Think life insurance is a complete waste of money? You’d be dead wrong. The truth is, when planning over the course of a lifetime, an insurance policy is an irreplaceable component of your financial future. Consider for a moment – the possibility of how an unexpected death in the family can affect every aspect of a person’s life: education planning, estate planning, risk management.
Practically every element of your family dynamic will be impacted by the choices you make regarding a life insurance policy, and consequently, there’s a variety of important decisions to make throughout the process. So, if you’re wondering, “Is life insurance worth it?”…buckle on in.
What happens when you die? (The least fun type of planning)
Sure, life insurance seems like a morbid topic to contemplate, but it’s also not a decision you can make without due consideration. Your preferred policy is arguably one of the most important choices you’ll make in this process and it all depends on what exactly you’re looking for.
For example—say you’re a multi-millionaire with needs beyond creating financial security for your beneficiaries. You’ll likely want to avoid term insurance, instead opting for more permanent options. Inevitably, there will be some opportunity cost when compared to investing this money directly into the market, but the value of securing a plan for the future is truly priceless. Not to mention, permanent policies offer a number of tax mitigation benefits and even an additional wealth-building channel, making them one of the best options for passing on your wealth to future generations.
On the other hand, term policies can still be one of the most straightforward methods for supplementing lost income and are a popular choice for those who haven’t yet built up a sizable nest egg. In the end, your choice of life insurance is inextricably linked to the kind of life you want your loved ones to have.
Let’s dive into both.
Term life insurance
Among policy choices, term life insurance is the most transactional in nature. Think no bells, no whistles here. With a term policy, you’re getting coverage for a fixed period of time (10, 20, 30 years) and in most cases, fixed policies are the cheapest option on the market. Of course, this comes with many trade-offs, and some term policies leave plenty to be desired. As a result, many of our clients ask: are these worth it?
One of the most important things to keep in mind with a term policy is that you won’t be building up cash value. Instead, the main advantage of a term policy is that it provides a relatively large death benefit for a lower recurring cost. For many individuals, this is actually the picture-perfect setup. If you’re young with decades of life ahead of you, a term policy is a reasonable compromise on coverage, allowing you to obtain some peace of mind at a budget price level.
Level term policies
For those with more specific needs, term insurance does offer a few variations. Level term policies are the most common (and the most affordable). With level term insurance, the cost of the premium remains the same over the life of your coverage, however, so does your benefit. As a result, although your family and financial obligations may grow over the years, a level term policy won’t offer any additional protection.
Increasing term policies
In contrast, increasing term policies tend to be more accommodating for a family’s steadily growing expenses. With each passing year, increasing term insurance provides a higher death benefit, offering extra protection for the additional financial obligations you may have accumulated— a larger house, a capital-intensive business, a bigger family— not to mention the relentless erosion of wealth via inflation. Keep in mind, however, that this increased coverage will likely come with larger payments, and in the end, you’re still not building up an investment over the long term.
Permanent life insurance
Whereas term life insurance lasts for a predetermined period, permanent life insurance does not have a fixed duration. Rather, these policies last for the entire life of an individual (assuming their premiums are paid throughout).
While premiums tend to be significantly more expensive in a permanent policy, it’s important to note that this type of insurance is unique in that it can also be viewed as a vehicle for investments. Unlike term insurance, portions of permanent life insurance premiums accumulate as a cash position over time. Once your cash has piled up for a few years, it can be deployed for a variety of purposes, from supplementing retirement income to paying policy premiums.
Like term insurance, permanent life insurance is actually an umbrella of various policies, each with a unique set of provisions and requirements:
- Traditional whole life: As the most common form of permanent insurance, traditional policies are rather straightforward. You agree to pay a certain amount in premiums over a lifetime, in exchange for a specific death benefit. These policies are typically coupled with a savings account, which grows over time as your insurer pays out dividends to policyholders.
- Universal life: Universal policies provide slightly more flexibility than traditional whole life insurance. The cash in your savings account generally earns a money market interest rate, and after your reserves have accumulated, this money can be used to lower the cost of your monthly premium. In some policies, death benefits may also be increased if an individual passes an optional medical examination.
- Variable life: For those looking to grow their policy’s value more quickly, variable life offers greater exposure to stocks, bonds, and money market mutual funds. With this exposure, however, also comes greater risk— if your investments perform poorly, your cash value and death benefit have the potential to decrease as well.
- Variable universal life: The variable universal policy provides a hybrid insurance offering, allowing individuals to take advantage of the risks and rewards of investing (like variable insurance) while still having the flexibility to control adjustments of premiums and death benefits (as is the case in universal policies).
It’s all about the timing. Or is it?
Clearly, there’s plenty of policy choices, each suited for different financial objectives and risk tolerances. But when’s the right time to actually start thinking about getting life insurance? As is the case in most questions of money management, this isn’t necessarily an age-specific issue. *Breathes a sigh of relief* Instead, it all honestly comes down to you. Your lifestyle, financial obligations, and long term goals.
