By CHAS P. SMITH, CPA/PFS
Excerpts Published Thursday, November 20, 2014 by Lakeland Ledger
BEGIN WITH A BASIC NEEDS ANALYSIS
The amount of coverage you may need can depend on many factors including the number of dependents relying on your salary, outstanding debt, future debt, or a future need such as education for your children. You want to make sure the coverage is adequate to cover these items in the event of an unexpected death. Along with proper dollar coverage, certain riders may be added to better assist in planning for uncertainties in life. Once the coverage amount is determined the next step is to decide on buying term versus permanent insurance and what your budget can afford. Term life insurance is substantially less expensive but the death benefit expires at the end of the term, 5, 10, 20 or 30 years. Permanent insurance, often referred to as whole life, is more expensive but often provides a cash value and is often fully paid at the end of a period with no further premiums due. A qualified advisor should provide a comparison of the various of the types of coverage and the related cost of each.
CAN YOU AFFORD THE PREMIUM PAYMENTS FOR THE COVERAGE YOU NEED?
For younger families, inexpensive term enables the breadwinner to purchase substantial death benefits when the family’s income cannot afford the permanent (whole life) policy. Having some coverage is better than none, especially when you are starting early in your career. Extra coverage can always be added later to achieve the full amount necessary. Some agents may not be so keen to lower their commission they receive by recommending term over permanent insurance, but a true fiduciary will objectively review your finances and assist in making the right choice. Many academic studies have concluded that buying term versus permanent and investing the premium difference in a diversified portfolio will produce greater wealth and provide the death benefit protection that a family needs.
INSURANCE COMES WITH MANY OPTIONS (RIDERS)
Certain permanent policies will generate a cash value that can be used to cover the future premium payments or be used with a loan provision if the need arose. For some clients, this cash value is an added emergency fund, while for others, the money could be used upon termination of an old policy to fund an investment plan. An accelerated death benefit (ADB) rider is a very common addition on newer policies. Upon diagnosis of an event that drastically shortens the life of the insured, insurers will pay all or a part of the policy’s face amount in advance of death. In these cases, some of the money is used now to help offset potential and unplanned medical expenses that could deplete liquid assets. Another common rider is a waiver of premium if the insured is disabled. The premium is suspended during the disability period. Newer policies provide a long term care insurance (LTC) provision. It’s a variation of the ADB rider, but provides the owner with a benefit during life that can be used to pay LTC related expenses.
REVIEW YOUR POLICY OVER TIME
Many factors could change the need or the amount of coverage needed. Inflation could reduce buying power; the size of your family may grow or an increase in the standard of living of your family. All of these and more could require the need for added or reduced life insurance coverage. Your advisor should continually keep track of your financial situation to ensure your coverage is adequate and whether or not riders are appropriate.
Next time: Why You Shouldn’t Delay Creating an Estate Plan
Chas P. Smith, CPA/PFS is president and chief investment officer of CPS Investment Advisors.