mediqus.com.

The material has been prepared or distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk, including risk of loss. Before investing, you should consider the investment objectives, risks, charges, and expenses associated investment products. Investment decisions should be based on an individual’s own goals, time horizon and tolerance for risk. Past performance is no guarantee of future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Consult your financial professional before making any investments.

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