If you have people in your life who rely on you, or loved ones you want to ensure are taken care of should anything happen to you, life insurance is a worthwhile investment. Some people might question the value of peace of mind. It’s true, you’ll see no benefit of a life insurance policy while you’re alive – but that’s not the point of these policies.
Life insurance is traditionally intended to provide financial security for the people you love in the event of your untimely passing. However, modern life insurance options offer a diverse array of features and benefits to further enhance the value of the product.
How Life Insurance Works
Like all insurance polices, life insurance represents a contract between you and the insurance company. As long as you make premium payments, the insurance company guarantees a death benefit that will be paid to your beneficiaries in the event you die. Death benefits can be used to cover funeral costs, outstanding debts, funds for the education of children or replace lost income.
There are two primary types of life insurance:
- Term life insurance is active for a set time period (usually 10, 20 or 30 years). If the policyholder passes away in the term, the beneficiaries named in the policy receive the death benefit stipulated in the policy.
- Permanent life insurance, such as whole or universal life, covers you for your entire life and often includes a cash value component that grows over time.
The Purposes of Life Insurance
Protecting loved ones is fundamentally the primary goal of life insurance. There are, however, some ancillary purposes some retirement savers may appreciate, like charitable giving via life insurance. In broad terms, life insurance is ideal for:
- Income Replacement: At its most basic and important level, life insurance is vitally important for parents or wage-earning spouses to protect the quality of life and future of immediate family or dependents in the case of their passing. These policies are particularly important for parents with young children or households that rely on a single wage earner.
- Debt Elimination: Repaying the outstanding debts of a family member who died can be a significant burden for some families. Life insurance can help pay off these debts, including things like car loans, credit cards or a mortgage.
- Final Expenses: Life insurance can cover funeral and burial costs, probate fees and other final expenses, eliminating the need for your family to dig into savings or sell assets to cover these costs.
- Estate Planning: In certain circumstances, life insurance can be a strategic tool in estate planning. The death benefit can provide liquidity to pay estate taxes, ensuring that heirs do not need to sell off assets to cover these costs.
- Charitable Contributions: If philanthropy is important to you, life insurance can be an avenue to leave a significant gift to a charity upon your death, by naming the charity as a beneficiary.
When Should You Get Life Insurance?
Virtually every adult can potentially benefit from life insurance, even ones who don’t have dependents. A life insurance policy can help families defray the cost of unexpected end-of-life expenses or ensure parents, siblings or any other beneficiaries or charities you care about receive funds in the event of your passing. However, the clearest and most obvious answer is you should invest in life insurance as soon as there are people who will suffer financially in the event of your untimely death.
Parents and adult children caring for older parents should strongly consider purchasing adequate life insurance for income replacement, debt elimination purposes and end-of-life expenses. Some types of policies make more sense at certain times in your life. For example, young, healthy workers in their 20s and 30s can receive generous term life policies with extremely low premiums.
If you’re interested in permanent life insurance as a part of your retirement plan, the earlier you start the longer the cash value of the policy will grow. You should also reexamine your life insurance situation after major life milestones, like having a child, purchasing a home, starting a new business or getting married.
Do You Have Questions About Life Insurance and How It Can Complement Your Retirement Savings Plan?
The team at Fullerton Financial Planning have extensive experience advising retirees and retirement savers on a variety of investment and savings vehicles – including life insurance. If you have questions about policies or are interested to learn how permanent life insurance can be incorporated into your plan, call our retirement planners at (623) 974-0300.
