Written by: William Cooper, CPA
Ask ten people whether you need life insurance, and you’ll likely get ten different answers. “Life insurance is a waste of money.” “Life insurance is only necessary for people with young children.” “Life insurance is a crucial part of your financial well-being.”
The truth is that there’s no one correct answer. Every individual’s situation is unique. Unless you’ve talked through your financial circumstances with a trusted advisor, it’s tough to know whether life insurance is right for you.
Types of Life Insurance
First, let’s clarify the two primary types of life insurance since each one serves different needs.
- Term life insurance is the most straightforward kind of life insurance contract. You pay a premium to the insurance company, and if you die during the policy term, the insurance company pays your stated death benefit. It’s less expensive than permanent life insurance, but you get nothing if you outlive the term.
- Permanent life insurance comes in several forms, including whole life, universal life, and variable universal life. A permanent life insurance policy doesn’t have a term. You pay the premium for many years—possibly the rest of your life—or until you’ve accumulated a specific cash value in the policy. These policies provide more options, including taking out loans, withdrawing the cash value, or using the earnings to pay the premiums. The tradeoff is higher premiums.
When Does Life Insurance Make Sense?
Let’s look at a few scenarios where carrying life insurance makes sense.
Example 1: Married couple with only one working spouse
Rob and Sara are a married couple. Sara owns a medical practice. Rob is taking a temporary break from his career in IT to care for their two young children. The family depends on Sara’s income. While Rob could return to work if anything happened to Sara, it would take some time for him to get her estate in order, find a job, and arrange childcare.
Term life insurance might be a good fit in this situation, as it would help Rob cover household expenses while he gets back on his feet.
Example 2: Owning a business with another person
Caleb and Amir start a business together, and if one were to die, become disabled, or retire, the other partner would have trouble keeping the company going.
In this situation, Caleb and Amir could each purchase a permanent life insurance policy on the other. If one partner passed away, the other would have the money to keep the business going and buy out the deceased partner’s family. If one becomes disabled or retires, the other could tap the policy’s cash value for the same purpose.
Example 3: A single parent whose children are dependent on their income
Asa is a single mother with two dependent children. If anything were to happen to her, Asa’s brother would be appointed as the children’s guardian. But Asa wants to ensure her brother has the financial resources to support her kids and send them to college.
In this case, Asa could set up a trust and name it the beneficiary on a term life insurance policy. A permanent life insurance policy could also be an option if Asa had enough income to afford the higher premiums.
Example 4: Heirs would owe estate taxes
Manuel’s estate is valued much higher than the lifetime gift and estate tax exemption amount—$12.06 million in 2022. Manuel doesn’t want his heirs to sell off a large chunk of those assets to cover federal and state estate taxes when he dies.
Manuel might consider implementing an irrevocable life insurance trust (ILIT), a trust designed to hold and own life insurance policies. He could then name the trust the owner of a life insurance policy. Upon Manuel’s death, the trustee of the ILIT would receive the death benefits and could use them to help pay estate taxes and other estate settlement costs.
The need for life insurance comes down to your personal and business situation. That’s why it’s essential to talk through your circumstances with an advisor you trust.
As a trusted advisor to our clients, we enjoy discussing our clients’ needs and helping them find the right solutions. Sometimes, the correct answer is a term life insurance, sometimes a permanent life insurance policy, and sometimes no life insurance at all.
If you need help making the best decision for yourself, your family, and your business, contact your Walter Shuffain advisor.