Life insurance is a sensitive topic. Nobody likes to sit down to discuss their mortality, but it is a conversation every responsible person should have. Life insurance can provide financial protection in the event a family member passes. There are many types of life insurance that could be considered for various stage of life, from birth to death.
Who Needs Life Insurance?
Life insurance can be a vital piece of a solid financial plan, particularly through the building years of a family and a career. Young families often have significant financial liabilities and commitments (such as paying a mortgage, providing for young children, and even caring for elderly parents). In such circumstances, losing either spouse could be financially devastating regardless of their status as a breadwinner. After all, if a stay-at-home parent is no longer available to provide care for the children and the home, the remaining parent will likely face additional expenses and a loss of income as they navigate the caregiving gap. That is a risk that must be addressed, even if you are young and healthy.
What Do I Need to Apply for Life Insurance?
Shopping around for life insurance coverage can be daunting. There are many reputable firms that you should research, but there are also fly-by-night salespeople who are only looking to make a buck by selling you something you may or may not need. It is beneficial to work with a financial advisor who is a fiduciary. That way, you can better understand whether life insurance is a necessary and appropriate part of your overall financial plan — and that you pick the right policy for your needs. SYM Financial is here to help make the process hassle-free.
The process of applying for life insurance is straightforward. All things being equal, those who are younger and healthier tend to produce a lower risk assessment from the insurance company’s perspective, which means that their premiums may be lower. On the other hand, those who smoke, have known health conditions, or live a riskier lifestyle may warrant a higher premium. Expect questions about your personal and family medical history, as well as questions about your career and lifestyle. A skydiver may get a higher premium quote than a bookkeeper, for example.
You also must know what type of life insurance you are seeking. We will investigate that topic later on.
How Much Does Life Insurance Cost?
The cost of life insurance can vary depending on your situation. To keep things simple, let’s assume a 40-year-old healthy man is diligently shopping for term life insurance. This generally healthy person asking for a $500,000 death benefit might pay around $600 annually for a 30-year term policy. Keep in mind that this figure is an estimate. The exact premium will be based on your demographics, the type of policy you choose, your coverage options, and the length of coverage (known as the term).
How Much Life Insurance Do I Need?
A member of our SYM Financial team can help you get a sense of how much life insurance you need. However, some general rules of thumb may be helpful as a starting point. For example, it is prudent to have a policy that covers six to ten times your annual salary. The specifics will depend on your location, lifestyle, and financial commitments. Some families may opt to add another $100,000 per child or dependent. Another possible shortcut is to multiply your annual salary by the number of years left until you retire. In general, you want enough coverage to meet the needs of your family if you pass.
How Are Life Insurance Rates Calculated?
The recipe for determining your life insurance premium includes a long list of ingredients. Let’s discuss several of the critical factors.
- Coverage amount: The more coverage you desire, the higher the monthly plan premium will be. Being underinsured can potentially expose your family to financial hardship; being over-insured can limit your options for investing your available resources. Review your situation and wishes to determine the optimal coverage level.
- Term length: The longer the term, the more expensive the policy will be since there is a higher chance of death.
- Age: Your risk of death also increases the older you are, so older individuals can face higher rates.
- Health: Individuals who are in shape, who exercise, don’t smoke, and are generally healthy can benefit from lower premiums.
- Lifestyle: Items such as your job characteristics, credit score, and hobbies can impact your risk level and the cost of life insurance.
- Policy riders: Think of riders as the bells and whistles of insurance plans. The more features you tack on, the higher the policy’s cost. Be sure to review the policy with your team at SYM Financial Advisors to help ensure that you have the coverage you need — and nothing you don’t.
What Is a Life Insurance Beneficiary?
A Life Insurance Beneficiary is the person who will inherit the death benefit upon the insured’s passing. A life insurance policy could have multiple individual beneficiaries, or it could list an organization as a beneficiary. While you choose your beneficiary, keep in mind that there are rules on who you can name. In most states, you must name someone who has an insurable interest in your life – meaning they are adversely impacted from a financial point of view should you pass away. Naming a secondary beneficiary is also a good strategy, much like listing a contingent beneficiary on a 401(k) account or IRA.
Most people name their spouse and/or children as the life insurance beneficiary. Generally speaking, whoever is most dependent on your income and daily provision should inherit the death benefit. If you have minor children, consider establishing a trust where an adult fiduciary can manage the payouts according to your wishes.
Life insurance payouts are not taxable income. That’s good news for loved ones receiving benefits after your passing. During an emotional and stressful time, this is one area about which your survivors do not have to worry. Any interest received from the policy is taxable, but the amount of interest income on a policy is rarely high.
The death benefit could be paid out in a few ways. Beneficiaries can receive a lumpsum payout, but there are other methods as well (such as an installment plan and even annuities). However, these options can come with income tax impacts. Be sure to consult with a tax specialist before you make your choices.
Which Is Better: Term or Whole Life?
One of the most common questions is, “What type of life insurance plan should I buy — term or whole life?”
Determining which is better is not always easy. Term plans can be attractive for their simplicity and potentially lower costs. A comprehensive financial plan might lean on term life insurance as protection against the risk of death while investment accounts are used for growing one’s wealth. However, some situations call for whole life insurance.
Let’s define what term and whole life policies are.
Term insurance is simply life insurance that provides coverage in the form of a death benefit for a set number of years. For example, if a 40-year old buys a 30-year term policy, his coverage expires when he turns 70. Some individuals find a benefit in buying relatively inexpensive term insurance early in their careers, then gain the ability to generally self-insure later in life after children have been educated, the mortgage paid off, and a nest egg accumulated.
Whole life coverage is more complicated. It is life insurance that lasts until you die. Many individuals are drawn to the “cash value account ”feature that often comes with a whole life policy. Whole life plans can have a higher monthly premium than a simpler term policy. Some plans come with attractive features, such as not having to worry about lapsing coverage or increasing premiums as they age.
The bottom line is that each type of plan has its pros and cons. It is important to work with a financial advisor who can help you determine the best policy for your situation. SYM Financial is here to help you with this crucial piece of a solid financial plan.
How Do I Check the Financial Strength of a Life Insurance Company?
Picking the lowest-cost life insurance plan is not always the best strategy. You must also consider the financial strength and stability of the firm selling you the policy. Luckily, it is easy to find credit ratings of insurance companies. Be sure to review ratings from A.M. Best, Standard & Poor’s, Fitch, and Moody’s. SYM Financial can help you decipher the ratings and what they mean. In general, it is a good idea to buy life insurance from an established company with a reputable history and a solid financial condition.
What Are the Benefits of Working with a Finance Professional?
A financial professional who is working as a fiduciary in your best interests can go a long way toward helping you manage the risk portion of your financial plan. We can work with you to determine your life insurance needs by carefully understanding your resources, obligations, and your vision for the future. We want to help you make a data-centered decision that is not swayed by high pressure or emotion. SYM is not compensated for life insurance transactions, we serve only to help clients make the best possible financial decision keeping your whole financial picture in mind. While an insurance salesperson might also call themselves a “Financial Adviser”, they are in a significant position of conflict to be determining the best choice for you when agent compensation factors into the advice you are given.
If a life insurance strategy is recommended, your SYM Financial Advisors team can assist in identifying the source and type of coverage. When warranted, we are also pleased to make introductions to trusted insurance professionals.
Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. The example discussed above is for illustrative purposes only and does not guarantee success or a certain level of performance. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.