Many people obtain life insurance when they first have children and then forget about it, except when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs throughout your life to ensure that the assets you've accumulated are protected and to provide additional opportunities to create wealth. Keep in mind that you never want to become insurance poor--overbuying insurance can be counterproductive as well.
Estimate your needs. Before assessing your insurance needs, look at your annual income. Then tack on one-time expenses, such as a mortgage, debt, and college tuition bills. Remember to consider the amount you still need to invest to fund your retirement. Also, factor in your final costs--estate taxes, potential uninsured medical costs, and funeral expenses.
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Another factor to consider when purchasing life insurance is whether it can complement your savings efforts. Because some types of life insurance have a tax-deferred savings component, it may offer you an additional way to save for the future.
Choices, choices. Next, figure out which type of life insurance is best for you. Many younger people opt for term life insurance because it's relatively inexpensive. The policy is written for a set period of time and may be renewed. Keep in mind the premiums usually increase each time you renew.
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Mature investors may wish to consider a permanent policy, which combines life insurance coverage with a tax-deferred savings plan. Permanent policies are generally more expensive than term life insurance. You pay the premiums and receive a fixed death benefit that might potentially rise depending on the policy's cash value. Part of each premium accrues as cash value, and you may be able to borrow against the accumulated cash tax free.
In addition to the broad categories of term and permanent, there are a variety of other life insurance choices available, any of which might be appropriate for your situation.
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Estate planning. Some people use life insurance to fund an irrevocable life insurance trust to create or transfer wealth for future generations, fund estate tax liabilities, or to help manage small business succession issues. This type of trust helps preserve assets because, if drafted and executed properly, the death benefit is not subject to estate taxes. It also offers the benefit of flexibility. For example, it may be set up to allow a surviving spouse to receive regular payments from the insurance policy or to set aside assets for a minor. Drawbacks are that you lose control over the policy, insurance premiums could be expensive, and you'll most likely pay legal fees to create and maintain the trust.
Seek qualified help. Different life insurance policies and their costs, terms, and restrictions can be confusing. Consider working with a financial or insurance professional to determine which type of life insurance best fits your needs. At a minimum, include your life insurance needs whenever you review your overall financial planning needs regardless of your age.
Doug Lockwood , CFP® is a partner at Harbor Lights Financial Group, a full service wealth-management team that has been dedicated to assisting clients in the accumulation and preservation of their wealth for over eighteen years. He was recently named one of America's Top 100 Financial Advisors by Registered Rep Magazine (August 2010) based on assets under management. Lockwood is a registered representative with and securities offered and advisory services through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. For more information, go to www.hlfg.com.
The policy is subject to substantial fees and charges. Death benefit guarantees are subject to the claims-paying ability of the issuing life insurance company. Loans will reduce the policy's death benefit, cash surrender value and will have tax consequences of the policy lapses.
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