Are you Prepared?
By Nancy Honig- Adult Development and Aging Agent
Are You Prepared?
Or are you part of the 52% of Americans who currently have life insurance? Or, are you part of the 48% who don’t? If you’re a small business owner, parents with jobs, stay-at-home parents, retirees, single people without children, and empty nesters, you might need life insurance. Basically, you need life insurance if anyone in your family would take a financial hit if you die.
I am not here to sell life insurance. What my goal is to educate others on how to prepare financially for the unexpected in life. For most families, the need for life insurance is greatest early in life. Children are young and the financial burden of supporting the family are large and create the need for life insurance. Ironically, families with the greatest need also are those who probably can least afford the life insurance premiums. The need for life insurance usually decreases as families age and accumulate more assets and net worth.
Many people don’t get life insurance because they believe the process will be inconvenient. There are applications, you often have to have a medical exam, and no one has time for that. Also, many millennial and Gen Z individuals believe that life insurance their employer provides will meet their needs, though evidence shows that it might not be enough coverage for a family. Many also incorrectly assume the cost is too much for them to afford.
There are two primary types of life insurance: term insurance and whole or universal life insurance.
Term insurance is purchased on an annual basis and usually increases in cost as a person gets older. Term insurance pays out at death if kept in force by paying the premiums until death. All premiums are used to pay for the cost of the insurance and no cash value accumulates as a result of having the policy. You pay a year’s premium for a year’s coverage. Several varieties of term insurance are available. Term insurance is much like fire, wind, auto, and medical insurance – you pay purely for the protection with no cash value accumulation.
Whole or universal life insurance is term insurance with an accompanying savings plan built in. There are many varieties of whole life insurance, all of which combine a savings plan along with the insurance protection. The cash “savings” value buildup can be borrowed at a rate of interest specified in the policy or taken out if the policy is terminated. Premium payments are obviously higher for a given amount of whole life insurance compared to term insurance, since a portion of the premium is allocated to purchase a savings plan.
Life insurance can also be used for many functions in estate planning. The following examples are from the University of Minnesota Extension.
* Term or whole life insurance can be purchased on an individual to provide funds for the surviving spouse or children when death occurs.
* Life insurance can provide dollars that can be passed as an inheritance to the non-farm heirs. That allows farm assets to flow to farming heirs. The insurance dollars offset the farm assets and therefore all family members receive something from the estate while preserving the farm or business intact.
* Life insurance can be used to provide funds for the payment of estate taxes, estate settlement costs or debt obligations of the deceased.
* Farming partners often buy insurance on each other. This process provides funds for buying out the deceased partner’s assets if a premature death occurs. The end result is that it enables the living partner to keep the farm or business intact.
* Life insurance can be used to create or enhance an estate. It can be an estate building plan providing money to heirs.
* There are new life insurance choices that enable people to draw on the death benefit to cover long-term health care costs. This can be beneficial for someone who may not qualify for long-term care insurance but would qualify for life insurance.
If you currently don’t have life insurance do some research to see if it makes sense for you and your family. See a qualified insurance agent for information and do your due diligence in learning more. This link to Minnesota’s Extension contains additional useful information.
https://extension.umn.edu/transfer-and-estate-planning/life-insurance-and-estate-planning
