You could say life insurance is the one type of insurance you’re guaranteed to use.
But death benefits aren’t the only reason to invest in life insurance, and there are a lot of options—and we mean a LOT—to consider.
What is life insurance?
Simply put, a life insurance policy provides a lump-sum payment to beneficiaries upon the insured person’s death. However, some policies may also help cover long-term care needs.
Life insurance is most commonly used to cover funeral and other death-related costs, but the payment can help provide peace of mind to beneficiaries and survivors.
“It’s a means to protect a risk, whether that risk is a loss of income stream from a loved one passing away or a risk of estate tax,” said Jon Herz, a Regional Manager for First Interstate Wealth Management.
Why life insurance?
There are many benefits to investing in a life insurance policy. The most obvious include covering funeral and/or burial costs and replacing lost income, but life insurance is also worth considering for these reasons:
- Paying off debt. If you share a mortgage or other debt with a spouse or family member, your death could leave survivors with a large debt. A large enough life insurance policy to cover any outstanding debts means you won’t be leaving loved ones with the added stress of loans they can’t pay off.
- Paying for college. If you have children or grandchildren, you may want to leave enough money to help pay for their higher education. Or, if you or your partner have student loan debt, a life insurance policy can help cover those costs if there is a death in the family.
- Business planning. If you own a business, you’ll want to ensure it can continue on after you’re gone. Even more important, if you have a business partner, a life insurance policy can ensure he or she isn’t left trying to cover business costs and debts alone.
- Estate planning. When someone passes away, their heirs could face estate and inheritance taxes on any assets they receive. If you’re worried about your loved ones getting hit with a big tax bill, a properly structured life insurance policy can help cover these added costs.
- Insurability. Purchasing life insurance early in a child’s life guarantees the child has some coverage and, depending on the type of policy, can potentially buy more as an adult. If a child develops a medical problem, he or she might have trouble obtaining life insurance as an adult.
Types of Life Insurance
While there are many varieties of life insurance that can be configured for your individual needs, there are four main product types—term, permanent, hybrid, and group insurance.
- Term life insurance provides coverage for a set time period, or term, typically 10, 20, or 30 years. If the insured dies during the policy’s term, the beneficiaries are paid the value of the policy. If the policy expires before the insured’s death, there is no payout. A term life policy is usually the least expensive and is often used by younger families. “If you exceed the term, the money goes away. It’s almost like renting,” Herz said.
- Permanent life insurance is a policy that typically doesn’t expire; it stays with the insured until he or she dies. Additionally, there is usually a cash value within the policy. Some permanent insurance allows for an option to withdraw cash from the policy or potentially create a tax-free income stream.
- A hybrid policy is life insurance that can also be used to cover the costs of long-term care, such as a nursing home, assisted-living facility, or hospice care. If long-term care is needed, the policy will pay benefits toward those expenses. The benefit is paid in an amount chosen when the policy is purchased—per day, week, or month. If long-term care is never needed, the policy works much like a permanent life insurance policy, with a death benefit paid when the insured person dies.
- Group insurance provides coverage to a group of members, typically employees of a company or members of an organization. Many employers offer life insurance as a benefit and help cover the costs of the policy. However, this form of life insurance stays with the company, not the insured. If you leave that company or organization, you lose the insurance.
Choosing Life Insurance
Herz recommends working with an advisor to best understand your individual needs and choose a policy that makes sense for you and your family.
“Don’t do it on your own. Most people are underinsured because life insurance is not something they’re super familiar with,” Herz said. “Working with an advisor is important because they’re going to ask questions that will open up where there are gaps, what needs to be filled, and why.”
If you choose not to work with an advisor, take the time to do your research—on the type of insurance you need and the quality of the insurance company.
How much life insurance is enough?
It depends, Herz said. “Every family is different, and every family has different risks and different needs,” he said.
For example, when it comes to life insurance for his family, Herz doesn’t want to leave a financial burden for his wife if something happens to him. He owns a mix of permanent life insurance and term life—to cover the years until he and his wife are retired.
“It’s a personal preference. I bought life insurance when I got married because I now had a new risk. And then when I had kids, I upped it even more.”
Life insurance can provide peace of mind for the insured and any beneficiaries, as well as supplement long-term financial plans.
“There are so many great things that can be done with life insurance,” Herz said. “People have this idea that it’s only used to benefit somebody if you pass, and I see it as so much bigger than that because it can be used to reach specific goals you have in your planning.”