Elm3’s Guide to Selecting Life Insurance

By: Stacey Nickens

Your life is invaluable. No one can put a price tag on the value you add to this world. You also may not want to consider the possibility that you or someone you love will die before their time. For all these reasons, it may be difficult to choose or evaluate life insurance coverage.

However, not having sufficient life insurance coverage could expose your family to significant risk. It’s important to consider why you may need life insurance, how much life insurance you should purchase, and the life insurance options available to you.

Why do you need life insurance?

There are many reasons people choose to invest in a life insurance policy. You may want life insurance because…

• You are the primary or secondary breadwinner for your partner and/or children, and you want to ensure that your family can meet their savings and expense needs if you pass away.
• You are the caregiver for children or a family member, and you want to ensure that your surviving family members will be able to afford caregiving expenses should you pass away.
• You know your family will face significant estate taxation, medical expenses, funerial expenses, or other costs upon your passing, and you want to provide your family with funds to support them in paying those expenses.
• You or your business partner want to buy life insurance on each other, such that you can buy the other’s portion of the business upon their passing.

Whatever your reason, life insurance can provide policy holders and their loved ones with additional financial security during unexpected and challenging times. Moreover, life insurance death benefits are generally income tax-free, as long as the policy was not sold or exchanged for value prior to the policy holder’s death. (There are some exceptions to this exchange-for-value rule.)

Life insurance can additionally provide pre-death financial benefits to policy holders. Some policies allow holders to take tax-free loans against the policy’s cash value. These loans tend to have low interest rates and no pay-back periods and may be useful during financial emergencies.  If the policy holder passes away while there are outstanding loans, the death benefit will be reduced. Additionally, life insurance can be sold or surrendered to afford medical bills and other expenses if someone is diagnosed with a chronic or terminal illness.

How much life insurance do you need?

There are a number of ways to calculate your life insurance needs. Generally, you may look for coverage that would provide for 12-18x your gross pay. This benchmark applies to policy holders who want to use life insurance to replace lost income if the family’s breadwinner passes away. However, if you want to use life insurance to cover caregiving costs, estate taxes, or other expenses, you should consider the amount of those expenses to determine the coverage needed.

Consider the cost of final medical and funerial expenses, the size of outstanding debt payments should you pass at different points in your life, funding needs for financial goals such as retirement, income needs for the surviving family, and retirement needs for the surviving partner. You should also account for your family’s grieving and readjustment needs. For 6 months to 2 years after your passing, it can be important to ensure that your family will be able to live off of the same income that they lived off of before your death. It can be difficult to adjust our habits while grieving, and giving your family time to adjust their habits can ease the grieving process.

What type of life insurance should you select?

You can choose between term and permanent life insurance.

Term insurance may be suitable for younger people who cannot afford higher premiums or for those with temporary life insurance needs. Term insurance is a pure death benefit policy, meaning that term insurance has no cash value. If the insured dies during the term, the death benefit will be paid to their beneficiaries. Term life insurance premiums tend to be lower for younger people and increase significantly with age. Many term insurance policies have a conversion feature, whereby the owner can convert the policy to a whole life policy without having to prove insurability at the time of the conversion. Conversion features can be attractive for younger families who currently have lower incomes but expect their incomes to increase over time, allowing them to eventually afford the premiums on a whole life policy. Term insurance may also be appealing if you have a temporary need. For example, perhaps you want to ensure that your spouse can pay off the mortgage if you pass early. You could purchase a term insurance policy that expires when your mortgage will be paid off and your need for insurance ends.

Permanent insurance includes universal, whole, and variable life insurance.

• Universal life insurance may be appealing to freelancers, those who are self-employed, or others with unstable cash flows. Universal life insurance allows for flexible premium payments and premium coverage through the accumulated cash value. Owners of universal life insurance policies can make excess premium payments that will be deposited into a cash accumulation account. This account earns interest based on current market rates, and if the policy holder stops making premium payments, the insurance company will cover the premiums with funds from the cash value until those funds are depleted. These flexible premium payments may appeal to policy holders who tend to earn significant funds during one time period while earning less during other time periods. Additionally, the cash value can grow on a tax-deferred basis, and if you have monetary needs in the future, you can take loans against or withdrawals from the cash value.
• Whole life insurance often appeals to families with healthy cash flows and low risk tolerances. Whole life insurance policies remain in-force as long as the holder makes the fixed premium payments, and whole life insurance policies come with a guaranteed death benefit and a guaranteed cash value growth. Comparatively, universal life has a guaranteed death benefit that may increase if the cash value grows sufficiently, and variable life has a minimum death benefit that may increase if the cash value investments perform strongly.
• Variable whole life insurance or variable universal life insurance are slightly different, but all variable life insurance policies offer investment control to their policy holders. This type of policy may appeal to the self-directed investor, who wants control over how their cash value is invested and believes their cash value will grow strongly under their tutelage. If the cash value does grow, the death benefit increases above the minimum amount.

What is best for you?

Working with our experienced financial planning team can help you in determining your life insurance needs. Reach out to Elm3 today for further assistance.