Presented by: T. Lloyd Worth, Worth Wealth Management
There are several different life insurance products and features to consider when evaluating plans.
Discussing the importance of owning life insurance can be a sensitive topic – after all, few people like to talk about death. However, if others depend on your support, or if you have substantial assets that you wish to transfer to future generations, life insurance can be an important financial tool. There are many types of insurance and features for you to consider if you are shopping for a plan.
Types of Life Insurance
Term insurance is perhaps the most common and least expensive form of life insurance – if you’re under age 50. These policies are written for a specific period – 1 year, 10 years, 30 years, etc. – and often have the option for renewal, during which time the premiums are likely to increase. If you wish to lock in the premium for periods of up to 30 years, select a level term policy.
Whole life incorporates features of permanent protection with a savings account. You can lock in a premium rate, and part of the premium accrues a cash value as long as you continue to pay the premiums. As the savings amount increases, you can even borrow up to 90% of the policy’s cash value tax-free (though borrowing money reduces the policy’s death benefit and cash value).
Universal life is similar to whole life while including potentially higher earnings on the savings feature. You can also change the premium amount and withdraw cash, as well as possibly even change the face value of the policy. These also can offer a guaranteed return on cash value.
Variable Life policies generally feature fixed premiums and a flexible cash value policy. In fact, you can invest the cash value in your choice of stock, bond, or money market funding.¹ However, keep in mind that the cash value and death benefit can fluctuate, too, based on the performance of your investment choice(s). There is typically a floor for death benefits but no guarantee on cash values. Additionally, fees for these policies tend to be higher than for universal life. Finally, should you accrue investment earnings, they are tax-deferred as long as the funds remain in the insurance contract.
First-to-die life insurance insures the life of two people and pays a benefit upon the death of the first insured. This is useful for covering a mortgage or other large debt where there are multiple debtors. It is often used when funding buy-sell agreements within a closely held business.
How Much to Purchase
There is no correct amount of life insurance to purchase. Some use a formula based on income replacement, selecting 5 to 10 times your annual salary to calculate a coverage amount. Others use an amount based on personal needs and preferences.
To determine your unique income replacement need, consider that a sizable amount of your income currently goes to support your lifestyle and pay taxes. Determine your net earnings after taxes, then add your personal expenses, including housing, healthcare, food, etc. This total represents the amount that your insurance will need to replace.
When calculating income replacement for a nonworking spouse, coverage should provide for day care costs, housekeeping, and other types of care. Add those amounts to any net earnings from part-time employment.
Life insurance is an important part of a financial plan. Assessing the various options and asking the right questions can help you select a policy that provides the best coverage for you and your family.
Feel free to contact Lloyd Worth at Worth Wealth Management to help you find the right life insurance for you.
Call (303) 558-0214 or Email at Lloyd.Worth@LPL.com
¹Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Guarantees are based on the claims paying ability of the issuing company.
The cost and availability of Life Insurance depend on many factors such as age, health and amount of insurance purchased. In addition to premiums, there are contract limitations, fees, exclusions, reductions of benefits, and charges associated with policy. And if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
Variable Universal Life Insurance/Variable Life Insurance policies are subject to substantial fees and charges. Policy values will fluctuate and are subject to market risk and to possible loss of principal.
Any life insurance guarantees are contingent upon the claims-paying ability of the issuing company.
This material is for general information only and is not intended to provide specifi c advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
This material was prepared by LPL Financial, LLC