Column by Van Sievers • July 14, 2009
Life insurance is a basic fin ancial product for most families. If you have a spouse and children who depend on your income and you don't have extensive resources, then life insurance is a useful tool to help them pay expenses. Single people without dependents typically don't need the same amount of life insurance because they don't have as many responsibilities that will outlive them.
Often, it is hard to decide which type of life insurance meets your needs. This is where a financial planner can really help. We tell clients that insurance is not a replacement for a long-term savings or investing strategy but an additional cushion. Depending on your financial situation, life insurance and its ancillary products can have some very attractive tax characteristics as well.
Who needs life insurance: Those with dependents, either children or friends or family members with special needs, with a nonworking spouse or one with an income substantially lower than yours or those with a big mortgage that will be too overwhelming for one income to pay off.
How much is necessary: Optimally, the right amount of life insurance allows your survivors to invest the insurance payout and then draw down the account over time in a way that matches the income you would provide if you were still around. You need to figure far more than a family's basic living expenses adjusted for inflation. Also consider:
Types of life insurance: There are several basic types of life insurance.
Term: Term life insurance is the simplest kind of life insurance because it pays if death occurs during the term of the policy, which is usually from one to 30 years. There are two kinds of term life insurance: Level term means that the death benefit stays throughout the duration of the policy, and decreasing term means that the death benefit drops in one-year increments over the duration of the policy. Term policies do not build any cash value.
There are four types of permanent insurance:
Life insurance proceeds don't generally go into Uncle Sam's collection plate, which makes life insurance an attractive purchase for many individuals hoping to maximize the amount to give to heirs. Yet life insurance also can be purchased in a way to give the living policyholder tax-free income during retirement. Since we're talking about estate issues here, getting proper advice is critically important. The federal government's current estate tax ceilings are set to expire in 2010, and this fact alone could affect the attractiveness of this strategy for your situation.