“Why would I need life insurance? I'm a stay-at-home mom. It's not like I have income to replace.” Someone asked me this recently, and it's not an uncommon sort of question.
Life insurance is a confusing and often uncomfortable topic to discuss. However, that does not diminish the importance of the role it can play in helping a grieving family.
Life insurance is important to virtually each and every member of a family—even children, for as we know, tragedies can happen. The costs of a funeral—service, music, travel for out-of-state friends and family, meals—add up quickly, sometimes reaching upwards of $10,000 or more. Imagine the shock of opening the bills, when your eyes are still puffy and red, and seeing how much you owe. That’s the kind of pain life insurance can help alleviate.
The death benefit of life insurance is usually tax-free to the beneficiaries. (This article will not include the estate tax ramifications of life insurance.) Any debt (car payment, private student loan payments, credit cards, mortgages), transfers to the estate of the deceased person and, potentially, to his or her heirs. Other accounts, such as an IRA, 401k retirement account or bank account, that may exist can pay for some but perhaps not all of that debt.
So, how can you get a life insurance policy that is the best fit for you and your family? Although there are many variations, I will define the most common.
Some companies offer group life insurance as an employment benefit. This type of insurance is the least expensive and is often paid in full by the company. The death-benefit is usually a year's salary or up to $50,000, depending on the plan. To increase that amount, you'll need to complete a questionnaire and have a blood/urine “para-med” exam with underwriting. A general rule: the healthier you are, the lower the cost.
When you retire/resign from your company, be sure to ask, “Is this policy portable? Can I take it with me and cover the costs on my own if I want to?”—because these policies are relatively cheap. Most often, however, when you leave that job, the group life insurance will stay behind.
Term life insurance is the basic individual form. Similar to auto, renters, and home insurance, if the insured dies within the period of the policy, the death benefit is paid to the beneficiaries. However, if the insured outlives the term, no benefit is paid. Riders, or extra benefits for an added premium, were created to address the question, “You mean, I paid for something for 20 years, and I get nothing back?” You can purchase a “return of premium” rider, whereby, if you outlive the term, you can be "reimbursed" for the premium paid. Each policy may differ, so be sure to inquire specifically about your policy.
A whole life insurance policy, meanwhile, accumulates cash value that is accessible during your lifetime. You could use the cash to pay for premiums in retirement or increase the death benefit your family receives. Whole life insurance typically costs more but will usually cover you up to age 90—although, with today's longer life spans, maybe even up to age 121!
Generally speaking, if you're younger than 30, a time when meeting monthly expenses can still be challenging, a term policy with a large death benefit can be a good inexpensive option. Later on, when you can afford more, you can convert to a whole life policy, as many people do. Most term policies will convert to whole life later without a medical review.
Depending on your circumstances, it may be more appropriate for you to use the cash value accumulated through your whole life policy for higher education, long-term care, or retirement—keeping in mind that any cash you receive reduces the death benefit for your family.
Consider this retirement scenario: you're receiving $2,000 a month from social security, $2,000 from your retirement savings (401k or IRA), and $2,000 from the cash value of your life insurance. Now there's a way to finance retirement you may never have contemplated.
When I started my own family, I wondered, “How will a life insurance premium possibly fit into our budget?” But then I considered, if I am not around to work, how will my family thrive without my income? Even if you're a stay-at-home mom, like the one I mentioned earlier, think about how much it would cost to hire someone to do all that you do: cooking, cleaning, helping with homework, going to school meetings, chauffeuring, grocery shopping. Life insurance proceeds can be a resource to help pay for those costs, should they ever be necessary. BC
Annie Morrison is an independent advisor representative with and securities and advisory services offered through Commonwealth Financial Network, a Registered Investment Advisor, Member FINRA/SIPC. Fixed Insurance products and services offered through CES Insurance Agency. Zuma Financial Advisors is located in Reisterstown, MD. Email her, at [email protected], or call (443) 468-3280.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There are costs and risks associated with loan and withdrawal transactions in whole life policies. These may reduce cash surrender values and the policy death benefit and could have adverse tax consequences if the policy terminates before the insured's death. Please be aware that there may be additional costs associated with any policy riders.