How Does My Debt, Future Plans Affect My Life Insurance Needs? -

How Does My Debt, Future Plans Affect My Life Insurance Needs?


Don’t own any life insurance?  You’re not alone.  According to the J.D. Power 2015 U.S. Household Insurance study, only 44 percent of consumers own an individual life insurance policy.  A popular reason for buying a life insurance policy is for the purpose of extinguishing your debts at the time of your death in order to relieve your loved ones of those burdens.  Auto loans, mortgage, credit card debts, IOU’s to friends –add ‘em all up.  You might even want to add another $15,000 to cover the cost of a funeral, just to be safe.  Life insurance rates are now at all-time lows, so this is an ideal time to lock-in a low life insurance rate.

One choice you’ll have is deciding upon an initial rate guarantee.  Another is whether to buy term life for a certain period of time (i.e. 10 to 30 years or a lifetime policy that offers level coverage and premiums for life).  If you opt for the lifetime rate guarantee, expect to pay much more.  The most popular choice for paying off debts is term life.  Term life is highly flexible in that you can choose your initial rate guarantee period – usually 5, 10, 15, 20, 25 and 30 years.  Financial planners would recommend choosing the rate guarantee that tracks with your longest debt, which is usually the number of years left on one’s mortgage.

If you are wealthy and have anticipated federal and state estate taxes that will be payable, then only the lifetime policies will do because the estate tax is triggered by the last to die in a marriage or estate situation.  In that case, coverage is needed on each spouse and the amount purchased should be the estimated amount of the estate tax.  Buying insurance to cover this anticipated liability can keep your heirs from having to sell, say, a family business.

Under the standard term life policy, death is covered by any cause at any time in any place, with the exception of suicide within the first two policy years (one year in some states).  The proceeds of a term life policy go to your beneficiary free of all income taxes to them, which is often a wonderful surprise.  Term life payouts are designed to occur in one lump sum, but can also happen over time at the election of the beneficiary.  If the beneficiary elects a payout over time, the life insurer will usually tack on interest payments, which can be another nice surprise to the beneficiary.

If you buy a new term life policy, make sure to buy one that includes early payout of the policy death benefit, should you become chronically or critically ill.  These early payout features are new in the marketplace, are very consumer-driven in their intent, and often cost nothing or just a little more – making them well worth the money.  A life insurance policy for a family can take on a whole new importance once you own the kind that can payout ahead of death, should a serious illness occur.  The riders are often called “living benefit riders” or “accelerated death benefit” riders, but make sure to read the rider before you buy.  And buy only the kind that pays out in the event of a defined chronic or critical illness.  Obviously, the death benefit of the policy then reduces once an early payout occurs, but this is a great feature to have.

Another feature of most term life policies is that they are, at the end of the initial rate guarantee period, renewable on a year-to-year basis without an exam – albeit at much higher rates.  This renewable feature can be a godsend for those who are terminally ill and thus not insurable in the standard markets.

The 2015 J.D. survey also revealed that only 17 percent of life insurance policyholders have subsequent interactions with their agent, so it’s a good idea to diary yourself for a yearly life insurance checkup in case your agent forgets about you.

An individual’s debt, including mortgage loans and anticipated estate tax liabilities, are all important considerations when choosing a life insurance policy that will leave one’s survivors financially stable.

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