By Greg Hammond
One of the most commonly overlooked parts of a sound financial picture is life insurance. An unexpected or premature death could be financially devastating to your spouse and family. However, not everyone needs life insurance and it is possible to be over-insured and pay unnecessary life insurance premiums.
Many people put off dealing with life insurance because it requires them to face their mortality. Just like drafting a will or estate planning, it’s important to realize you will not live forever. You may not want to talk about your death or think of what could happen to your family if you were no longer there for them, but it’s an issue that deserves your focus. Otherwise, an unexpected event or illness could potentially leave your spouse, significant other, or family in a very difficult financial situation.
One of the risks you face each day is your mortality. Life insurance is a way to shift the risk of your premature death and the financial consequences to an insurance company. Depending on your circumstances and financial situation, you may or may not have a risk to be insured against.
There are different types of life insurance, but the vast variety of life insurance policies can be divided into two basic categories: term life insurance and permanent life insurance.
Term life insurance is typically the least expensive and it allows you to pay as you go. It’s similar to putting money in a parking meter. If you want to avoid the financial impact of getting a parking ticket, you can pay for an hour of parking. At the end of the hour you can choose to pay for another hour or you can decide to stop paying and risk getting a ticket.
Term life insurance gets its name from the fact that the insurance company will guarantee the same insurance rate or cost for a specific period of time (the term), for example 10, 15, 20 or 30 years. The policy will remain in force, meaning that you have life insurance as long as you pay the premium. If you stop paying the premium, the policy will end. Term life insurance is typically used to cover a risk you might have over a specific period of time.
Permanent life insurance, as the name suggests, is a type of insurance policy intended to be permanent, lasting as long as you do to address a risk that never goes away. There are many types of permanent policies such as: whole life, universal life, variable life and second to die policies. In this article we will simply refer to a permanent policy in general without any specific reference to the type of permanent policy to be used.
7 reasons why you may need or desire to have life insurance
When reviewing your need for life insurance, look carefully at the following risks and the most appropriate type of life insurance for each.
- Final Expenses
Depending on your financial picture, you may want to have a life insurance policy in place to cover burial expenses, funeral or any other death costs. Since these costs never go away, this risk should be covered by a permanent life insurance policy.
Whether you have a two income or single income household or are retired, having life insurance in place to pay off the mortgage provides some financial comfort to a surviving spouse or partner.
In this case, a term life insurance policy can be used to cover the risk because a mortgage is for a fixed length of time. The term life insurance policy should cover the entire length of the mortgage. If you refinance your mortgage, potentially lengthening your payment period, be sure to review a term life insurance policy to ensure you are covered for the life of the new mortgage.
- Income Replacement
Life insurance should be considered to replace an income stream if a spouse or partner predeceases you, thus reducing your income. Most couples lose at least one social security income and some individuals will have pension income. Unless you own sufficient financial investments to replace the lost income, you may want to make plans to replace it with life insurance.
To address this need you may want to consider having a permanent life insurance policy in place for your spouse or partner’s entire lifetime. The last thing you would want is to have a term policy that lasts until your spouse or partner is age 75 only to have him or her die at age 76. Please note- there may be an age where the income needs of a surviving spouse can be covered by your investments, possibly making a lower cost term life insurance policy more appropriate. For example, if a spouse dies at age 75 and your investments are sufficient to provide an income from that point forward, you may want to choose a term life insurance policy to age 75 to address this risk.
If you have school age children, you may want to have life insurance in place to provide funding for their support and college tuition should something happen to you. Once again, if your spouse or partner predeceases you, you may have enough income to support your family if the mortgage is paid off, but it can be extremely difficult for a single parent household to raise children and pay for their education. Therefore, a term life insurance policy should be considered until children are out of school.
When you think of your life and the impact you wish to have on the lives of your children, grandchildren, nieces, nephews or other beneficiaries, you may want to have life insurance in place to provide a guaranteed inheritance or legacy, and/or leave a specific sum to a charity or religious organization.
One strategy with this type of planning could be called, “How to spend your children’s inheritance and have them love you for it.” Typically when you think of leaving a sum of money to a beneficiary or charity you put the money aside and don’t spend it. By using life insurance you spend a small amount of the money for the policy to create the same benefit for your beneficiaries. This allows you to spend the difference for your enjoyment and leave a tax-free amount to beneficiaries or charity.
