Today, I have a guest post from Chris Huntley. Enjoy
Why Life Insurance is Important
For Hanna Boykin, losing both parents in a 14-month span was devastating for her and her five siblings. Her parents had no life insurance coverage, and Hanna and her siblings didn’t have enough financial support to stay together.
…they were forced to move into different homes.
Hanna, recipient of our inaugural “Huntley Wealth Cares Scholarship,” is the perfect example of why life insurance is important.
Life insurance provides quick financial relief to the policy’s beneficiaries. It can help pay bills, pay off debts, and pay for basic burial and final expenses.
In Hanna’s case, since she had an adult sibling, life insurance could have allowed her siblings to save their home, provide for food, clothing, and to go to college.
Even if you don’t have children, you may need life insurance.
In this article, we’ll look at the most common reasons people need life insurance, as well as the types of coverage and estimated costs for each.
Why people buy life insurance
According to LIMRA, a research and consulting firm, the top three reasons why people buy life insurance are:
- To cover burial and other final expenses
- To transfer wealth or leave an inheritance
- To help replace lost income
Let’s look at each of these in a bit more detail.
#1 – To Cover Burial and Other Final Expenses
Number one is pretty straightforward.
If you are concerned about burdening your family with the expense of your funeral and burial (roughly $5,000 to $10,000), life insurance is an excellent way to mitigate that risk.
Please don’t rely on GoFundMe to pay for your final expenses. A $10,000 guaranteed universal life insurance plan, which can provide coverage to age 90, 95, 100, or 120, can be purchased for less than $20 per month in many cases.
#2 – To Transfer Wealth or Leave an Inheritance
As of 2016, individuals can leave up to $5.45 million to their loved ones without paying any federal estate taxes. But if your estate is valued higher than that, the difference is subject to a whopping 40% federal estate tax.
Life insurance can pay for some or all of any applicable taxes your estate will owe. That way, more of your money goes to your heirs instead of the government.
Life insurance can also make it easier to divvy up your assets between your heirs. For example, if you have a lot of real estate and other illiquid assets, it can be tough to split those up equally.
Life insurance can be used to equalize the shares of your estate for everyone involved.
Just make sure your life insurance benefit is paid out properly. Otherwise, it could be included in your estate and be considered taxable. Read this article to learn more.
Leaving a Nest Egg
Perhaps you simply never acquired the amount of wealth you had hoped to in life, but would like to leave your children an inheritance when you pass.
You can do so for pennies on the dollar with a permanent life insurance policy, such as whole life insurance or universal life insurance (I recommend the latter).
For example, say a 60-year-old female who earns $40,000 per year would like to leave her children $100,000.
If she’s starting with nothing, she would have to set aside $3,000 per year for 20 years and consistently earn 5% after tax, in order to save up $100,000.
… and that’s assuming she lives to age 80.
Instead, the same 60-year-old, if she’s in good health, could buy a $100,000 guaranteed universal life insurance policy to age 95 for as little as $1,200 per year!
Of course, if she went the life insurance route, it would pay out the full $100,000 at any point, even if she only lived for a few weeks after buying the policy!
#3 – To Help Replace Lost Income
If you’re the breadwinner in your home, a premature death could be financially devastating to your family.
Perhaps you have 10, 20 or 30 years left in your working career. Your family is probably counting on you to earn that money to help pay for food, the rent or mortgage, health care, and other bills.
Scott Johnson, owner of WholevsTermLifeInsurance.com, put it this way:
“An extended member of my own family passed away in middle age with not nearly enough life insurance to support his family. Life was much more difficult for the survivors. The event is one of the reasons that I got into the insurance business.”
LIMRA estimates that half of the households in America would feel the financial impact from the loss of their primary wage earner in a year or less, and 40% said they would feel the impact within 6 months!
The best way to protect your family from loss of income is with a term life insurance policy.
Term life insurance plans often cover you for 10-, 20-, 30- and even 40-year terms. They are considered short term plans, and because you’ll likely outlive a term policy, they’re very affordable.
For example, a 40-year-old man could buy a 20-year term policy with $500,000 of coverage for as little as $28 per month.
While these are the three most common reasons to buy life insurance, I believe there are two more important (commonly overlooked) reasons I’d like to cover before we close.
#1 – You have a child with special needs
It’s common to have life insurance to cover final expenses, debt and lost income. But if you have a child with special needs, the financial devastation can be so much worse if you pass away prematurely.
Bill Humphrey from TermHut.com shares this story:
“A client of mine recently passed away unexpectedly. She left behind a devastated husband and three young children, one with special needs. Her life insurance policy gave her husband the money he needed to keep their home, pay for the cost of their special needs daughter and help their family heal.”
If you have a child with special needs, consider setting up a special needs trust and set up a life insurance policy with the trust as the beneficiary. Having funds for that specific purpose can save your loved ones a lot of grief.
#2 – If you have a business
Running a business can be risky, but even a successful business can fail if a partner or key employee passes away.
One specific type of life insurance policy for businesses is called a buy-sell agreement. If you have one or more business partners, this setup arranges for the transfer of each member’s portion of ownership to the surviving partner(s).
By including life insurance in the agreement, you ensure that your heirs get fair value for your portion of the business.
Key person insurance is another option for businesses. With this policy, you can secure a death benefit to protect your business from losing someone whose death could ruin the company overnight (i.e. a key executive or a salesperson responsible for 80% of the company’s contracts).
How to get life insurance
If you’re interested in getting life insurance, I highly recommend you work with an independent life insurance agent to get a quote. Independent agents have much better access to a variety of policies than an agent who sells insurance for just one company.
In most situations, you’ll want to buy term insurance. Permanent insurance policies can be very expensive and only make sense in a few situations.
Chris Huntley is president of Huntley Wealth & Insurance Services in San Diego. He also owns eLifeTools, a site dedicated to online marketing for insurance agents. He can be reached on Twitter @mrchrishuntley.