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Life insurance is a key component of your family’s estate plan, offering those who depend on you for their financial security a safety net in the event of your death. Investing in life insurance is a way to say “I love you” and make certain that when you pass away, the people you love will have a reliable source of financial support to count on.
Purchasing life insurance may seem fairly straightforward, it can actually be quite complex, especially given all of the different types of coverage available.
Betting On Your Life
Depending on the type and purpose of your coverage, a life insurance policy pays benefits to your family or business (whomever you choose as the beneficiary) in the event of your death.
Life insurance comes in two main forms, which you can think of as permanent and non-permanent. With permanent coverage, such as whole life and universal life, as long as you pay the premiums, your insurance cannot be canceled, and your policy will be there and pay out when you die.
Permanent vs Term Life Insurance: Which Do You Need?
To determine which type of life insurance policy you should purchase for your family—permanent or term you’ll need to consider a number of factors:
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- You are likely to have dependents—minor children, a non-working spouse, or senior parents—who rely on you for their financial needs, and you will not have enough saved up at the time of your death to provide for their needs for the rest of their life.
- You have a business that will need a cash infusion if you die to keep it running, until it can be sold or for your loved ones to buy out a business partner.
- You will have an estate tax bill that you want to make sure is covered by life insurance so your family doesn’t have to sell assets to pay your estate taxes.
In each of these situations, you want to make sure you have either term life insurance that will continue long enough to cover your needs, or you’ll want to consider purchasing permanent coverage.
Term Life Insurance
The coverage periods of term life policies can vary widely: 10, 15, 25, 30 years, or longer. Because your coverage expires after a certain number of years, term life insurance is much cheaper than permanent.
Term policies are typically used by people who expect that they’ll only need the insurance for a certain period of time or for a certain purpose, but at some point in the future, they will no longer need the coverage.
For example, you might purchase term life coverage in order to pay off your home mortgage in the event you die before it’s paid off. Or you might have minor children, who rely on your income for their basic needs, and you need a term policy to ensure they have enough money to live on until they become financially independent should you die before they reach adulthood.
Permanent Life Insurance
Permanent life insurance comes in several different forms, such as whole life, universal life, and variable universal life. And it’s mostly used for estate tax planning, very high-end income tax planning, and can also be used as key-person insurance, which pays out benefits if you fill a vital role in a company that would need cash upon your death to continue operating.
How Much Life Insurance is the Right Amount?
When purchasing life insurance, you’ll want to make sure you have enough term life insurance to cover the expenses that your dependents will require until they are no longer dependents, or until you are certain that you will have enough money saved up to cover the lifetime needs of those dependents.
If you have children with special needs or a non-working spouse, they will require a longer period of care after your death, compared to a family with two incomes and children who will achieve their own independence in their late 20s or early 30s.
