Now more than ever, life insurance is worth considering
The COVID-19 pandemic has changed the way people think about many things — including the fragility of life. If you don’t already have a will and estate plan, you may have been thinking more about putting them in place. Same with life insurance. Here are some of the issues you need to consider.
Do you need it?
If you have others depending on you financially, your top priority is likely ensuring they’ll continue to be provided for after you’re gone. Life insurance can help achieve this goal. These policies are appealing because relatively small payments now can produce a proportionately much larger payout at death. But the fact that the return on the investment generally isn’t realized until death can also be a downside, depending on your financial situation and goals.
Not everyone needs life insurance, though. If you’re single and have no dependents, it may be less important or even unnecessary. Perhaps you’ll want just enough coverage so that your mortgage can be paid off and your home can pass unencumbered to your heirs.
High-net-worth individuals also may not need life insurance. But even if you have enough to provide for dependents, a life insurance policy could serve other purposes in your estate plan. For example, it can provide liquidity to pay estate taxes without having to sell assets that you want to keep in the family. Or, if you have a family business, it can be used to equalize inheritances for children who aren’t involved in the business without giving equal business interests to everyone.
How much coverage?
If you determine that you need life insurance, the next step is calculating how much. Is the policy intended to support your family? Tally the costs that would need to be covered, such as housing and transportation, child care, and education — and for how long. Don’t forget about funeral costs, which can easily top $7,000. Gravesite expenses typically add thousands more to this number. In addition, you may need coverage equal to the amount of your outstanding mortgage balance.
Estate tax liability is another factor. If you’re a business owner buying insurance to equalize inheritances, estimate the value of business interests going to each child active in your business. Then purchase enough coverage to provide equal inheritances to the inactive children.
Finally, identify income available from Social Security, investments, retirement savings, employer insurance policies and other sources. Insurance can help bridge gaps between expenses to be covered and available income.
Term or Perm?
Life insurance policies generally fall into two broad categories:
- Term. As the name suggests, these policies are effective for a specific period of time. If you die during the policy’s term, it pays out to the beneficiaries you’ve named. If you don’t die during the term, it doesn’t payout. Term coverage typically is much less expensive than permanent, at least while you’re relatively young and healthy. Renewal typically becomes more expensive as you get older or your health changes.
- Permanent. These policies last until you die — so long as you’ve continued paying premiums. Most permanent policies build up a cash value that you may be able to borrow against. Over time, the cash value also may reduce premium size.
(Related: Types of term life insurance: Options, features, and value)
Because premiums typically are higher for permanent insurance, consider whether the extra cost is worth the benefits. It might not be if, for example, you don’t need much life insurance after your children are grown. On the other hand, a permanent policy may make sense if you’re concerned that you could become uninsurable or if you’re providing for special-needs children.
Life is unpredictable
As we’ve sadly learned from the COVID-19 pandemic, life is unpredictable. Consider looking into life insurance while it’s on your mind.
Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC,90 Park Ave. 17th Floor, New York, NY 10016, 212.536.6000. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Lenox Advisor, Inc., its employees, or representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal tax or legal counsel.