Talking about death can be an uncomfortable conversation for anyone, but proper financial planning can ease any nerves that your family will be taken care of after you're gone.
Life insurance is often used as a way to provide financial peace of mind, but picking out the right plan can be tricky. And once you have a plan, that doesnâ€™t mean you are set for the rest of your life. As we age, our financial circumstances, challenges and beneficiaries will change, making it important to review your life insurance policy periodicallyâ€”particularly after major life events.
Ted Bernstein, founder of Life Insurance Concepts, (www.lifeinsuranceconcepts.com), says not having the right life insurance plan can leave boomers uninsured, underinsured and incorrectly insured, and he offers the following tips for boomers aiming to find the right plan.
Boomer: How do I choose between the different life insurance products and find a plan that best fits my needs?
Bernstein: There are two basic and important things to consider when determining what kind of life insurance policy to purchase. The first is duration of coverage and the second is whether you want to use the policy as an investment vehicle; one that will accumulate cash in the future if and when you no longer need the coverage.
Duration: This may be the most important element of consideration to help determine policy type. If the policy is needed for short to medium duration, typically five to 30 years, term insurance is a strong consideration because it is less expensive. If you are certain that you want coverage for as long as you are alive, term insurance has to be ruled out. Many people shoot for retirement because their fixed obligations are much higher and their income is higher. They usually purchase term insurance because it is more affordable. It is critical in this case to buy a policy with excellent conversion options, in case the coverage is needed, or wanted, for a longer duration. Often, as people get older and closer to retirement, their feelings change about duration. If coverage is needed for lifetime, a permanent form of insurance is the only solution. The annual cost is higher, but the net cost is considerably lower for permanent insurance.
Investment: Life insurance has very special tax treatment. The proceeds are income tax free (in most cases) and the cash value accumulates on a tax deferred basis. Therefore, if you can afford to pay higher premiums, you can purchase a permanent policy that will build up an investment account within the policy, or cash value. This cash value can be used for any reason by the policy owner and is often used to supplement retirement.
Boomer: What factors should be taken into consideration when deciding on the amount of life insurance one will need?
Bernstein: For personal insurance needs, the most important factor to quantify is the economic loss of the insuredâ€™s early death. Usually, a multiple of income is a good starting point. Life insurance companies will consider up to 20 times income for income replacement purposes. Another factor to consider for personal insurance is potential estate tax. For business insurance, buy-sell agreements and key-man insurance are funded with life insurance and the amounts are determined by the buy-sell agreement and the loss of the key person to the organization.
Boomer: If I purchase permanent insurance, what kinds of benefits does the policy provide while I am living, and what guarantees are associated with this product?
Bernstein: There are many varieties of permanent insurance policies. There are options that include:
â€¢ Lump-sum or installment payout
â€¢ Increasing death benefit
â€¢ Long-term care riders
â€¢ Minimal or no cash value accumulation
â€¢ High cash value accumulation
â€¢ Critical care riders
â€¢ Ability to borrow or withdraw cash value
â€¢ Tax deferred growth
â€¢ Joint life policies such as second to die and first to die
Every policy is different; none have all of these options. It is important to establish your goals and objectives which will help you determine what policy to buy. Whichever policy one buys, the one with the most flexibility is best. There are innovations, improvements and enhancements occurring on a regular basis and the life insurance buyer should be in a position to take advantage of new and better products in the future.
Boomer: I am in my 50s and have only an employer-sponsored life insurance policy, which I can convert at a much higher premium when I leave my employer. What type of individual policy should I now be looking for that would be affordable?
Bernstein: If you are healthy, the world is your oyster. Depending on duration and affordability, you should consider either term insurance or a form of permanent insurance. If lifetime coverage is wanted or needed, you can purchase a permanent policy that can accumulate cash value or one that accumulates little or no cash value, for less premium. I urge every person in this position to shop the market now and not wait until you are about to leave; protect your good health today while you have options. In most cases, a healthy person will pay less for an individual policy than a company sponsored program.
Boomer: How do you know if you are incorrectly insured?
Bernstein: There are some simple tests to help you determine if you are incorrectly insured:
â€¢ Are you aware of the Installment Life Payout Option that enables you to choose an â€œannuitizedâ€� death benefit instead of a lump-sum payout?
â€¢ Are you aware of no-load and low-load life insurance?
â€¢ Are you aware that you can finance your premiums?
â€¢ Are you aware that many policies today offer long term care and critical care options?
â€¢ Have you had your policy reviewed within the past few years?
â€¢ If you have permanent life insurance, are you aware of the different interest rate or dividend scale being credited to the cash value of your policy?