I Need Life Insurance, Right? Not So Fast…

March 10, 2019

You have auto insurance for your car.  And home insurance for your house.  Seems like you would want life insurance for your life!

But wait.  Do you?  The primary purpose of life insurance is to provide your beneficiaries with a financial benefit after your death.  How much life insurance you need or want depends on your goals.  If you are young and have children, you may want to provide enough financial support to replace the earnings you would have contributed to your family.  If you are older, you may just want to give your beneficiaries a nest egg or pay off a mortgage.  If you are very wealthy, you may want to use life insurance to avoid estate taxes.

For those of us in the middle category, life insurance is not always the best investment and sometimes it’s better to use the money you’d pay for premiums and invest it somewhere else.  It’s important to talk to your insurance broker and your financial advisors about your specific goals and budget.

Insurance information always reads like stereo instructions to me so here is a quick and dirty summary:

Term life insurance:

Pay for a specific time period (10 or 20 years, usually) and if you die, they pay out.  If you don’t die, you can renew for the next period.

Pros: Generally cheap and easy to get.

Cons: Once the period has passed, you’ll need to purchase a new policy.  Because you’ll be older, a new policy will typically require a medical exam which might limit your coverage and your premiums will likely be higher just because of your age.

Permanent life insurance:

This includes whole/straight life, universal life, variable universal life and a bunch of variations and is exactly what it says: life-time insurance coverage.

Pros: Provides life-time coverage and can be used for estate planning.  In most policies, you can change the premium and coverage amounts, depending on your needs.

Cons:  Blends insurance coverage with a savings account, but the savings account, unless you have a huge policy, is not a great investment vehicle.  More expensive than term because it is a life-time policy combined with a mandatory savings account.

Joint life insurance (First to die) insurance:

Life insurance for two parties, which pays out when the first dies.

Pros: Great for business partners where cash would be needed to buy out beneficiaries or sustain business activities after the death of a partner.  Also a good option if one spouse is in poor health and cannot get a different type of individual policy.

Cons: Depending on the health of the individuals, a joint policy might cost more than two individual policies.

Survivorship (Second to die/joint) insurance:

Similar to “First to die” policies except that the payout comes after the second person dies.  Used primarily for estate planning.

Pros: Can be used to offset high estate taxes.  Also a good option if one spouse is in poor health and cannot get a different type of individual policy.

Cons: Depending on the health of the individuals, a joint policy might cost more than two individual policies.

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