Insights by Cathay

Many people understand the importance of life insurance. According to the 2018 LIMRA “Insurance Barometer Study,” 90% of respondents believe the primary wage earner should have a life insurance policy. The top reason for purchasing a life insurance policy to most survey respondents (91%) is to cover the costs of burial and other final expenses.

But life insurance can be more of a safeguard than you think. Having a policy can help protect your business or family from financial loss if you should die while you have obligations. For example, a policy can help replace lost wages. Life insurance could also be used as an inheritance, especially because death benefit proceeds are typically not subject to federal income tax.

How to choose your type of life insurance

With the different types of life insurance policies, it can be difficult to determine where to start. Choosing which type of life insurance policy to purchase is based on several factors, including your age, life stage, and budget. Insurance policy premiums increase as you age and/or develop health concerns — thus it is best to buy insurance when you are younger and in good health.

There are several different types of life insurance policies, with these being the most common:

• Term life: This type of insurance most commonly provides the largest amount of protection at the lowest upfront cost. A term policy ends at a specific future time. Parents of young children might purchase a 20-year term policy that provides protection until the child is an adult. Other uses for a term policy include protection until a mortgage is paid off, coverage until retirement, or coverage while there is an outstanding loan on a business.
• Whole life: Often called “permanent insurance,” this type of policy does not end and continues to build a cash value. While it might be more expensive, it is ideal for an inheritance plan.
• Universal life: More flexible than traditional whole life insurance, this type allows policyholders to earn a minimum interest rate and choose a premium payment schedule. The cash value can be borrowed against the policy as the value grows.
• Indexed universal life: This type of policy allows holders to choose a percentage of the policy to be invested at a fixed rate of interest or a fluid rate based on the performance of independent financial indexes — the most popular being stock indexes calculated without dividends.
• Variable universal life: Even more flexible, this type of policy adds the opportunity to invest a portion of the premium payment. These subaccounts can be invested in stocks, bonds, and other funds. VUL has the potential for higher returns — but also losses if the investments fall in value — and is best for policyholders who plan to keep the policy for a longer term.

Importance of life insurance in financial planning

The majority of people purchase life insurance when they hit milestones — getting married, having children, purchasing real estate, or investing in a business. Term life insurance can be an economical short-range choice; in fact, 71% of consumers who own some sort of life insurance policy have a term life policy.

Every few years, new types of policies emerge, with a recent one being a return of premium term policy that returns the premium at the end of the term — allowing you to pay for a child’s wedding or other significant event. Those who purchase these term policies typically buy permanent insurance after the term expires.

But it would be a good idea to look well beyond a set term. Increasingly, people are coming to understand the role of life insurance in financial planning and long-term investment strategies.

1. Family income replacement

Policyholders hope to allow beneficiaries to maintain their present lifestyle and standard of living despite the loss of earnings. LIMRA's analysis suggests that the average family needs an income replacement value for 5 1/4 years, but most only have enough for three years. This is a key reason life insurance is important.

2. Mortgage protection

Paying a mortgage can be a burden to loved ones, so many policyholders purchase life insurance to pay off the outstanding mortgage balance. This allows family members to remain in the residence.

3. Children’s education

A properly structured life insurance policy may ensure that college is financially feasible or continue to pay for existing college expenses.

4. Retirement income for surviving spouse

Without your income, saving for retirement might be challenging for your spouse: 66% of American consumers are concerned about having enough savings for a comfortable retirement. After a spouse’s death, that concern can significantly increase. Insurance benefits can help to eliminate or close the gap needed for the surviving spouse to save for retirement.

5. Business protection and continuation

Small business owners often invest their life savings in their business. Life insurance can help protect the business and the beneficiaries. A “buy/sell” agreement, funded with life insurance proceeds, can be a powerful tool to help ensure business continuity.

6. Estate planning

Life insurance policy benefits can be used to fund estate taxes and other liabilities upon the policyholder’s death. Life insurance might also help survivors avoid the sale of a home or business to meet those obligations.

Many people want to purchase life insurance but do not know where to start or how much they need in their policy. Being informed and starting to plan early are the best preventative measures. See how Cathay Wealth Management can help.

Related link:

• Life insurance policy review