A 6-PART FINANCIAL WELLNESS SERIES
Traveling is as much about the ability to pursue dreams as it is about boarding passes and bucket lists. At Griots Republic, we understand that building a secure financial base is only one aspect of ensuring that we reach those dreams. Stay tuned and please leave comments or questions for our 6 part financial wellness series.
Under our last article about estate planning, a crucial tool in preparing your finances and your family for the inevitable is life insurance. What is life insurance? Simply put, it is a policy you can purchase that your family can use to cover funeral costs, mortgage payments, college tuition, debt and other expenses after you’re gone. Sounds simple enough, right? Well, there are some options to consider, and in this article, we will explain the details and debunk some misconceptions.
There are two different types of life insurance: Term & Whole (also called Permanent Insurance). The easiest way to think about these is in the names themselves.
With Term Life insurance, the benefit will only be paid if you meet your demise prematurely or within the predetermined length of time of the policy. Most policies are granted with 10, 20, or 30-year terms. If you think about it, the working class (us non-rich folks) mainly work from 21 years of age until 66 (45 years on average). At the same time, we pay into social security, and a 401k or Individual Retirement Account (IRA) to provide us with income after retirement. So, like any other insurance, you are protecting your assets and your family’s wealth in case you die before you are no longer in the workforce. But if this does happen, the policyholder will pay the agreed amount to your designated beneficiary (which should be your living revocable trust, remember?)
Term Life insurance has low monthly premiums and is pretty easy to setup. According to NerdWallet.com, when shopping for Term Life insurance you should:
- Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early.
- Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.
Ideally, your family’s need for life insurance will end around the time the term expires: The presumption is that your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net.
What is Whole Life insurance?
Think about it this way: You will be paying for this your WHOLE LIFE! Although this form of Life Insurance provides lifelong (permanent) coverage, the premiums are usually significantly higher. Whole Life also provides a cash value (separate from the benefit amount) that you can invest in different funds so it can grow. Since you are paying so much in premiums, it becomes another investment option like an IRA, Heath Savings Account (HSA), or Money Market account. The difference is that the benefits of those accounts are used in life where the benefit of this is in death. (Also, all of these accounts should have the Pay on Death benefit paid to your Living Revocable Trust.)
Now, you can borrow money against a Whole Life policy at any time for cash. But if you do you will reduce your death benefit and if you surrender the policy, you’ll no longer have coverage. Depending on the one you choose, some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed, you should ask if the policy pays dividends when setting it up.
According to ThinkAdvisor.com, most Americans don’t have enough life insurance, and many don’t have any at all. The most common reason given is that they have competing financial priorities. 44 percent of U.S. households had individual life insurance as of 2010 — a 50-year low. In 1960, 72 percent of Americans owned individual life insurance. In 1992, 55 percent owned it. 70 percent of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if a primary wage earner were to die today. 4 in 10 households with children under 18 say they would immediately have trouble meeting everyday living expenses.
I know that some of you may be thinking: I am single, and I don’t have any children, do I need life insurance? The answer is: Sometimes. According to a 2011 survey from USAA Life Insurance, the number of single people buying life insurance increased 10 percent compared to a year earlier. Part of the increase in life insurance purchases can be attributed to the economic recovery following the most recent recession. Buying insurance when you are young and healthy is more affordable (cheaper) than when you get older. There are also now more single households than married households, and people stay single longer. Single people are more likely to experience major life events, which often lead to the purchase of life insurance, including having children and buying a home. There’s one more factor, too: Single people are often responsible for parents or grandparents, and they might want to make sure those dependents will still be cared for should anything happen.
There are many factors to consider when looking at your overall financial wellness and estate planning. Whichever type of Life Insurance you choose to go with, rest assured in knowing that having some is better than having none at all. You will be protecting your spouse, children, and family’s (or any future dependents) wealth and helping to decrease the overall wealth gap in the country.