September is Life Insurance Awareness Month. Of course, most people are aware that insurance exists, but many people are unaware of the wide range of policy types and their uses. Life Insurance Awareness Month is a great opportunity to learn about coverage options and review your own needs.
Why Purchase Life Insurance?
Many people purchase life insurance because they want to provide for their loved ones no matter what. Life insurance can replace lost income, allowing a family to stay in their home and maintain their way of life. Life insurance can also cover hospital bills, funeral expenses, and other end-of-life expenses, shielding loved ones from financial burden.
These are important uses of life insurance – but they’re not the only uses. Here are four more ways life insurance can work double-duty:
- Estate planning. Life insurance benefits aren’t typically subject to income tax. This makes life insurance a practical way to transfer wealth from one generation to the next.
- Wealth building. Some life insurance policies can also help cover major expenses that occur during the insured’s lifetime. This is because many permanent life insurance policies, including whole life insurance and universal life insurance, can accrue a cash value over time.
- Living benefits. Riders may provide additional living benefits that allow the policyholder to use the death benefit while living to cover certain costs like long-term care or chronic illness expenses.
- Business succession. Business owners can use life insurance as a tool to fund buy-sell agreements between partners or to protect the business against the financial risk of losing a key person.
What Type of Life Insurance Policy Do You Need?
When purchasing life insurance, there’s a lot to consider. Here are just a few policy options you’ll want to discuss with your agent:
- Term vs. Permanent: A term life insurance policy provides a death benefit and is designed to cover a set period of time, although you may be able to extend coverage or convert your policy to a permanent life insurance policy after this period ends. A permanent life insurance policy never expires, and it may accrue a cash value.
- Underwriting Requirements: Some life insurance policies require extensive medical underwriting. This means you might need to undergo an exam. Other life insurance policies offer streamlined application processes with no exam needed.=
- Benefit Amount: Deciding on the benefit amount can be one of the most difficult aspects of purchasing coverage. Don’t just guess. Calculate your needs. Decide what you need your policy to cover, for example, income replacement, mortgage payoff, college tuition, etc. You can subtract other funds that you have available for these costs. This will tell you how much coverage you need.
- Riders: You may be able to obtain additional benefits through the use of riders. For example, a children’s rider provides a small benefit if the insured’s child passes away, and this benefit can help with unexpected funeral costs or other bills. A critical illness rider can cover medical costs if the insured becomes seriously ill, while a long-term care rider can cover the cost of nursing care.
How Often Should You Update Your Coverage?
Like other types of insurance, life insurance should be reviewed and updated at least once a year. As your life evolves, so do your life insurance needs. When you marry, divorce, have a child, change jobs or buy a home, it’s important to review your coverage. If your income, assets or financial responsibilities have increased, you may need more protection. You may also need to update your beneficiaries.
Life insurance can be much more than a death benefit. With smart planning, it can be used in conjunction with other savings and investment tools to achieve your financial goals.