Determining the Best Life Insurance for You as Part of Financial Planning:

Many people look at purchasing life insurance as an undesirable expense. We cannot disagree. Maybe more than any other insurance product, the idea that money will be paid on the occurrence on a bad event (in the case of life insurance, a death) makes it the type of subject most people do not want to even think of.  That said, it also may be one of the more prudent “investments” one could make to protect their loved ones.

It has been said that “life insurance is for the living” and this is true even though it only pays out at death.  The reason it is for the living is that it provides an unmatched security and return in the event of an untimely death, especially if it is the breadwinner of the family that dies too soon. Along these lines, if you are single with no dependents, you likely do not need life insurance at all. Life insurance can also be an incredible tool to hedge risk in connection with business succession, loan obligations if you buy life contingent payments.

If you do have dependents, however, it is important you get life insurance and the sooner the better as life insurance gets more expensive to acquire as you get older. In determining what life insurance to get it is important to keep in mind that are generally two types: “term” vs. “permanent”. Which is better for you depends on a host of factors that are worth exploring.

Term life insurance provides a fixed death benefits and covers the insured for a fixed number of years.  Generally term life insurance runs for 10, 20 or 30 years but some companies offer more variables in terms of time periods. The nice part of term life insurance is that it is generally cheaper than permanent and it allows you to match the length of the policy to your anticipated need.

Here is a helpful example:

Say you 30 years old, married and have 2 children that are 3 and under in age.  You have a mortgage and if all goes well you intend to save for your children to attend college. On the mortgage you owe $250,000 and you hope to put away $100,000 for each child to go to school. In short, aside from day to day life expenses you have about $450,000 in “big ticket” expenses that you would like to cover in the event of your death. In this vein, and knowing your kids will be in college in approximately 15 years and graduating in around 20 years, you may elect to get a 20 year term life insurance policy that, in the event of your death, allows your surviving spouse to pay off the mortgage and provide the money for your children’s education that you had hoped to cover if you survived.

Unlike the example above, a permanent policy would not end at the end of twenty years but instead it would remain in place for as long as you paid the monthly or annual premiums. The obvious benefit here is that ultimately the policy will pay off should you decide it makes economic sense to keep paying and you can make that decision at any point in your life.

The truth is that between the two types of policies there are benefits and drawbacks and like with any long term financial planning it is often hard to predict the future. Many people as a result elect a blend of both policies in that they establish some coverage via a term policy and some via permanent policy. A skilled life insurance agent, looking at your life and finances as a whole will be able to give you advice.  Like with any important decision it is often prudent to consult with more than one agent, hear what each has to say and then make the best decision you can with the information on hand.

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Arnold Smith

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