Life insurance is necessary to cover financial obligations and protect family members in case of a loss of income in the event of a person’s death, particularly the primary breadwinner. Statistics and industry surveys show that affordability is the number one reason U.S. consumers don’t buy life insurance; however, most individuals surveyed overestimated the cost of coverage by nearly 3 times.
If the cost of a policy is the primary reason you are hesitant about purchasing life insurance, rethink your decision – it could be one of the costliest mistakes of your life.
Considerations For Couples
While most wage earners buy life insurance to cover the loss of their income, they may neglect to buy enough protection for a spouse who is not employed outside the home. This can be an expensive mistake since the spouse often provides services like child care, household maintenance, meal preparation – services that are most essential to a family but difficult to value at times.
There are also final expenses, such as funeral expenses, which can easily exceed $10,000. It is important to cover all family members who make a contribution to the household with wages or services. For young families with relatively limited budgets, even partial coverage is better than none. You can always buy in increments and add new policies as your income grows.
Estate and Financial Planning
Term life insurance is the most highly recommended by insurance experts. Because it is pure insurance and only pays out in the event of the insured person’s death, it is the most popular and cheapest form of coverage available.
However, we would be remiss not to mention other policies that offer features for saving or investing. Depending on your financial circumstances and future needs, whole, universal and variable life insurance can be important tools in financial and estate planning.
Learning about the pros and cons of different types of life insurance policies can help consumers choose the best ones to help them achieve financial goals.
Financial Instruments – Investments
Although term policies usually offer the cheapest quotes and premiums, term coverage does not offer the benefits of building cash value. Permanent life insurance policies are financial instruments which can be redeemed for cash should an unexpected emergency arise. Think of it as a mandatory savings account that appreciates in value, like an investment.
This consideration should be balanced against the lower, more affordable cost of term life insurance, especially by those with limited financial resources. Yet having a nest egg may be worth the additional cost.
Is Equity Indexed Universal Life Insurance Right For You?
Equity indexed universal life insurance is a permanent type of policy with an investment component. “Equity” refers to the cash value paid into the policy and “indexed” refers to the fact that the money is invested in a stock market index, such as the NASDAQ or S&P. An equity-indexed universal policy offers the security of fixed universal coverage with the potential for earnings found in variable policies.
Features of EIUL
Most EIUL policies have a capped annual rate of return and some are based on a participation rate stated in the fine print. If the participation rate is 75% and the index returns 10%, then the policyholder earns 7.5%. There are also policies that guarantee a minimum rate of return, but those tend to have higher premiums.
Risks and Returns
In the nine years since equity indexed policies have been introduced, they have outperformed standard universal contracts. While these policies pay higher rates, they do not involve the same risk level as variable life protection. Many financial advisors consider equity indexed contracts to be a hybrid of whole and variable life insurance with the best features of both.
Unlike investing whole life insurance, which does not report the amount of fees and charges to the policyholder, universal life policies are subject to SEC regulations and must report all charges. However, universal life may have more fees than whole insurance since there are charges associated with the investments (management and fund fees), yet the actual rates are usually lower. Even in a less than stellar economy, rates on EIUL have been higher than those of whole life insurance due to the strong rebound of the stock market.
While we’ve discussed a number of insurance options, there is only one strategy that makes sense for a majority of Americans – buying term life insurance. A 30 year term policy purchased in your late 20s or early 30s should last you to retirement, when coverage needs are usually declining. Nevertheless, everyone’s financial circumstances and long-term goals are different, so consult a financial advisor to discuss the best insurance for your family.
Do you have life insurance?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.