Learn More About Your Life Insurance Options
Life insurance is one of the founding principles of any Financial Plan! If you have debt, dependents, a business, a unique skill, or you plan to accumulate and preserve wealth… Life insurance is a MUST! There are many different types of life insurance and an equal amount of opinions on which type to buy! If you need help understanding which product would work best for you, please give us a call. We would be happy to assist you!
Types of Life Insurance:
Accidental Death (AD&D)
This type of insurance only pays in the event you are killed in an accident. If you die of normal causes, disease, or an illness… It DOES NOT pay! It is very limited and specific, so it is very cheap! If you have AD&D as your only form of life insurance, you need to buy something in addition to this that will protect you and your family!
Term Life Insurance
Term insurance is purchased for a specified term; 5 years, 10 years, 15 years, 20 years, and 30 years! It is touted as the "low cost" solution but it depends on the situation. Renting a house is generally cheaper in the beginning but you own nothing! People are living longer than ever before and unfortunately, term insurance expires about the time many need coverage leaving them without protection. "One size fits all" doesn't work with pants, and it is not a good fit for life insurance… but there is definitely a place for this type of insurance.
Universal Life combines low‑cost insurance with a savings component. It is very flexible but does not generally guarantee the death benefit unless you pay a higher premium. Universal Life is flexible, so people generally put as little into their policies as they can. This is called under‑funding and can result in a loss of your guaranteed death benefit and higher premiums in the future. We recommend over‑funding as the savings component is "tax‑favored" and generally outperforms the savings rate by up to 5 times (even with the cost of insurance). Universal life can protect your cash values, but it DOES NOT guarantee your premiums. It is not a "one size fits all," but it's a lot like having an elastic waistband!
Indexed Universal Life
Indexed Universal Life also combines low-cost insurance with a savings component. It is very flexible but does not generally guarantee the death benefit unless you pay a higher premium. The savings component is attached to an index, like the S&P 500 or the Russell 2000. However, your money is not invested directly in the market, so there is no risk of loss! If the index goes up in a given 12 month period, you get a percentage of the gain... and if the index goes down or is negative for the year, no interest is credited to the account for that period. The savings component is "tax-favored" and generally outperforms savings rates by up to 15 times (even with the cost of insurance) if you are over‑funding. It is very flexible and can be customized to fit many different scenarios. However, it is not a "one size fits all" either, but could be compared to wearing elastic jeans or spandex!
Variable Universal Life
Variable Universal Life IS subject to market gains and losses. It is flexible but does not generally guarantee the death benefit unless you pay a higher premium. These life policies are NOT considered safe! Variable Life generally has higher fees because you receive all of the market gains and losses, so the insurance company charges management fees similar to a mutual fund. Most variable policies tout income guarantees to attract investors. Variable Universal Life is also flexible, so many investors put as little into their policies as possible. This is called under‑funding and can be extremely devastating to cash values when combined with market losses. Over‑funding is a must with Variable Universal Life! We would only recommend this for the savvy investor, and M3 Wealth does not sell Variable Universal Life products! Variable Universal Life can camouflage higher insurance costs and enhance performance if inflated returns are used in the projections. This is definitely not a "one size fits all" but could be likened to wearing oversized pants!
Whole Life provides tiered insurance costs and a fixed savings component. If the insurance company you are working with is a mutual company they will pay dividends in addition to your interest. The policy is less flexible but it has very strong guarantees on the death benefit and premiums. There is absolutely no risk of loss! This is as safe as it gets! These types of insurance policies generally work best for insureds who have a steady and substantial income. Whole Life is designed to be steady and safe, but it is not as flexible as Universal Life insurance! This type of insurance can be likened to wearing a custom‑tailored pair of pants… not everyone can "pull this off" but when the fit is right it is a great financial planning tool.
How much Life Insurance do I need?
DEBT: Add up all of your debt balances: $250,000.
INCOME NEED: I need $60,000 to live on annually.
Use 3% return to calculate income - $2,000,000 (X) 3% = $60,000 a year of annual income
AMOUNT OF INSURANCE: In this case $2,250,000
*(Remember, this does not consider college savings, inflation or your potential tax liability)
Buy/Sell insurance protects the families of each business partner and each of the business partners in the event of an untimely death. The business partners agree on a starting valuation for the business and life insurance is purchased on each of the partners to buy out the surviving spouse in the event of premature death. No dickering with the surviving spouse on the value, no scrambling to find a loan to buy them out, it's simple and easy!
Key‑Person or Key‑Man:
This type of insurance protects businesses that have a "key" employee. A person or persons who may be responsible for the majority of the business's sales, or someone who possesses the majority of the business's intellectual property. It is a way for the business to protect and replace a key individual in the event of their disability or untimely death. This is a great way to guarantee "business continuation" should something unforeseen happen to a "key" employee!
Things to condsider when buying Life Insurance:
- Find the right agent. Make sure life insurance fits into your financial plan.
- Longevity - The carrier must be there to pay your claim.
- Check the companies ratings - What is their COMDEX score?
- Compare performance using the same interest rates.
- Building a self‑completing plan takes Life & Disability Insurance.
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