Insights by Cathay

Although three out of four American adults have some form of life insurance, according to Forbes, its importance can sometimes be overlooked or forgotten.

Life insurance can be more of a safeguard than you think. Having a beneficial policy can protect your business or family from financial loss if you should die while you have obligations. For example, a policy can help replace lost wages. Life insurance could also be used as an inheritance, especially because death benefit proceeds are typically not subject to federal income tax.

Let’s take a look at your life insurance options to help you discover what policy may best serve you and your family.

 

Assessing Your Options: Types of Life Insurance Policies to Choose From

Basic life insurance is defined as a type of insurance policy that pays out a specified amount of money either on the death of the policy holder or after a set period. This type of security is designed to protect you, your spouse and your children from being put in a difficult financial situation that could occur if something were to happen to you as the main monetary provider.

With so many life insurance policies to choose from, it can be difficult to determine where to start. Deciding which type of life coverage policy to purchase can be based on several factors, including your age, life stage, and budget. Insurance policy premiums increase as you age and/or develop health concerns — meaning it’s best to buy insurance when you are younger and in the prime of your health.

The most common types of life insurance options include:

Term Life

Term insurance most commonly provides the most security at the lowest upfront cost. As the name suggests, a term policy ends at a specific time in the future, meaning you’re only paying for a term of coverage. Parents of young children may purchase a 20-year term policy that provides protection until the child is an adult. Other uses for a term policy include security until a mortgage is paid off, coverage until retirement or protection while there is an outstanding loan on a business.

Whole Life

Often called “permanent life insurance,” this type of policy is designed to provide coverage throughout the policy owner’s entire life. Essentially, it doesn’t have a designated end and continues to build a cash value over a person’s life. This policy tends to cost more than term life insurance policy, but it may be beneficial for the insured person to have an extended period of protection. This style of permanent life insurance policy is also ideal for an inheritance plan for your children or grandchildren.

Universal Life

More flexible than traditional whole life insurance, this subtype of permanent life insurance allows policyholders to earn a minimum interest rate and choose a premium payment schedule. The savings component — also called cash value — can be withdrawn or borrowed against the policy as the value grows. The policy’s death benefit will be paid out to your dependents when you pass away. Universal life insurance is extremely flexible, enabling you to access your money while it increases with time.

Indexed Universal Life

Indexed universal life insurance is also a permanent life policy that allows the policy owner to choose a percentage of the coverage to be invested at a fixed rate of interest or a fluid rate. This amount is based on the performance of independent financial indexes instead of through only non-equity earned rates — the most popular being stock indexes calculated without dividends. If you play your cards correctly, this permanent coverage has the potential to pay for your premium using your built-up cash value, resulting in a policy that costs you nothing.

Variable Universal Life

Suppose you desire even more flexibility with your life policy. In that case, this type of lifelong coverage adds the opportunity to invest a portion of the premium payment as well as access cash while still alive. These sub-accounts can be invested in stocks, bonds and other investment types and function like mutual funds. Because the ROI is based on the market, variable universal life insurance has the potential for higher returns — but also losses if the market goes down — and is best for policyholders who plan to keep the policy for a longer term to ride out the market fluctuations. If you’re looking for a pliable premium policy, variable life insurance allows you to switch up your premium payment amount in the case of a down market or a rough financial season.

 

Choosing the Right Kind of Insurance for You

You may be asking yourself, “How do I make up my mind about the right life policy plan?” or, “What’s the best life insurance policy?” If these questions keep you up at night, we’re here to help you take a deep breath and relax.

A great way to choose your life insurance plan is to consider the following inquiries:

• How much coverage do you need?
  Everyone has unique requirements, meaning you need to look at your own needs to determine what life insurance policy is necessary. Start with the income you generate for your family to see what coverage amount would need to be taken care of if you could not work.
• What designated budget do you have for your coverage plan?
  To secure the policy that delivers your necessities, you may need to cut down on spending in other areas to afford a higher premium. Or, you might have to choose a different, less expensive policy.
• How long do you need coverage for?
  Ideally, you should plan for a policy to cover you until you retire, you’ve paid off any debt or other family members can cover expenses.
• What features or policy services are important to you?
  Life insurance riders — additional benefits that can be bought and added to a basic life insurance policy — can expand your plan to include more extensive coverage. For example, some riders enable you to access a portion of the death benefit while you’re still alive if you face health-related expenses, depending on the insurance product.

 

Importance of life insurance in financial planning

It’s common for people to buy life insurance when they hit a milestone — getting married, having children, purchasing real estate or investing in a business to protect that new stage of life and those involved.

New policies emerge every few years, allowing you to pay for a child’s wedding or another significant event. Those who purchase these term policies typically buy permanent insurance after the term expires.

But, to ensure you and your dependents always have what you need, it’s a good idea to look well beyond a set term. Increasingly, people understand life insurance's role in financial planning and long-term investment strategies. By knowing how much money you have secured, you can better plan ahead and make more informed financial decisions for every facet of life. 

Here are the top future-thinking benefits of investing in life insurance coverage:

Family Income Replacement

Policyholders hope to allow beneficiaries to maintain their present lifestyle and standard of living despite the loss of earnings. Legal and General America states that you can calculate this by determining the years you or your loved one’s income would need to be replaced. Then, multiply the lost annual income by that number. This will tell you how much money you’ll need to replace it. The problem is, most people don’t have that type of money saved up, which is a key reason the correct coverage amount of life insurance is essential.

Mortgage Protection

Paying a mortgage can be a burden to loved ones, so many policyholders purchase life insurance to pay off the outstanding mortgage balance. This allows family members to remain in the residence without fear of losing their homes.

Children’s Education

Higher education becomes extremely difficult to fund without the main breadwinner providing for their family. A properly structured life insurance policy may ensure that college is financially feasible or continue to pay for existing college expenses.

Retirement income for surviving spouse

Without your income, saving for retirement might be challenging for your spouse: Only 43% of Americans expect a financially comfortable retirement, according to Gallup. After a spouse’s accidental death, the concern can significantly increase. Insurance benefits can help to eliminate or close the gap needed for the surviving spouse to save for retirement.

Business Protection and Continuation

Small business owners often invest their life savings in their businesses, and life insurance can help protect that funding. A “buy/sell” agreement, funded with life insurance proceeds, can be a powerful tool to help ensure business continuity.

Estate planning

Life insurance policy benefits can be used to fund estate taxes and other liabilities upon the policyholder’s death. Life insurance might also help survivors avoid their home or business being sold to meet those obligations.

Many people want to purchase a life insurance product but don’t know where to start or how much they need in their policy. Being informed and starting to plan early are the best preventative measures. See how Cathay Wealth Management can help you find the best life insurance to meet your needs.

 

 

Related Links

• Life insurance policy review