Life Insurance. Two simple words that carry so many emotions. People will go to great lengths to avoid a discussion on life insurance. And who can blame them? Purchasing life insurance is like planning a party for someone that you do not get to attend. So why do we purchase life insurance? We do it because we love someone more than ourselves. Life Insurance is the last love letter we write to our loved ones. It is the foundation of a family’s protection. I learned long ago not to prejudge when it comes to talking to people about life insurance. I have seen couples who I never dreamed would own life insurance have their family properly protected. But I have also experienced high income professionals that wake up everyday with zero protection in place. So when it comes to life insurance, I live by a simple motto, “Every family deserves to be protected.”
The need for life insurance never goes away. Now I know you would expect the life insurance guy to say that so let me say it this way. The need for life insurance never goes away, but the goals change. Understanding how to leverage life insurance during the different time periods of your life will allow you to better understand the need for life insurance. Our lives are basically divided into two sections: Pre-Retirement and Post-Retirement. Let’s explore how life insurance is utilized in each section.
During the pre-retirement stage, our main goal is to generate income. We wake up everyday and go to work to provide an income for our family. We do our best to live within a budget and begin saving money for retirement. So our life insurance goal during this stage is income replacement. How would our family survive if for some reason mom or dad were no longer around to generate an income? For example, let’s say a 30 year old mother of two is the primary income earner for the family. She has a good job making $100,000 a year. If she were to pass away at the age of 30, her family could miss out on 30 years of earned income. How many families could overcome a potential $3,000,000 shortfall? So what is the best way to protect her income? Term Insurance.
Term Life Insurance: A term life policy is in force for a specific time and has a face value (death benefit) that you specify when you purchase the policy. In the event that you die within the specified term, the insurance company pays the face amount of the policy as a death benefit to your beneficiaries tax free.
Term Insurance is by far the best way to protect an income. You need coverage and you need a lot of it. In our example above, a healthy 30 yr old female could purchase a 20 year $2,000,000 term policy for around $600.00 a year. She would be able to protect 20 years of her income for her family by using less than 1% of her annual income. Far too often I see insurance agents try to sell expensive permanent life insurance like whole life or universal life for younger clients. Sadly, these agents are usually only concerned with putting commissions in their pocket. Term insurance is the most economical way to cover the exposure of income replacement.
I would consider life insurance during the post-retirement stage to be just as important as during pre-retirement. This is a concept many have a hard time understanding. Clients have a good nest egg saved, the kids are married and the mortgage is paid. Why would you need life insurance now? Well, the need is no longer for income replacement but the need has shifted to asset protection. The largest exposure faced in retirement is “what happens if I get sick?” How fast will I bleed my savings and what will I leave behind for the surviving spouse?
Long-Term Care (LTC) Insurance: LTC is a permanent insurance product that helps pay for the cost of long-term care when a person can no longer perform two of the six activities of daily living.
Long-Term Care is a vital asset that should be included in every client’s retirement portfolio. About 70% of individuals over the age of 65 will require at least some type of long-term care services during their lifetime. Unfortunately, many clients seek coverage once it is needed and that is when it is too late. The thought process with LTC is to leverage dimes for dollars. You want to trade a dime for a dollar today so that one day when you need care, you are not trading dollar for dollar. By law, Medicare will not pay for LTC services. Two types of long-term care policies are offered:
- Traditional – Traditional LTC polices are paid on a continual basis. They provide a defined daily benefit of care. These polices have been around for several years and work well. The disadvantage to traditional LTC is paying premiums for many years and passing away without using the benefit. It is a use it or lose it benefit.
- Hybrid Life Insurance with LTC Rider – Many clients are moving away from traditional LTC policies to life insurance policies that include a LTC Rider. These products are life insurance policies first, that allow you to access the death benefit each month to pay for your care. Your premium dollars are leveraged two ways so even if you were to die someone is still going to receive a death benefit.
Hopefully, you have a better understanding of how life insurance is used during the different periods of your life. While generating income for your family, term insurance is vital to making sure life would continue as normal if you were no longer around. When it is time to enjoy retirement, LTC or permanent life insurance is needed to protect those hard earned dollars you have saved. At Life Insurance with Jason, we place the importance on planning. Please reach out and let us help design the right plan for you.