Back to Basics : Why Do I Need Life Insurance Pt. 1

Have you ever heard your parents talk about life insurance before? Have you ever wondered what life insurance is, or why you need it?

Before I started college, I had no real idea what insurance was. I knew that people in retail stores tried to sell you warranties to protect your high priced items from being damaged. But life insurance is very different and unique in its own way.

In this first post, I am going to speak on the following:

• What is insurance
• Why do we need Insurance

Next Time I Will Cover:

• Term Life Insurance

Life Insurance is very important for those with dependents with bills to pay

What is Life Insurance?

 According to Fidelity, a life insurance policy is a contract with an insurance company. In exchange for premiums (payments), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of the insurer's death.

There are many types of life insurance, but the first two I want to cover are the most common; Term Life Insurance and Whole Life Insurance.

 Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free

Comparing Types of Life Insurance

	Term Life Insurance	Universal Life Insurance	Whole Life Insurance
Needs it helps meet	Income replacement in a lump sum	Wealth transfer, income protection and some designs focus on tax-deferred wealth accumulation	Wealth transfer preservation and tax-deferred wealth accumulation
Protection period	Designed for a specific period (usually a number of years)	Flexible; generally, for a lifetime	For a lifetime
Cost differences	Typically less expensive than permanent	Generally more expensive than term	Generally more expensive than term
Premiums	Typically fixed	Flexible	Typically fixed
Proceeds paid to beneficiaries	Yes, generally income tax-free	Yes, generally income tax-free	Yes, generally income tax-free
Investment options	No	No2	No
May help build equity	No	Yes	Yes
Available through Fidelity	Yes, Fidelity Term Life Insurance3	Yes, Universal Life Insurance, primarily focused on death benefit protection	Not currently offered

Why Do We Need Life Insurance?

 Imagine a world where you have a spouse, two kids, with a house and car to pay for. One second you're living life, next second BAM. Your spouse passes away from a car accident. Now what?

Not only are you emotionally distressed, but now your family now has half as much money to pay for the same mortgage, car, and living expenses. Not to mention the funeral expenses and other personal liabilities that the deceased person might have had. Without sufficient savings, your family may be forced to sell their car, or move out of their home. Their entire lifestyle could change.

Now lets go back to the same situation, but lets pretend that this family was protected under a life insurance plan. By working with an agent, the family calculated how much money they would need to pay for the necessary expenses in the case of a death of a breadwinner. The insurance company was able to get the family the funds they needed within a week after the death. While the death benefit couldn’t pay for all of their expenses, the family was able to pay off their house and funeral expenses. The spouse was able to keep the house, and the family was able to keep the rest of its life intact.

Whole Life Insurance serves a six key purposes, according to Forbes and Northwestern Mutual

Here is the link if you want to check out their site

Protect you and your family from the worst so you can live your best

1.       Access to Cash (Whole Life Only)

Whole Life policies accumulated cash over time. The cash value is accessible through policy loans or withdrawals for business opportunities, education funding, retirement income, emergencies, or to pay policy premiums.  

Translation: Whole Life policies build money at a guaranteed rate set by the insurance company. This money builds over time, at a very, very slow rate. You are not going to be impressed by the returns, but the key here is that it is guaranteed by the insurance company.

2.       Asset Protection (Term and Whole Life)

Life insurance can offer a financial fall-back when needed and offset the impact of estate taxes upon your death. The death benefit also can provide surviving family members with funds they need to live comfortably and help achieve their goals.

Translation: When you die, your family is left to pay the bills. Funerals cost anywhere from $3,000 - $20,000. Transfer of assets (think cash) often takes time to process. If your family is unprepared, your savings can be wiped out from an unexpected passing. Or you might not have any money to pay for the costs. Life insurance makes sure your family remains financially stable during a time where they are emotionally unstable, and unable to make good decisions.

3.       Consistent Safe Accumulation (Whole Life Only)

Permanent life insurance cash values are guaranteed, meaning you will always have access to the assets you accumulate.

Translation: Whole Life Insurance is a low risk product for people who want safe, guaranteed money. If you have a low risk tolerance, whole life may be an option for you to accumulated assets. Again, the growth is very slow.

4.       Flexibility with Less Restriction (Whole Life Only)

You can access your accumulated cash value without restrictions that exist on other assets. For example, there are no penalties or required minimum distributions, unlike other tax-favored investments such as IRAs and 401(k) plans.

Translation: Whole Life Insurance has more flexibility that other retirement accounts. There are few other retirement accounts that offer the same tax advantages at the level of flexibility.

5.       Long Term Financial Security for You and Yours Family (Whole Life Only)

Once you have built cash value over decades, you have multiple options for accessing those funds. You can cash in the policy, convert it to an annuity for guaranteed lifetime income, keep a portion of the death benefit and access some of the cash value, or continue the policy to protect your family and leave a legacy.

Translation: Whole Life is just like wine; It gets better with age. The rate of return on the cash value portion increases each year. If you want to transfer wealth with a tax advantage and leave something for your family, you might want to consider Whole Life.

6.       Protected Insurability (Whole Life Only)

As long as premiums are paid, permanent life insurance provides coverage throughout your life, even if health or personal situations change. And buying a policy at a young age locks in insurability.

Translation: Whole life lives up to its name. It is truly meant to be a permanent insurance policy with its protection and cash Value.

This list in in no way complete, but simply the benefits that I would like to point out.

What is Term Life Insurance?

                Term life insurance of the most affordable coverage. We will talk more about Term Insurance next time…..