Life Insurance Considerations

There are several considerations in planning for life insurance. The focus should be on understanding the likely present and future needs of one’s survivors. Below are key areas to think about in determining the amount of insurance needed:

Lump-sum, present day needs - How much money will the survivors need immediately, generally in cash, to handle short term expenses? Consider the following:

Final expenses: More than simply funeral expenses, consider unpaid medical bills, which can be substantial, and other short term financial responsibilities

Estate settlement costs: One should account for costs such as probate expenses, attorney’s fees and death taxes.

Mortgage payoff and debt reduction: Ask yourself if it is important to provide your survivors with a paid-off house? Consider if other debts should be retired, to relieve survivors of potential future debt?

Future income needs: How much income will your survivors need, now and in the future, to cover living expenses such as the following:

Household living expenses: Is it your goal to allow survivors to remain in your residence? Can they afford to cover expenses without you? Will they want to stay, and if so, will they have the option?

Additional childcare: Will there be a need for additional financial support to help care for young children?

Educational expenses: How will future educational costs be paid for? Will there be enough money for college expenses?

Types of Life Insurance Policies

There are many different types of life insurance available in the marketplace, including term life, whole life and key employee policies.

Term Life: Term life insurance is generally considered when one is concerned primarily with meeting present and future financial needs of survivors. It is appropriate when the need or desire to build cash value is not present, and when life insurance is not to be used as an investment vehicle. There are many types of common term life insurance, including:

Long-Term Level Premium Term: Key components include a level premium, level coverage and no cash value. The annual premiums are fixed for a period of time, typically 5, 10, 15, 20 or 30 years. These policies are suitable for financial obligations that remain constant for a short or intermediate period, including income during a minor’s dependency and educational expenses.
 

Decreasing Term: This type of policy includes a level premium, decreasing coverage and no cash value. Decreasing Term policies are generally suitable when future financial obligations will reduce over time. Examples include mortgages and other amortized loans.

Annual Renewable Term: Increasing premium, level coverage and no cash value are present in this type of policy. These policies offer lower initial premiums, but increase over time as one’s means increase. As with level term, annual renewable term is suitable for financial obligations which remain constant for a short or intermediate period

Whole Life – Whole Life policies are generally more costly less initial coverage. This is because whole life policies build cash value based on premium levels and an insurance company’s general asset account portfolio performance. Cash value builds over time and can taken out, borrowed against or paid out to survivors upon death. Whole life is suitable for long-term obligations such as providing the surviving spouse with lifetime income needs, estate liquidity, death taxes and funding retirement needs.

Universal Life: Offers level or adjustable premium and coverage, with cash values. Cash values may increase, based on the performance of certain assets held in the company’s general account. Suitable for long-term obligations or sinking-fund needs: estate growth, estate liquidity, death taxes, funding retirement needs, etc.

Variable Life and Variable Universal Life: Level/adjustable premium, level coverage, cash value: Suitable for long-term obligations and those who are more active investors and for estate growth and death tax liquidity.

Single Premium Whole Life: Entire premium is paid at purchase, cash values, level coverage: Provides protection as well as serving as an asset accumulation vehicle.

Note: Withdrawals and loans may be available from permanent policies. There are different income tax consequences if they are modified endowment contracts.