Life insurance – it’s not sexy, but it’s necessary

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The foundation of any financial security plan begins with the proper insurance. There are three types of insurance that are necessary for a well-crafted financial security plan: life insurance, critical illness insurance and disability insurance. This post is going to deal with the most common form of insurance: life insurance.

Life insurance allows people to address the financial risks of dying too soon. If you die too soon you may still have financial obligations that will be passed on to loved ones. Some common uses of life insurance are to provide an estate for heirs, funds to provide an income to survivors or financial resources to help children pursue their education.

There are two questions that you need to answer when thinking about life insurance: How much? What kind?

How much?

The first question can only be answered by figuring how much money you need to cover final expenses. Final expenses include such things as burial expenses (they average $10,000 to $15,000), taxes due upon death, total debt and any amount you want to leave to support loved ones or a charity upon death.

Once you have the amount of life insurance that is necessary you need to ask yourself the next question: What kind?

Term or perm?

The next step for figuring out the right need for insurance is to decide which of the above needs are temporary and which are permanent. Term insurance is the most cost-effective way to insure against risk that will disappear over time. Typical uses of term insurance are to cover debt, pay for a child’s education and cover replacement income.

Term insurance provides coverage for a certain specific period of time. You can usually find term insurance policies with durations of one, five, 10 or 20 years or sometimes for a period that ends when the person turns 65 years old.

Most term policies provide an option that allows the insured to renew the policy with the same death benefit without medical questions. This is a renewable term insurance policy. Another useful option to add to a term insurance policy is a convertible option. Adding this option offers an opportunity to convert a portion of the contract or the whole contract to a permanent insurance policy.

Adding renewable and convertible options to a term policy mean that if your final expenses unexpectedly increase you will be able to increase the amount of permanent insurance you have without medical questions.

Permanent coverage

My favorite form of permanent insurance coverage is whole life insurance. With permanent coverage, as long as you pay your premiums you will always have coverage in place.

I prefer whole life insurance because it offers a cash surrender value (CSV). The policyholder can take out loans against the CSV; this isn’t an option available with term insurance contracts.

Another benefit of a whole life policy is that there are non-forfeiture options available to the policyholder. Non-forfeiture options can protect the policy from lapsing if, for some reason, you miss a payment. Again, term insurance contracts don’t provide policyholders with this option.