Life Insurance is an often-overlooked component of a complete financial plan. But without it even the best plan can quickly fall apart at the worst time. Therefore, it’s important we take the time to discuss the basics of life insurance.
How to Get Started
Life insurance must be purchased through a licensed insurance advisor – like KLT Wealth Management. The first step you’ll tackle together is determining how much insurance you need. Generally, you want to be able to cover debts, end-of-life expenses (funeral, taxes, etc.) plus enough to make up for your lost income. Once that is settled, you’ll discuss your options.
Types of Life Insurance
There are a few options when it comes to types of life insurance. The basic types include:
1) Term Insurance – The simplest, cheapest form of insurance. A specific amount of coverage is purchased over a specific term – ex. 10 or 20 years. After the term ends, the cost increases, usually significantly. Therefore, many people reevaluate their insurance needs with their insurance advisor near the end of their term.
Mortgage Insurance – A term policy whose sole purpose is to cover the mortgage. Unlike regular term policies, these are generally not underwritten and therefore not guaranteed to pay out.
2) Whole Life Insurance – As the name suggests, this policy covers you for life. However, since the policy will pay out at some point, it costs more. These policies usually have a cash surrender value you can cash out or borrow against in an emergency.
3) Universal Life – Universal Life (UL) is the luxury car of policies. They have the most options with the highest cost. Insurance companies set aside a portion of your payments for all policies and invest them to pay out future claims. With a UL policy, you pick the investments, participating in any growth. Growth which can go towards the policy payments or increase the death benefit.
Underwriting & Determining the Cost
Once you settle on a type of insurance, you’ll need to go through underwriting. Underwriting is the process insurance companies use to determine their risk in covering you and therefore how much they’ll charge. It involves a detailed questionnaire and possibly a visit from a nurse for bloodwork and/or further questions.
The insurance company will evaluate your results and provide you with an offer. If they deem an aspect of your file as high risk, that offer may be rated – i.e. cost more – or denied.
Examples of high-risk items:
• Hazardous job or hobby
• Health
• Family health history
• Smoking status (tobacco or marijuana)
Only after accepting an offer is a policy in place.
Life insurance can be a powerful financial tool. I just scratched the surface of the topic. We didn’t discuss the myriad of extra features available, nor the strategies that life insurance provides for dilemmas such as business succession, a family cottage, tax-efficient wealth transfer, and estate preservation. To discover how life insurance can enhance and protect your financial plan, contact KLT Wealth Management.
- Courtney Beach QAFP
