Life insurance is a key financial planning tool. People’s situations change over time, resulting in changes in their life insurance needs. When periodically reviewing financial and estate plans, life insurance policies should be included in the process.
The primary reason for life insurance is to protect the financial interests of beneficiaries in the event of death.
For younger people with minor children, life insurance is a relatively inexpensive way to provide a decent estate for their family in the event of their premature death. A term life insurance policy can be purchased for a reasonable price if they are young and in good health.
Other clients may be older and nearing, or already in, retirement. They may have children who are adults and self-sufficient. These clients may be financially secure and have sufficient assets for their heirs in the event of their death, and for them, there may be little need for life insurance.
For wealthy individuals, life insurance may be about more than providing the financial security of a death benefit, it can be a useful tool as part of their estate planning process.
People who own a business may need life insurance to fund a buy-sell arrangement with business partners. The policy proceeds will provide cash to the business owner’s family and not burden their business partners with the need to deal with heirs who previously had no connection to the business. Business owners might also use life insurance to provide cash flow to their family and to allow the business to continue in the event they die with no clear succession plan in place.
How Much Coverage?
Closely aligned with what or who they need to protect with a life insurance death benefit is the amount of that death benefit.
Younger individuals will want to have a sufficient death benefit to provide for the needs of a young family if they are married and have minor children. The death benefit may be needed to ensure that the surviving spouse doesn’t have an issue making mortgage payments, and potentially to cover future college costs for the children. For younger people in good health, obtaining a term policy with $1 million death benefit or greater can be relatively inexpensive.
Older individuals nearing retirement with adult children may not need a policy at all. If they do this might for reasons such as estate planning or to ensure liquidity for their family if they own a business. Life insurance can also be used to replace a loss in pension income should the spouse who is the pension beneficiary die first. This need will depend upon the survivorship provisions of the pension.
The Right Policy
Along with determining the death benefit needed, it’s important to determine if your client has the right type of policy or policies in place to provide the type of protection they are seeking for the policy’s beneficiaries.
A term policy can provide a relatively large death benefit for a specified period of time at a relatively low cost, but it’s important for an individual to decide if they will need life insurance coverage beyond the end of the term period. If there will be a need, advisers should be sure the policy offers a provision to convert the policy to another type of policy once the end of the term approaches without taking a medical exam. It’s impossible to know what an individual’s medical condition will be in the future.
Group life insurance offered by a client’s employer might provide a cost-effective alternative, but individuals should review the provisions of the policy with their financial adviser, including whether the policy can be kept in force upon leaving the employer.
A permanent policy generally offers a level premium over time plus a build-up of cash value. However, the premiums can be considerably higher than a term or group policy. The permanent aspect of the policy can be key in providing the type of protection a client might need for their situation.
Any changes in an individual’s situation should also factor into the equation when determining if someone has both the right type of insurance and the best policy for their needs. These factors can include a change in marital status or homeownership, having a child or adopting, college savings, changes in business including new debt and more.