Life Insurance: Protecting Your Most Important Asset
Life insurance. While most people understand that holding a life insurance policy is important, it’s also one of those tasks that many people tend to procrastinate until they’re faced with a relevant life experience that increases its level of priority. Holding a life insurance policy is an integral piece of a sound financial plan, as it can provide a financial safety net as well as peace of mind for the policy holder and their loved ones. In this space, we share our thoughts on life insurance, including two unique contextual views on life insurance policies.
What is Life Insurance?
A life insurance policy is a contract where an insurance company agrees to pay a lump sum benefit at the insured’s death.
There are various types of life insurance that have different characteristics and often serve different purposes. The two most common types of policies are as follows:
- Term Life Insurance: Death benefit is paid out only if death occurs within the contractually specified term.
- Whole Life Insurance: Death benefit is paid, regardless of when the insured dies, as long as the premiums continue to be paid.
What is it good for?
As financial planners, we aim to help Clients identify and achieve their goals through the creative and specific management of the financial planning process. This includes addressing the core elements of cash flow management, insurance planning, investment planning, tax planning, retirement planning, and estate planning. Life insurance clearly falls under the category of insurance planning, as it can be used as a protection measure for your family’s financial life. However, its impact can expand beyond that when considering its use as a tool for Family Insurance and Estate Planning.
One way we can look at life insurance is as “family insurance,” or as income replacement to ensure your family’s needs for the future would not be financially derailed if anything were to happen to the household earners (you or your spouse). Examples of family needs may involve anything from housekeeping and child care, to mortgage expenses, sending your children through college, or even to ensure sustainability through retirement.
Family insurance would typically be accomplished by attaining a Term Policy. The two variables to consider next are the length of term and amount of insurance. The appropriate length of the Term Policy is highly dependent on where you are in your life’s journey and how close to retirement you are. The amount of insurance would be calculated based on your earning potential, time until retirement, and/or certain future costs.
Another common way of analyzing life insurance needs is in the context of estate planning. In order to protect your assets, life insurance can be used to provide liquidity needed to pay off debts, final expenses, or pay estate taxes. If your intention is to create wealth, life insurance can be utilized for charitable purposes or as an inheritance for your heirs.
Whole life policies are more commonly used for estate planning purposes as they can be customized using policy riders in order to meet specific needs. When using life insurance for estate planning reasons, the ownership of the policies and naming of beneficiaries become critical pieces of consideration and need to be monitored and reviewed on a regular basis.
What does Yeske Buie do?
At Yeske Buie, we complete a Life Insurance Analysis for our Clients that takes into consideration each of their unique needs and circumstances including current income, spending needs in retirement, college costs, retirement age, existing savings, current insurance, and more. We also review their estate tax calculations each year in an effort to identify scenarios when more estate planning may be recommended. This analysis is initially completed during the onboarding process, and we review the coverage annually as part of our financial hygiene check. However, the planning does not end with the analysis! We then use this information and analysis as a resource for a larger conversation with our Clients to determine if their existing coverage is adequate and to make recommendations for policies we believe will best serve their needs.
Life insurance decisions and recommendations cover many aspects of financial planning and should be considered on a deeper level than what has been covered here. We understand that life insurance isn’t a subject people often choose or want to discuss, but the benefit of starting the uncomfortable conversation early far outweighs the potential devastation that can occur as a result of not having it. Life is unpredictable – let’s work together and prepare for it.
As always, please don’t hesitate to contact us if you have any questions about life insurance and how it fits into your financial plan.