Heather Morgan Insurance, Sedona Allstate Insurance
Financial Literacy 101: Making sense out of life insurance
By Heather Morgan, Allstate Agent, Sedona, Ariz.
Summer is a popular time of the year for weddings; yet while many couples are planning for their happily-ever-after, they may be overlooking the opportunity to plan for the unexpected. The majority of newlyweds (61 percent) who responded to a survey from Allstate Insurance Co. said they did not purchase a life insurance policy before their marriage, and 64 percent of those still had not purchased life insurance within the first three years of marriage.
Newlyweds aren’t alone; 44 percent of all Americans know they don’t have enough life insurance, and 28 percent have none at all. Marriage, buying a new home and starting a family are major life events that cause people to reconsider their financial picture.
To de-mystify life insurance, it helps to think of it in two ways: term or perm. In theory, one might think that all life insurance is the same, but there are key differences that should be considered in planning for the future. For instance, if you are on a tight budget or would rather purchase a policy for a certain amount of time, ranging anywhere from one to twenty years, term life insurance is often a good choice. But, if you need something a little bit more permanent, designed to last throughout your life, you may consider permanent life insurance.
Determining the kind of coverage you might need depends on your health, age and objectives. Term is an excellent choice for someone who is looking for an affordable option to insure their life for a specific period of time. Term life insurance allows you to buy higher levels of coverage when the need for protection is often greatest. You may decide that you need coverage only until your children graduate from college or a particular debt is paid off, such as your mortgage. The benefit is paid to the designated beneficiary only when the insured dies during the term of the contract.
Most term policies set limits on how long they can be renewed, requiring you to purchase a new policy at the end of the term period if you still need insurance protection.
As your policy comes up for renewal, you may experience an increase in the cost of term insurance. To renew the policy, you may have to present evidence of insurability. The condition of your health will be a factor in determining whether or not you re-qualify and at what rate your policy will be renewed.
Permanent insurance provides an investment component and spans over an entire lifetime, but is typically more expensive to purchase. It really depends on individual life circumstances to decide which option is best for you.
How Permanent Life Insurance Differs
Term life insurance can be compared to renting a home, while permanent life insurance is more like owning one. Because it is designed to last a lifetime, permanent life insurance accumulates cash value – like the equity in your home – and is priced for you to maintain over a long period of time. If you make the necessary premium payments and avoid loans, withdrawals or surrenders, the full-face amount will be paid on death.
Over time, policy cash value (or equity) accumulates on a tax-deferred basis. Its growth rate is dependent upon a number of factors such as the cost of the insurance, the interest rate credited by the insurance company and the death benefit.
The cash value in your permanent policy may be accessed for such things as funding your children's education or as a supplement to your retirement income. When you borrow money from a permanent life insurance policy, you are using the policy's cash value as collateral so the interest rates tend to be relatively low. And unlike loans from most financial institutions, there is no lengthy application process when requesting a loan. However, you ultimately must repay any loan with interest or you will reduce your cash value upon surrender; your beneficiaries may receive a reduced death benefit and there may be income tax consequences.
Determining How Much and How Often
Once you’ve established a general idea of what type of policy might interest you, the next step is to consider how much insurance coverage you’ll need.
While there is no set answer, a good rule of thumb is that your life insurance should be seven times that of your annual salary, although individual circumstances should be taken into account when estimating actual coverage needs. In addition to your income, consider your expenses, assets and liabilities. Also think about whether or not your home is paid for, or if you plan to send children to college.
Since variable factors help determine the amount of coverage that is right for you, it is also a good idea to review your coverage each year. If you changed jobs, you will want to check your coverage, as employer-paid life insurance isn’t always portable. Many people also like to increase their coverage with the addition of a new family member. On the flip side, when your mortgage is paid, or as children complete their education, you may want to reduce coverage.
Make organizing your life insurance needs a part of your spring cleaning every year to help ensure that you, and those who depend on you, are prepared and protected now and in the future.
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Heather Morgan, an exclusive Allstate agent in Sedona, Ariz., can be reached at (928) 282-9226.
The information provided here is for educational purposes only and is not intended as legal, investment or tax advice. We recommend that you consult with an attorney or tax advisor regarding the tax implications of purchasing life insurance.
