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Life Insurance: Protecting Your Family

Importance of Life Insurance in Marriage

If something happened to you today, would your spouse or family be able to financially support themselves? Would they be able to afford the costs of a funeral? What would happen to your home?

These are all very realistic considerations when you are married and have children. When you get married and/or have children, it is important to ensure that they are taken care of financially if you die. Think of it as your family “peace of mind” plan.

Consider these elements:

  • The cost of funerals and burials are expensive…often exceeding ten thousand dollars. Who will be responsible for paying for it?
  • You are the sole financial provider for your family. How will your family survive financially? Is there a family life insurance in place? 
  • What if you have extreme debt…your family will likely be stuck with it.
  • How will your children’s expenses be covered (e.g., college, activities, etc.)?
  • If you have a mortgage and your spouse doesn’t work or make enough to cover the monthly costs. What will they do?

This is where life insurance comes in. The question that usually looms in people’s minds, though, is whether they should have it and if so, how much? 

Choosing life insurance can be complicated and is unique to an individual’s intent and situation. For instance, a 40-year-old may wish to only have a $250,000 policy for 30 years (until they are 70) and not be interested in recovering their premium at the end of the coverage period. On the other hand, another 40-year-old may wish to use the policy as a potential investment opportunity…thus receiving money back at some point in the future.

To determine what type of insurance and how much you want to insure, it is important to understand the primary types of insurance that are available. These include:

  • Whole Life (permanent)
  • Universal (permanent)
  • Term (temporary) insurance policies. 

In essence, whole life insurance involves investing a portion of your insurance premiums to eliminate annual cost increases as you get older and term life is basically a stripped down life insurance policy with no excess premiums and a defined coverage period with no payments beyond the end of the term. Universal policies are similar to Whole Life, but is different when it comes to how premiums are handled and the excess is managed.

Whole life insurance

Whole life insurance is designed to provide coverage for an individual’s entire life. This plan offers guaranteed premiums, interest rates and death benefits for the life of the policy. An advantage is that the cash value of the policy also grows on a tax-deferred basis…also often allowing the individual to make withdrawals and loans against the policy. These plans tend to be more expensive than term and universal policies.
Some advantages of whole life insurance policies include having fixed premiums, tax-deferred cash accumulation and being covered for life.

Some disadvantages of whole life insurance policies include no flexibility with premiums, the chance of your rate of return being lower than other investments and surrender charges.

Universal life insurance

Universal life insurance is designed to build on term life while adding a cash component. Unlike selecting a specific term and putting 100% of your premium towards the policy, part of the premium is placed in a cash account…an account that earns interest and accumulates on a tax-deferred basis. It also provides flexibility. For instance, if you need to temporarily stop making premium payments, as long as the cash value can cover the cost of insurance, your policy should remain in place. Although not usually as expensive as whole life, it is more expensive than term life.
Some advantages of universal life insurance policies include flexible premiums and death benefits, lifetime coverage, and pricing based upon the current assumed interest rates.

Some disadvantages of universal life insurance policies include the death benefit possibly dropping below adequate coverage when interest rates drop and increased premiums if interest rates decline.

Term life insurance

Term life insurance is just what it sounds like…it is insurance that is set for a defined period of time (or coverage). Typically, the terms are 10, 20 or 30 years. It is usually less expensive than whole and universal life insurance, but lacks the savings or investment aspect associated with permanent insurance plans. There are three primary types of term insurance including level term, annual renewable term, and decreasing term.

A level term policy has the same premium and death benefits for the entire time covered. Unlike a level term policy, annual renewable term policies are renewed annually, thus premiums can increase. The death benefits, though, remain the same. A decreasing term policy’s death benefits decrease each year, although the premium remains the same.

Some advantages of term life insurance policies include getting maximum coverage per premium and coverage periods up to 30 years.

Some disadvantages of term life insurance policies include lacking the savings feature associated with permanent insurance and no lifetime coverage.