The COVID-19 pandemic reminded Americans how fragile life is. Applications for life insurance policies in the United States increased 4 percent in 2020, according to the MIB Life Index. If you’re thinking about purchasing life insurance coverage, here’s some basic information to help you make an informed decision.
Death can occur when we least expect it. Life insurance provides financial support for loved ones left behind after a death from illness, accident or natural causes. Dependents or other named beneficiaries receive the proceeds of the policy, which are intended to compensate for lost income.
Clearly, breadwinners should have life insurance to protect those who depend upon their income. But life insurance is also appropriate for others. A child with a life insurance policy is guaranteed coverage into adulthood, regardless of pre-existing health conditions. For families with young children, if a non-income-earning spouse pre-deceases the working spouse, life insurance proceeds can help cover the cost of childcare. Single people without dependents should consider purchasing a policy that covers funeral costs and any outstanding debts, so these responsibilities are not left to family members.
Types of life insurance
There are two main types of life insurance:
• Term life insurance — Term life insurance covers a set period of time, such as 10, 20 or 30 years. If the policyholder dies during the term of the policy, the named beneficiaries receive the death benefit. There is no residual benefit to this type of policy if the term expires and the policyholder is still living. All the money paid over the years of the term belongs to the life insurance company. On the plus side, term policies are less expensive than whole policies. Many workers choose a term policy during their working years to provide income protection to their dependents.
• Whole life insurance — Whole life insurance offers permanent, lifelong coverage. It does not end at a certain age. Once you have a whole life policy, the state of your health does not impact what you pay (whereas with a term policy, if you want to extend your coverage, your health and age determine how much more you pay each month and whether you even qualify for continued coverage). A portion of your whole life premium is invested and grows in a tax-deferred account, managed by the life insurance company, and accumulates what is called “cash value.”
Whole life is more expensive than a term life policy, but the policyholder retains the option to borrow money against the cash value or cash in the policy. High net worth individuals sometimes use this type of policy to offset estate taxes for their heirs. Families with a special needs child may prefer this type of policy for the guaranteed income it can provide. Others simply prefer whole life for the flexibility it offers as both an investment and life insurance product.
Life insurance is an important aspect of a comprehensive overall financial plan. Your financial advisor can help you review your life insurance options and select a suitable level of coverage. Buying while you are young and healthy can help you lock in a more affordable rate.
MICHAEL W. K. YEE, CFP,® CFS,® CLTC, CRPC®
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Michael W. K. Yee, CFP,® CFS,® CLTC, CRPC,® is a Private Wealth Advisor, Certified Financial Planner™ practitioner with Ameriprise Financial Services Inc. in Honolulu, Hawai‘i. He specializes in fee-based financial planning and asset management strategies, and has been in practice for 36 years. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Investment advisory products and services are made available through Ameriprise Financial Services LLC., a registered investment advisor.
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