Your need for life insurance depends on a number of factors, including your age, health, the size of your family and the nature of your financial obligations, to name a few. For example, if you are a young, single worker with no spouse or children, you may not have a great need for life insurance. As you take on more responsibilities and your family grows, your need for life insurance will likely increase in order to ensure your family’s future financial security.
Here are some questions that can help you start thinking about the amount of life insurance you need:
- What immediate financial expenses (e.g., debt repayment, funeral expenses, estate tax liability) would your family face upon your death?
- How much of your salary is devoted to current expenses and future needs?
- How long would your dependents need support if you were to die tomorrow?
- How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities or an inheritance for your children?
Types of life insurance policies
The two basic types of life insurance are term life and permanent life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy's death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may—in some cases—be renewed until you reach age 95.
Permanent (cash value) insurance policies offer protection for your entire life regardless of your health—provided you pay the premium to keep the policy in force. As you pay your premiums, a portion of each payment is placed in a cash-value account. During the early years of the policy, the cash-value contribution is a large portion of each premium payment, as your life insurance needs are typically as low as they will get while you are young and—hopefully—healthy.
As you get older and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value of your account continues to grow—tax deferred—as long as the policy is in force. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges. Many different types of cash-value life insurance are available, including:
- Whole life: You make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance company). Your only action after purchase of the policy is to pay the fixed premium.
- Universal life: You may pay premiums at any time and in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
- Indexed universal life: This is a form of universal life insurance with excess interest credited to cash values. Unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
- Variable life: As with whole life, you pay a level premium for life. The difference is that the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts—a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be invested.
- Variable universal life: A combination of universal and variable life. You may pay premiums at any time and in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value and death benefit fluctuate based on the performance of investments in the subaccounts.
What type of insurance is right for you?
Before deciding whether to buy term or permanent life insurance, consider the policy cost and potential savings that may be available. Also keep in mind that your insurance needs will likely change as your family, job, health and financial situations evolve, so you'll want to build some flexibility into the decision-making process. In any case, here are a few things to consider when choosing which type of insurance fits your needs:
- Mortgage or long-term debt: For most people, the home mortgage is one of the largest sources of debt. An untimely death may remove a primary source of income used to pay the mortgage. Term insurance can replace the lost income by providing life insurance payments to your beneficiary for the length of the mortgage.
- Family protection: Your income not only pays for day-to-day expenses, but also provides a source for future costs such as college education expenses and retirement income. Term life insurance of twenty years or longer can take care of immediate cash needs as well as provide income for your family’s future needs.
Review your coverage regularly
Once you purchase a life insurance policy, make sure to periodically review your coverage as your needs will change over time. However, you may want to first consult with your financial and/or legal advisors to see if life insurance is right for you. The Busey Wealth Management team can help you decide which type of coverage is fits the unique needs of you and your family, and also help you manage your coverage as your family grows and your financial obligations evolve.
To learn more about the comprehensive services offered by Busey Wealth Management, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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Not FDIC INSURED | May lose value | No bank guarantee