What Types of Life Insurance Are Available
Why Do You Need Life Insurance?
People often equate life insurance with tragedy and death. In truth, life insurance is for the living. Without it, the sudden demise of a key breadwinner could leave a family stranded without the resources to maintain their lifestyle - or even to retain their home.
Financial experts generally consider life insurance to be a cornerstone of sound financial planning for two key reasons. First, it can be a cost-effective way to provide for your loved ones after your loved ones after you are gone. And second, life insurance can be an important tool in the following ways:
- Income replacement - For most people,their most valuable economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they could no longer rely on your income. A life insurance policy can also help supplement retirement income, which be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.
- Pay outstanding debts and long-term obligations - Without life insurance, your loved ones must shoulder burial costs, credit card debts, and medical expenses not covered by health insurance using out-of-pocket funds. The policy's death benefit might also be used to pay off a mortgage, supplement retirement savings, or fund college tuition.
- Estate planning - The proceeds of a life insurance policy can be earmarked to pay estate taxes so that your heirs will not have to liquidate other assets to do so.
- Charitable contributions - If you have a favorite charity, you can designate some or all of the proceeds from your life insurance to go to this organization.
How Much Life Insurance Do You Need?
Determining how much life insurance coverage you need is a four-step process:
Step 1: Determine Your Family's Short-Term Needs
Short-term needs are financial obligations and/or expenses arising within six months of death. Examples of short-term needs include expenses you pay now such as:
- Loan balances (automobile loans, etc)
- Outstanding credit balances (credit cards, revolving lines of credit, etc)
- Mortgages (first and second mortgage, home-equity loans, lines of credit)
Add to these current expenses any death-related expenses that must be paid in the short term:
- Funeral expenses
- Final medical costs
- Estate settlement costs and probate
- Estate taxes due
- Charitable bequests you would like to make upon your death
Step 2: Determine Long-Term Needs
In addition to covering your survivors' short term needs, some level of monthly income will be needed to maintain their current standard of living and meet financial goals such as saving for retirement and funding college for children. The value of these future obligations is discounted back to present value amounts to provide a dollar amount that, if invested, could provide an adequate income stream to fund all of your long-term goals.
Step 3: Calculate Your Total Available Resources
By this point, you should have a good idea of your family's total cash needs in the event of your untimely death. With any luck, you have already begun to set money aside to cover some of these costs. Other resources that may be available to your family include pensions, annuities, funds from retirement accounts, employer-provided life insurance, and Social Security.
The Social Security program offers benefits to survivors under age 17, and those whose spouses were receiving retirement income from Social Security can also count on survivorship benefits.
The total value of these future resources is discounted back to present value amounts. This gives us a single dollar amount that we can use to offset your total needs discussed in step 2.
Step 4: Provide Funds to Cover a Shortfall
In most cases, comparing total needs to total resources will result in a shortfall. That's where life insurance comes in. Without it, your survivors will be left with the choice of either finding or creating additional resources (such as having the surviving spouse return to work) or experience a decline in the quality of their lifestyle.
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What Types of Life Insurance Are Available?
Gates-Cole offers both term and permanent life insurance policies. Our insurance professionals will work with you to tailor your coverage to best meet your needs.
Annual Renewable Term - Annually renewable term or “ART” (sometimes called yearly renewable term, or “YRT”), is an example of a term insurance policy that has a constant face value and premiums that are adjusted upwards each year to reflect the increasing probability of your death in any given year.
Decreasing Term - Decreasing term insurance refers to a type of annual renewable term life insurance policy with a decreasing death benefit (face amount) and level premiums. Decreasing term is ideal for insuring a liability that is gradually being paid off, like a home mortgage.
Level Term - If you prefer, you may select a “level term” policy which guarantees that you will pay the same annual premium for a set number of years (usually 5, 10, 15 or 20) for the same amount of death benefit. The longer the guaranteed term, the greater the initial premium, but the longer the premium stays fixed. In most cases, if you know you will your term insurance for an extended period of time, a level term policy will prove less costly than an annual renewable term policy.