A permanent life insurance policy typically addresses this type of need. When setting up life insurance that provides a guaranteed death benefit to your beneficiaries, it’s very important to look at how the life insurance is owned. The death benefit for a life insurance policy is tax free, but could be included in your taxable estate. If the life insurance proceeds might be subject to estate taxes, you’ll want to make sure the insurance policy is owned outside of your estate. After all, there’s no need to create a large tax-free death benefit if you end up giving most of it back to the government in estate taxes!
- Estate Taxes
Under federal and state regulations you have the ability to pass a certain amount of assets to a non-spouse beneficiary without any estate taxes. If your net worth and potential life insurance proceeds exceed the federal or state exemption amounts, your estate will be subject to estate/inheritance taxes. This can be a big problem for individuals with a large portion of their estate invested in real estate or businesses since the government wants to be paid estate taxes due within nine months of the death. This could force beneficiaries to rapidly sell these illiquid investments at below market values to generate the funds necessary to pay the estate taxes. Instead, life insurance could be used to provide the necessary funds to cover a potential estate tax problem.
Once again, you’ll want to be certain that the life insurance is owned properly so it doesn’t compound the problem. A permanent policy set to be in place for as long as you live is typically used for this insurance need. For a married couple, a second-to-die life insurance policy that pays the death benefit upon the passing of the second spouse can be a lower cost insurance option when funds are needed for estate taxes.
- Long-Term Care Planning
6 out of 10 individuals will need long-term care at some point during their lifetime. Many do not want to cover this risk with long-term care insurance or they don’t qualify for the insurance because of health reasons. The goal of any long-term care planning is to protect assets for a spouse, children or other beneficiaries. Otherwise you could just spend down your assets for your care if needed. In some cases where a health condition might disqualify you from obtaining long-term care insurance, you may still qualify for life insurance. This would allow you to obtain a permanent insurance policy to potentially replace your assets should you need to spend your current assets for long-term care costs.
If one or more of these seven reasons apply to you, consider life insurance to protect and provide for your spouse, partner, family or non-profit organizations you care about. To determine the appropriate amount and type of life insurance needed, you should consider consulting a financial advisor or life insurance agent. Don’t wait until it’s too late! Look at the financial risks in your life and think about protecting those you love from a financial disaster.
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Greg Hammond is passionate about helping people make a greater impact in their lives, their families, and in their communities. Using his remarkable range of experience, Greg helps individuals establish what’s most important, then set and pursue goals toward preserving and growing their wealth. He believes everyone should have a chance to “do and achieve what matters most.”
As a wealth advisor, Greg has counseled hundreds of individuals, families, and business owners on developing strategies for investments, intergenerational wealth transfer, building a legacy, reducing taxes, protecting the value of their estates, and charitable planning.
A sought-after charitable giving and financial educator, consultant and speaker, Greg has been in financial management for more than 20 years. He is frequently interviewed by the media; recently by the Wall Street Journal for “Earning Income While Making a Gift” and the Hartford Business Journal Nonprofit Notebook for “Planned Giving.”
Greg co-hosted the radio show, “Planning for Tomorrow” on WTIC News Talk 1080AM covering topics such as creating lifetime income, charitable use of life insurance, and philanthropic planning. He has been interviewed on WTIC AM news, published a special report on nonprofit challenges, and regularly speaks on “Building a Legacy” at national and regional conferences, estate planning councils, religious and nonprofit organizations.
A graduate of Miami University, Oxford, Ohio with a B.A. in Accounting, Greg is a CERTIFIED FINANCIAL PLANNER™ Professional and Certified Public Accountant. Greg is also a certified True Wealth Consultant, a member of the Partnership for Philanthropic Planning (PPP), The Planned Giving Group of Connecticut (PGGCT), The Financial Planning Association (FPA), Association of Fundraising Professionals (AFP), The American Institute of Certified Public Accountants (AICPA) and the International Association of Advisors in Philanthropy (AiP).
Greg’s commitment to making a difference has guided him to participate in Habitat for Humanity and to lead groups on mission trips in the United States and Mexico. Greg contributes to his local community as a board member for PGGCT, Treasurer for Westminster Presbyterian Church and Advisory Board member for The Connecticut Forum. Greg and his business partner, Scott Iles, sponsor many annual fundraising events for nonprofit organizations including a golf tournament to benefit ALS and fundraising for the Connecticut Children’s Medical Center.
A published author, Greg lives in West Hartford, CT with his wife Karen and their two daughters. Greg enjoys research and writing, tennis and a challenging game of golf when he is not at the office or enjoying time with his family.
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