The COVID-19 pandemic has changed the way people think about many things — including the fragility of life. If you do not already have a will and estate plan, you may have been thinking more about putting them in place. The same applies to life insurance. Here are some of the issues you should consider.
Do you need it?
If you have others depending on you financially, your top priority is likely to ensure they will continue to be provided for after you are gone. Life insurance can help achieve this goal. These policies are appealing because small payments now can produce a proportionately much larger payout at death. But the fact that the return on the investment generally is not realized until death can also be a downside, depending on your financial situation and goals.
Not everyone needs life insurance, though. If you are single and have no dependents, it may be less important or even unnecessary. Perhaps you will want just enough coverage so that your mortgage can be paid off and your home can pass unencumbered to your heirs.
High-net-worth individuals may also not need life insurance. But even if you have enough to provide for dependents, a life insurance policy could serve other purposes in your estate plan. For example, it can provide liquidity to pay estate taxes without having to sell assets that you want to keep in the family. Or, if you have a family business, it can be used to equalize inheritances for children who are not involved in the business without giving equal business interests to everyone.
How much coverage?
If you determine that you need life insurance, the next step is calculating how much. Is the policy intended to support your family? Tally the costs that would need to be covered, such as housing and transportation, child care and education — and for how long. Do not forget about funeral costs, which can easily top $7,000. Gravesite expenses typically add thousands more to this number. In addition, you may need coverage equal to the amount of your outstanding mortgage balance.
Estate tax liability is another factor. If you are a business owner buying insurance to equalize inheritances, estimate the value of business interests going to each child active in your business. Then purchase enough coverage to provide equal inheritances to the inactive children.
Finally, identify income available from Social Security, investments, retirement savings, employer insurance policies and other sources. Insurance can help bridge gaps between expenses to be covered and available income.
Term or Permanent?
Life insurance policies generally fall into two broad categories:
- Term
As the name suggests, these policies are effective for a specific period of time. If you die during the policy's term, it pays out to the beneficiaries you have named. If you do not die during the term, it does not pay out. Term coverage is usually much less expensive than permanent, at least while you are relatively young and healthy. Renewal typically becomes more expensive as you get older or your health changes. - Permanent
These policies last until you die — so long as you have continued paying premiums. Most permanent policies build up a cash value that you may be able to borrow against. Over time, the cash value also may reduce the premium size.
Because premiums typically are higher for permanent insurance, consider whether the extra cost is worth the benefits. It might not be if, for example, you do not need much life insurance after your children are grown. On the other hand, a permanent policy may make sense if you are concerned that you could become uninsurable or if you are providing for special-needs children.
Life is unpredictable
As we have all learned in a very real way during the COVID-19 pandemic, life is precious. Life insurance is just one of many tools to make sure you and your family have peace of mind when it comes to your overall financial health.
