How much life insurance do I need?

 

Financial planning experts weigh in on the basics of life insurance, how it works and when it’s a wise investment.

   

     

“Should I get life insurance?”

This isn’t a question I asked myself until quite recently when my husband and I started discussing how to best prepare for having kids, and what sort of financial goals we want to set for ourselves now that we’re really ready to do the family thing.

Naturally, I googled “life insurance”. The wealth of information (crowded with mysterious money jargon) that poured out at me resulted in an instant headache. “I’ll just come back to this some other time,” I told myself.

Just a week later, that time, I’m declaring, is now, because I’m very good at procrastinating important financial decisions and, as my paltry retirement fund reveals, delaying these decisions hasn’t worked in my favor.

I turned to financial planning experts to learn the basics of life insurance, how it works and when it’s a wise investment.

There are two types of life insurance plans: Term and Permanent

“There are two basic kinds, term and permanent,” says Sean Scaturro, director of life and health insurance advice at the United Services Automobile Association (USAA).

“Term insurance is great for paying for the things you need to have paid for if you were to die during the next 20 to 30 years (the term of the policy),” he says. “Permanent insurance, like whole life or universal life, will pay for the things you want to have taken care of when you die, like funeral costs or leaving an inheritance. Permanent insurance will also gain cash value, similar to equity in a home that you can access over time.

The pros and cons of perm and term: ‘There is no right answer

“Term policies are cost-effective and can be specifically tailored to when you need the coverage,” says Brad Goldsberry, insurance solution finder at Farmers Insurance. “[They] give you the ability to ladder your coverage for when you need it the most. For instance, the coverage you have to send your kids to college doesn’t need to be in place forever. This allows you to only pay for the coverage you need at a certain time. This idea can be applied to everything, how long is your mortgage? When do you plan on retiring? How many years of income need to be replaced?”

The biggest downside to term policies, Goldsberry highlights, is that they are not in place forever.

“If the insured gets sick and becomes no longer insurable, they will not be able to add additional coverage,” he says. “Also, the cost of term policies only gets more expensive as we age. A common mistake we see is people waiting until the end of their term policy to get another one. Instead of taking out a new policy as early as they can, they wait and end up paying more for the same amount of coverage down the line.”

Another downer about term policies is that if you go to renew after the term, the premium will shoot up.

“For term policies, you buy a set number of years, say 10. In year 11, the premium goes up to reflect the true cost,” says Mike D’Andrea, founder at D’Andrea Financial. This increase can be 2–3x the original premium you were paying over the 10-year level period.”

Permanent policies are, as the name indicates, permanent, meaning they span your whole life.

“A huge plus to these permanent policies is that they have cash value, they grow tax-free and that money can be borrowed from the policy tax-free after a certain number of years,” says Goldsberry. “For higher-income earners, this can be an effective way to have tax-free income in retirement and provide them with great tax diversification. Another plus to these policies is that they can be used to pass down an inheritance essentially tax-free. When someone passes away, they might have to pay some kind of estate tax on their assets, setting up a permanent policy to relieve this burden is an effective way to pass down what you have worked so hard for.”

It sounds like permanent insurance is the best way to go, but of course, this is the more expensive option.

“The downside is that they are not cheap,” notes Goldsberry. “They are in place forever and will eventually payout while a term policy has the chance of never paying out. The returns of a life insurance policy are highly debated in the industry, some financial planners swear by the tax advantages while many say, ‘buy a term and invest the rest.’ There is no right answer and everyone’s situation is different.”

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Reference: Better by Today

Date of Publication: November 25, 2018, 12:20PST

Source: https://www.nbcnews.com/better/pop-culture/how-much-life-insurance-do-i-need-ncna935811#anchor-