Updated: Oct 16
Kathleen Owens | Financial Planner | Fiduciary | Certified Financial Planner candidate
Life insurance is one of those expenses that we just don't want to have. It's a reminder that something bad might happen. But, it's a necessity to offer some financial protection to the ones we love. I'll run down a general overview when and why you should obtain a term or whole life insurance policy on yourself or someone else.
Others are financially dependent on you
Life insurance is an "instant inheritance "for your loved ones who survive you.
When you get married or have your first child you definitely should get life insurance. A term life policy is a less expensive option, but once the "term" is over, all the money you paid into the policy is gone. It's like leasing a car, once the lease is over, you return the car and you don't get back any of your lease payments.
The Benefit Amount that would be right for you will depend on a lot of things: your age, current income, your spouses income, the age of your child and your annual cost of living, and what other expenses the policy would replace.
You would want to consider maintaining a term life policy until your child becomes eighteen, or has graduated college.
A whole life policy has many options and offers many more benefits than a term policy. But, you guessed it, a whole life policy costs much more than a term policy.
The great thing that I like about a whole life policy is that you are not throwing your money down the drain, never to be seen again. With a whole life policy you can accumulate cash value, and you can take loans from the policy if you need to. Each insurance company has various riders (such as long term care insurance) that can be attached to the policy for additional benefits (at additional cost). If you can swing it financially, a whole life policy is a better option and something to consider.
Get a policy while you are young and healthy
Insurance companies are very strict about who they will insure. I had a client who was male, age 50 and in good health. However an insurance company would not even accept an application from him because in the pre-qualification questionnaire we had to report that he was getting injections in one knee. It was a substance that was suppose to help cartilage rebuild. I was very surprised that he was denied coverage for something that seemed very minor.
The younger you are, and of course you need to be healthy, the easier it will be to obtain insurance and your premiums will be lower. The older you are, the higher your premium payments are.
If you are in your late twenties to early thirties and you know you are probably going to get married and have kids (if you aren't already) it would be a good time to get a whole life policy for a small benefit amount, such as fifty thousand dollars. You can always increase the benefit amount as your income increases. It is MUCH easier to add to an existing policy than to obtain a brand new policy. Any high-quality insurance company will require you to submit to a health exam prior to issuing a new policy. With an existing policy you will not have to submit to a health exam.
Here's a tip from an expert: do not let a life insurance policy lapse. However we have a safeguard against that happening. The policies we obtain for our clients have a safeguard: we are notified if your policy lapses and we will notify you and work with you to get the policy up to date or reinstated.
But my employer provides life insurance for me
Yes, I know many large employers provide term life insurance for their employees. Usually though the benefit amount is usually fifty-thousand dollars. How long could your loved ones survive on fifty-thousand dollars without you? It would provide some temporary relief but would not be a long term solution to the loss of your income.
You own a business, either alone or with a partner
If you own a business and you have a business partner, life insurance is essential for you and your business partner. The strategy is that each partner takes out an insurance policy on the other partner. In the event of the death of one of the partners, the surviving partner uses the life insurance payout (Benefit Amount) to buy the deceased partners share of the business.
You own a business on your own.
If you own a business, and you have loved ones that you give financial support to, then you need life insurance. You would put your loved ones at a great disadvantage if you should die unexpectedly and then your family has to scramble to either sell the business or try to run it themselves. Someone will swoop-in and buy the business at a huge discount because they know the survivor have their backs against the wall. Having an "instant inheritance" buys your loved ones some time, and the money gives them options that they would not otherwise have.
You want to take advantage of sophisticated estate tax planning strategies
Life insurance is used often in sophisticated planning that will benefit your estate and reduce taxes. Obtaining and maintaining life insurance is a smart way to pass on cash to your heirs tax free and is also used to hold cash once retirement accounts are maxed-out.
How to get the right insurance form a good company
We're independent fiduciaries and financial planners so we're able to work with any highly rated insurance company. Actually, we only work with highly rated companies. We don't work with low-rated companies. We will assure that your policy will be backed by a company that has the financial ability to honor it commitments. You want to know your insurance company is solid financially and is going to be in business for a long time. We've have been advising on insurance since 2003. Contact us to explore different options and learn what would be best for you.