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