Term life insurance, for example, is generally seen as the most affordable way to supplement lost income and should be tailored to completely cover any lingering expenses you may leave behind. That’s why it’s great for someone with kids and/or a mortgage. Generally, the death benefit is enough to offset housing and childcare costs until your kids are on their own and the mortgage is paid off.
On the other hand, if you have future beneficiaries who have claims to your earning potential and portfolio wealth, consider permanent life insurance. This is especially relevant if you wish to help your heirs pay for inheritance or estate taxes, in addition to other expenses such as funeral expenditures. Permanent life insurance plans might also be an appropriate choice if your death would leave your spouse on the hook for a substantial debt, or if you have a lifelong dependent such as a child with special needs.
Adapting with age
As we age, our priorities will naturally change and evolve. At a certain point, everyone begins to plan around their families and kids, contemplate their retirement, and acknowledge they could probably use a bit more exercise (and if your fitness journey happens to include a Peloton, you should check out #MonumentWealth). However, one of the biggest questions clients ask as they age is how easily their life insurance policy can evolve to reflect their new priorities.
Thankfully, there’s a wide diversity of life insurance offerings with innovative new policies being introduced to the market on a daily basis. It’s easy to get confused, which is why we keep up-to-date on the market trends and can help simplify the process to ensure you’re always using the best product. For instance, in many variable and universal plans, you can adjust the amount you’re paying, adapting your policy to your lifestyle as conditions change. You are even able to convert some term life insurance policies to more permanent options if that would best suit your needs.
With the right cash position, you can often also unlock increased flexibility, with some plans even offering optional refinements to your death benefits. While the degree of flexibility is certainly impacted by the classification of policy— with permanent being the least flexible and term being the most— there’s still an increasing amount of adaptability across the board as insurers continue to modernize and customize their offerings.
There are tax benefits with life insurance. That’s right. You heard us loud and clear.
Now, let’s cut to the chase – one of the most valuable benefits of a life insurance policy is the plethora of tax advantages they can provide to the policy owner. For example, beneficiaries can receive the death benefit tax-free in the event of the policy paying out.
All life insurance policies provide tax benefits of some sort, but there’s some nuance to each offering.
What about tax benefits for whole life insurance?
Whole life insurance offers the most conservative guarantees. In these plans, the “interest build-up” portion of the policy’s annual cash value increase is not taxed by the IRS. The same tax-free nature applies to dividends, which an insurer may credit to your account depending on their annual profits.
Along the way, there are additional options that make this cash accessible without major tax consequences—so long as the withdrawal is structured properly.
In essence, these features of guaranteed interest and tax mitigation make your permanent life insurance policy similar to a long-term savings account, allowing you to continue growing your wealth over time with fewer hassles and headaches.
What about tax benefits for universal policies?
Universal policies, on the other hand, have a higher range of variability in terms of their guarantees, depending on the carrier. These policies allow you to choose different investments at different risk levels and, of course, higher risk options could potentially yield greater rewards (or losses). As long as your policy still carries a cash value, however, this growth will accumulate tax-free, and the same rule applies to any corresponding growth in your policy’s eventual death benefit.
In all of these options, it’s important to note that there are a few restrictions to the tax-advantaged nature of an insurance policy. For example; there are legal limits to how much you can pay before the policy becomes a “modified endowment contract.” This classification can neutralize many of the tax benefits that help make life insurance such a popular investment vehicle, so be sure to consult with a professional about any limitations to your plan.
Trust the policy and partner you have
In managing your finances, trust is essential in every facet. When it comes to determining if life insurance is worth it, however, having confidence in your advisors to help you make that decision is more vital than ever. Aspects like ensuring you’re not being taken advantage of and seeing to that your family is covered no matter the circumstances can be an undue source of pressure and stress for an individual when a sense of trust hasn’t been prioritized.
In this respect, estate planning and life insurance are a perfect match. Without a holistic strategy for managing your wealth, you’ll likely struggle to create a sustainable safety net for your long-term finances, leaving your family exposed to unpredictable levels of risk and volatility.
One of the best ways to safeguard from the perils of poor planning is to take advantage of personalized programs such as Private Wealth Design, an advisory service we offer here at Monument Wealth Management. By specializing in understanding and advising on your big picture, we’re then able to connect you to a trustworthy insurance agent who can meet your needs rather than funneling you through salespeople. Trust and dependability are preserved through every step of the planning process by maintaining good working relationships, remaining neutral and independent, and keeping clients up to speed throughout the progression of their insurance partner relationship.
Life insurance can be a contributing factor to your family’s sound financial future, and Monument Wealth Management is a great partner for ensuring every aspect of your estate is covered. With a team of seasoned professionals and a collaborative, customized, and creative approach to wealth management, we can help you conceive a financial blueprint for the life you want to live and the legacy you want to leave behind.