As you know, there are only two sure things in life – death and taxes. I am addressing what can be done to ease the financial burden of your heirs at your death (and maybe some options before death as well).
Your estate will require cash, which you may or may not have. For lawyers, accountants and final expenses, if you are not a ward of the state, even things as simple as a funeral can run into five figures.
Life insurance sales personnel have one of the most difficult sales jobs. Rejection rates are high. People are reluctant to discuss death. (If you have read this far, kudos to you!)
Although there are a lot of variations, there are two major types of life insurance - permanent and term. Permanent life insurance can last “forever” and term lasts for a pre-determined period of time, usually 10, 15 or 20 years. You may have heard of whole life, but it is only one type of permanent insurance. Other types include universal life, index life, and variable life.
Premiums for all life insurance policies (other than many group life plans), are based on your age, health and amount of coverage.
Permanent life premiums are typically paid for life. They cannot be changed by the insurance company due to a change in your health.
Permanent insurance is more expensive than term insurance because it builds up cash surrender value. This value is like equity in your home. Although not a huge amount in the beginning, you can use some or all of it to make your premium payments or any other purpose you choose.
Term life covers a specific period of time. If you pass within the time frame, the policy pays. If however, you pass after the term, it does not pay.
Term is less expensive than permanent life, which is why many people prefer it. Or maybe you need to cover a large amount that might go away later in life, or your estate may have more money in the future. For example, you may end up inheriting money from your parents’ estate. Assuming they predecease you, maybe you will not need the life insurance “forever.”
However, when the term is ending, a renewal or extension is based on your health at that moment. You cannot predict if your health will be the same five or ten years from now, but very likely it will not be the same.
Fortunately most term policies have a built in conversion option that allows you to change some, or all, of your term policy to a permanent policy without any medical qualifications., or even a conversion to whole life. This is particularly useful if your health changes and the new insurance will be very expensive or not available.
A word on group life. Since the insurer is not evaluating your health specifically, rates can be higher than if you purchased it on your own assuming good health. (I am sure you receive solicitations in the mail.) And if your employer is offering it as a benefit, even better. If you change or lose your employment, the term life typically terminates.
As you prepare your financial plan (hopefully at a young age), please keep a life insurance professional on your team. There are many good ones out there.
A 1975 graduate of the Wharton School at the University of Pennsylvania, Harvey enjoyed a 20+ year career in commercial banking, exercising his “golden parachute” in 1996. In his volunteer life, he is a past chair of the Small Business Banking Unit of the American Bankers Association, Easter Seal Society of New Jersey, the SAAGNY Foundation, PPAF EXPO, and Supplier Committee of PPAI. He is also a past President of PPAF. PPAI awarded him the H. Ted Olson Humanitarian Award in 2013.