Why you might want to consider life insurance.
Life insurance is a great option for many people who have family members or relatives who rely on them for financial support. It is also an easy vehicle for covering end of life expenses that you don't want to burden your loved ones with. If you have a spouse, children or care for a parent these are all catalysts for considering life insurance. Additionally, if you just want a simple policy to cover funeral expenses this is a great tool for that as well.
What should I get insurance to cover?
There is no one right answer for everyone when it comes to what a person might want insurance to cover because we all have our own values and relationship with money. However, some common financial responsibilities people get life insurance for might be covering your portion of the household expenses after you pass, mortgage payments, car payments, a child's future education expenses, childcare expenses in general, funeral expenses and the list goes on. While each person starts with their own values and what financial responsibilities they want to insure for, they will need to create a list of what is important to them to get covered, for how long it should be covered and what the dollar amount of coverage should be.
What types of insurance policies make sense?
There are various types of life insurance policies you may want to consider. There are term policies, whole life policies and universal policies.
- Term life policies cover a fixed period of time for a set amount of money. This is a great option for insurable interests that have a known time horizon.
- Universal life insurance policies are often for people who value the flexibility of changing their premiums and their coverage amounts. This may be a good option for people with highly dynamic circumstances.
- Whole life insurance policies are in force for the life of the insured so long as the premiums are paid in accordance with the policy. A great use case for this is to pay for extra expenses your heirs may encounter should you pass such as taxes on your estate, leaving inheritances to your heirs, or covering costs associated with your passing.
When deciding which type of policy is the right one for you, you may want to consult with a financial advisor so you don't end up paying too much money for coverage you don't need or worse yet being under-insured and leaving your family without protection.
How do I choose an insurance provider?
The most important factor to consider when choosing an insurance provider is their financial solvency. Unlike bank deposits, life insurance is NOT BACKED by the federal government. You want to make sure that your insurance provider has a sterling credit score and is able to service their liabilities when it matters most. Another important consideration is their level of customer service. In many instances when life insurance is needed you will want a company that makes the process as friendly and easy as possible for your family to navigate.
You ought to also consider the price point for the insurance you are paying for. I strongly encourage anyone seeking coverage to get multiple quotes from various insurance reps and companies to make certain they are not paying too much for their coverage. Different insurance companies have proprietary calculations they use as well as potentially different datasets they have access to which inform their decision on what premiums they charge. As such, you should anticipate that you get quotes at different price points from different insurance companies and reps.
What about SGLI and VGLI?
SGLI is one benefit that has historically had immense value and I don't expect that will change anytime soon. According to the DoD, SGLI is a low-cost term life insurance product available to eligible service members. I tend to agree with them as the premiums are low and there is no doubt that at some point you must leave service and therefore your policy has a maximum length. As of 2023, the premium for a SGLI policy is six cents for every thousand dollars of coverage. For the current maximum coverage of $500,000 that equates to a premium of $30 per month plus an additional $1 per month for traumatic injury protection.
VGLI is a benefit available to veterans thinking about transitioning out of the service, however, there is a narrow window to apply for benefits. In most cases you will need to apply for benefits within 1 year and 120 days of leaving the service. With veterans the premiums go up fairly dramatically and are based on age instead of a flat fee. For example, a service member who is under the age of 29 and wants the full $500,000 of coverage can expect their premiums to increase by a little over 14%. While this is a lot in percentage terms it is still nominally a very small amount (Learn more here about VGLI).
Another thing to keep in mind is that you have the right to convert your VGLI policy into a private policy. This is helpful in the event you find a more competitive insurance policy from an approved vendor.
Life Insurance Strategies.
There are a number of tried-and-true insurance strategies that can be beneficial based on your personal circumstances. In this article I will focus on two strategies that many people find helpful.
The first strategy is to ladder or stack term life insurance policies to coincide with your financial obligations. Term policies are often used because they are a fraction of the cost of other insurance policies and have a naturally occurring end date.
The idea behind this is that at different points in your life you may have different financial obligations and so you may want some portion of your policies to expire when those financial obligations naturally run their course.
A great example of this is people with children. If you have a child then you probably expect them to move out and get a job or go to school. After they graduate and start working you likely won't need to assist them as much as you had before and therefore if you were to pass it would have less of an impact on their financial lives. Another example is to have another policy that runs the course of your mortgage. Your mortgage payment is likely a big portion of your family's budget and as such many people like to buy insurance policies that allow them to pay off the debt on their house should they pass so their spouse or kids don't have to worry about that obligation.
Another strategy that gets a lot of attention is geared more towards wealthy individuals and used to help facilitate the transfer of wealth from one generation to the next. This strategy involves using an irrevocable life insurance trust. In this case the trust purchases the policy and is the beneficiary resulting in the benefit being excluded from the estate. When the you pass the trust transfers and the death benefits from the life insurance policy are not taxable for purposes of income taxes.
The fact that insurance policy benefits are not considered as part of an estate in some cases and also are not taxed by the federal government gives them some intrinsic advantages for people who are likely to break the threshold for the estate tax exemption when they pass away. While the threshold for estate tax exemption is set to adjust it is usually the people who are multi-millionaires who benefit from this because some portion of their estate is no longer exempt from taxes after they pass.
Disclaimer: Consult a professional for tax and financial planning advice. This article should not be construed as tax advice or financial advice. This blog post may be helpful but there a number of pitfalls when executing tax strategies and you should consult with a professional before attempting to implement any such strategy. All photos are from open source domains.