At a recent financial industry event, behavioral finance expert Meir Statman tried to put the risk of investment losses in perspective. “The real risks in life are not the stock market,” he said. “If you want real risk, get married. And if you want more risk, have children.”1
This statement makes an important point. Although investors are usually aware of market risk, they may forget about the risk of dying and leaving loved ones without the financial support they might need. Three out of 10 U.S. households have no life insurance, and half say they need more coverage.2
Coverage You Can Keep
You may have group life insurance through work, but the value of employer-based policies is generally not sufficient to replace 100% of lost income. And if you change employers, you would typically lose the coverage. There are two basic types of individual life insurance. One or both could be appropriate to help meet your needs.
Term life insurance is generally more affordable and may be more reasonably priced than you realize. One study found that consumers tend to overestimate the cost of life insurance by as much as 300%.3
Term insurance pays a death benefit if the insured dies within the covered time period, which could range from one to 30 years. Premiums may adjust each year or remain fixed for the full term, depending on the policy. You might be able to continue coverage beyond the original term at a higher premium, or possibly convert to a permanent policy (subject to age restrictions and policy minimums) while the policy is in force.
Permanent life insurance offers lifetime protection and a guaranteed death benefit as long as you keep the policy in force by paying the premiums. Although the premium for permanent insurance is usually higher than for term insurance, it typically remains level for the rest of your life.
A portion of the permanent life insurance premium goes into a cash-value account, which accumulates on a tax-deferred basis throughout the life of the policy. This may increase the death benefit, and you may be able to borrow against the cash value during your lifetime to help pay for retirement, education, emergencies, or other needs.
Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans are also free of income tax as long as they are repaid. Loans and withdrawals from a permanent life insurance policy will reduce the policy’s cash value and death benefit. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.
As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. If a policy is surrendered prematurely, there may also be surrender charges and income tax implications.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.
1) InvestmentNews, April 29, 2013
2–3) LIMRA, 2012
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