By: Matthew Lengel, CFP®
Whether you were a fan of Kobe Bryant’s or not, his sudden death made a lot of us feel the same way: vulnerable.
In a moment, we were reminded of the fragility of our lives and the small amount of control we possess over them. To think your life can be taken from you in an instant, leaving loved ones behind, is terrifying.
I had my own wake up call not too long ago. I was driving down to Denver from the Rocky Mountains after an amazing client meeting. As I wound my way down the mountain through the snow, I was thinking about how well things had gone; I knew I could bring value to these clients and that I would enjoy working with them. I couldn’t have felt better.
And then my car began to slide.
With no guardrails my car went careening off the mountain where it got caught in the trees. Somehow, I ended up walking away from this scary accident – the car, not so much. As I looked at the wreckage, all I could think was, “Thank God I have life insurance.”
Things to Consider
As a wealth manager, it’s my job to help people not just grow their money but plan for the unthinkable. A couple of questions I consider with my clients are:
- Are your loved ones adequately protected from financial hardship caused by your absence?
- Can the mortgage on the house be paid off and will your kids still be able to attend school/ college if something happened to you tomorrow?
- While protecting against the financial hardships is important, what about organization?
- Are your Wills, Powers of Attorney, and Estate documents all in good order?
- Does your spouse know who to call and where all the account numbers and assets are should something happen to you?
- Is there a plan in place of who takes care of your kids and how assets will be disbursed when you pass away?
Once we’ve talked through these initial questions, it’s time to discuss exactly what kind of protection the client might need – many people are unaware of the fact that there are choices when it comes to life insurance and it’s not a one-size-fits-all situation.
With that in mind, let’s talk about the pros and cons of the most common choices: Permanent Life Insurance and Term Life Insurance.
Permanent Life Insurance
There are a few different forms of Permanent Life Insurance, but the most common choices are Whole Life, Universal Life Insurance, and Guaranteed Universal Life Insurance.
Whole Life Insurance is billed as a savings vehicle and is best suited for people with a longer time horizon. Supporters of Whole Life Insurance will argue you are building up cash value in the policy and receiving a modest dividend of 2-4% annually that gets credited to your cash value. Some people enjoy the safety of knowing if they buy Whole Life, they’ll have coverage for their entire life and are “saving” into the policy because of the increased premium payments that help build up cash value within the policy. Additionally, these policies can be “paid up” at a specific age.
Here’s an example: If your Whole Life Insurance policy is paid up by age 65, as long as you consistently pay into the policy, you will have permanent coverage and you will no longer have to pay after age 65.
But take note: Whole Life Insurance premium payments can be very high, and a serious financial commitment must be made toward funding these policies.
Universal Life Insurance works as a much more flexible form of Whole Life. While Whole Life Insurance must have consistent funding for a level death benefit, Universal Life Insurance offers much more flexibility in paying more or less in premiums towards the policy. In times when cash is flush, you can throw extra money at the premium which can help supercharge the cash value. When money is tight you can let the cash value you built up over time help fund your premium payments.
But be careful: If too much of the cash value is used toward funding the premiums, the policy can lapse. Universal Life also doesn’t have guaranteed dividend payments and offers lower premium payments than Whole Life. You should also be aware that Universal Life premiums can fluctuate based on how the market indexes that were helping keep your insurance premiums down are performing. If markets are down, your insurance premiums will go up.
Guaranteed Universal Life Insurance looks a lot like Term Insurance which we’ll get to next. “GULs” are for people who like the concept of flexible pay options and want lower payments than Whole Life offers but want to make sure their premiums won’t change.
The negative of these Guaranteed Universal Life policies is that they most likely won’t build cash value; the strength is the consistency of coverage over your entire lifetime. This is why they resemble Term policies which cover you for a period of years (normally 20 or 30 years). But for people who want longer lasting coverage with a consistent death benefit and cheaper premiums than Whole Life, GULs can be a great place to look.
Term Insurance is about as cut and dry as it gets; it covers the insured for a set number of years and then “falls off” when coverage is completed. For example: if a 40-year-old purchased a 20-year term policy for a $1 million death benefit and died in year 21 when they were 61 years old, they would receive nothing. However, if they passed away in year 19 at age 59, they’d receive the entirety of the death benefit.
Because there are much less bells and whistles with Term Insurance, the premium cost is much cheaper. You receive basic coverage for a number of years at the cheapest possible price and the policy lapses once the term is over.
Something to keep in mind: When you are working and earning money, it’s very important to protect the projected income you will earn over your life. The draw of Term Insurance is as you near retirement you no longer need to insure future years of income…because you’ve already earned it! If that’s the case, why not find the cheapest way possible to cover the risk of dying too early and save/ invest the difference?
It’s an expense, and something that most likely you’ll never need. Trust me, I get it. But the catastrophic loss that can incur if you die early and aren’t prepared for it will send ripple effects through your family for years if not generations. That being said, HOW you cover the risk is important.
Here’s the bottom line: Studies have shown that for the vast majority of people, Term Insurance is much more viable than using Permanent Insurance as a “savings” or “investing” strategy when you factor in cost and fees.
However, for those with more sophisticated insurance needs – such as business owners and those with complicated estate plans – they can be better served by a more permanent life insurance because you can count on those death benefits in retirement.
Have questions? We’re here to help. CLICK HERE to make an appointment so we can discuss all your options and what is the best fit for you and/or your family.
Denver Private Wealth Management is an independent fee-based financial planning practice with 50+ years of experience in the financial industry. DWPM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at firstname.lastname@example.org.
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