Annual premiums for permanent life policies may be much higher than premiums for term life policies, but without key tax advantages. Image: Teacher Photo/Shutterstock.com
By: FEDweek StaffHow much life insurance coverage do you need? Rather than follow a pre-set formula, you should evaluate your personal situation and purchase adequate insurance while not buying unnecessary coverage. Your life insurance should be able to provide funds for:
* Any immediate needs your family may have at the time of death, such as medical expenses, funeral costs and estate taxes or probate.
* Expenses your family may incur during a readjustment period, such as time for a surviving spouse to find a job.
* Income your family would need to maintain their standard of living.
* Your children’s education and your spouse’s retirement.
* Paying off a mortgage or other personal and business debts.
Most people are well-served by term life insurance, which will provide you with the maximum coverage for the lowest cost.
Which type of life insurance do you need?
Basic coverage is known as term life insurance, which will be in force for a specific time period. Often, this coverage is appropriate for a finite need: you might want family protection until your children are living independently.
The alternative to term life insurance, permanent life insurance, includes an investment account known as the cash value. As permanent insurance, this coverage might be necessary for an ongoing need, such as estate liquidity.
Annual premiums for permanent life policies may be much higher than premiums for term life policies. However, permanent life offers additional tax advantages. Over long holding periods, permanent life policies may turn out to be excellent investments. Who should own the policy? If access to a policy’s cash value is important, you may want to own it outright. On the other hand, there may be excellent reasons for holding a life insurance policy in an irrevocable trust. In trust, the policy proceeds may not be subject to estate tax, creditors, or squandering.
As you age, your need for life insurance changes, too. When you were building a family, with young dependents, you were well-advised to sign up for ample protection, in case of your untimely death. As you grew older and your children went out on their own, such safeguards no longer were vital. Moreover, you may have accumulated sufficient assets to provide for your surviving spouse. Now, you might be paying substantial premiums for coverage you no longer desire.
Life insurance choices include:
1. You can keep your policy in force. If you still have loved ones who depend on you or if there will be a need for liquidity after your death, you can continue to make premium payments.
2. You can downsize the policy. Depending on your specific circumstances, you may be able to pay lower premiums–or no further premiums–for a smaller death benefit.
3. You can sell your policy. Alternatively, you can offer your existing insurance policy to the highest bidder. Today, there are many eager buyers so a broad secondary market for life insurance policies is developing.
Generally, buyers are most interested in policies insuring the life of someone over age 75. Therefore, this might be a good opportunity for a parent or grandparent who has a policy that’s no longer needed. An experienced life insurance agent may be able match interested buyers with serious bidders.
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