Saving for retirement is often emphasized as a top priority by financial pundits and ordinary people alike. While everyone's journey starts somewhere, many people turn to an advisor for help. Then, once the financial planning process begins, advisors will often stress how black swan events can derail plans.
Often overlooked, black swan events are unpredictable but unequivocally alter our trajectories.
Now, most people think of these events as significant, far-reaching ones, such as the Pandemic Plummet. While such events fit the definition well, personal black swan events frequently remain neglected, and thus, are today's focus as we discuss life insurance.
Planning for a happy future is a rite of passage, but so is ensuring your loved ones can survive without you. After all, how would your spouse feel if you passed away unexpectedly in your peak income-earning years? How would that affect their ability to retire and maintain the lifestyle your family was accustomed to living? While morbid to consider, end-of-plan discussions are a must when considering our financial futures.
Life insurance is a tool, just like an IRA or emergency fund, in your financial arsenal. However, unlike savings accounts, life insurance is a backup in case things go awry. So, how much do you need?
Isn't that the million-dollar question! Generally, a good rule of thumb is that you should have enough coverage to pay off all debts, plus fund any future goals that otherwise would have been provided for by you, such as college tuition or mortgage payments. If you own a business, life insurance is essential for succession planning. Everyone's situation is different, though, so think about what is important to you and talk to your advisor to determine the most appropriate amount.
Once you bring up the conversation, inevitably, you will be asked about what type of life insurance you want. For those new to the subject, life insurance comes in two main variants: term and permanent.
Term policies are temporary insurance that lasts for a specific period and works similarly to car insurance. Thus, you only use term insurance if you pass away. Permanent life insurance, however, works differently. Because permanent policies are guaranteed to payout - everyone passes someday - they do not function solely as insurance. Instead, they serve as insurance, an estate planning tool, and a cash reserve accessible during your lifetime.
Permanent life insurance has many names - whole, universal, and variable life - but all offer the same premise of lifelong coverage. For most people, term policies will suffice since they cost less and allow you to focus on funding your other financial goals. Nonetheless, for some, permanent life insurance can be appealing, despite its higher premiums.
Commonly, permanent life insurance is an estate planning tool for families that want to pass on generational wealth or assets that otherwise would be impacted by the estate tax.
How? Because insurance proceeds are non-taxable, the proceeds can be applied to satisfy any tax burdens at the federal and state levels.
If we haven't discussed whether or not you have the proper life insurance coverage in the past year, I suggest we set up a time to talk soon. Insurance is an essential tool that covers you and your loved ones under various scenarios.
Remember: So long as your premiums don't lapse, you'll be thankful you let it last.