Life insurance is one of the best products available to protect your family, home, and assets. If you have $100,000 in the bank, then you don’t need a $100,000 life insurance policy. The problem is, most people don’t have $100,000 in the bank…or $250,000, or $500,000, or $1,000,000.
Life insurance is intended to transfer risk to somebody other than your family or business. As an example: upon your death, your family would need $250,000 to pay off your home, your vehicles, your credit card debts, and replace your income for two years. You could pay $37 a month (hypothetical rate) for $250,000 in life insurance protection.
As an extreme example, after being approved, you could have the policy in place for one month, and if you die during that month, the insurance company would pay your beneficiaries $250,000; you would have only paid $37 in premiums.
Don’t think this happens? You’re wrong.
An agent we know recently helped a client with an $89,000 policy with a premium of $25 a month. 19 days after the insurance policy went into place, the insured suffered an aortic aneurysm and died immediately.
The ensured only paid $25, and within 30 days, the insurance companies had to write the beneficiary a check for $89,000. This money was intended to pay off the home mortgage.
For $25, the surviving spouse owned their home free and clear…which is why this couple purchased life insurance.
How should you buy life insurance?
Some “experts” say you should not buy life insurance for specific financial reasons. One example would be mortgage protection. LINK LINK LINK LINK TO BMP
All life insurance policies are purchased for specific needs. You may want a $250,000 to pay off your home, pay off vehicles, pay off credit cards, and replace income for two years. If this can be accomplished through one $250,000 policy…. perfect!
Maybe you insure your home first. If you have a mortgage balance of $125,000, you could get a life insurance policy valued at $125,000. As you pay your home loan down, it will free up more money within the life insurance policy to pay off other debts.
After paying on your home for ten years, you may owe $75,000 on your home. When you die, your life insurance beneficiaries will receive a check for $125,000 to pay off your home loan of $75,000. The extra $50,000 ($125,000 minus $75,000 to pay off the house) could pay off other debts, such as automobile loans or credit card bills.
So, even though you bought a life insurance policy for a specific need, in this case, it helps cover multiple needs over the years as your loan balance goes down.
If you have a $125,000 mortgage protection policy in place, and you needed more coverage in the coming years, you could purchase additional life insurance.
The advantage of purchasing life insurance in this way is that you get life insurance in place immediately for your most pressing needs, and you get the cheapest rates when you are younger and healthier.
As you add more life insurance a few years later, your rates will be a little bit higher (as you are now a few years older), but because you have the mortgage protected at $125,000, you may only need another $75,000-$100,000 to cover your financial needs.
So, although the “experts” say you should just buy one big policy and be done with it, our budgets rarely allow this. With that in mind, here are areas where life insurance may be purchased for specific purposes:
When you die, your ability to produce income dies with you. If you’re married or have children, they will need the money you would have earned as income when you are alive. Since your employer will not continue to pay your family your wages after your death, life insurance is the perfect solution for replacing income after a loved one dies.
If you make $65,000 a year and want your spouse to have replacement income for approximately 5 years, a $300,000 life insurance policy would be appropriate. If you made $75,000 a year and wanted income replacement for your spouse for two years, a $150,000 life insurance policy would be appropriate.
Some “experts” will tell you that you should take your current income and multiply it by 10 to come up with the ideal amount of life insurance for your spouse and family. If you make $75,000 a year, you may not be able to afford $750,000 worth of life insurance. You may, however, be able to afford it in the future as your income increases, but not right now.
Here, you could start with $250,000 in life insurance, and in five or six years, purchase another $250,000. As your income grows, your finances will allow you to buy more life insurance.
The dream most couples have is to own their home free and clear. When a death occurs in a family, this dream can turn into a nightmare for the surviving spouse. Not only has the surviving spouse lost a beloved spouse, but the home will be at risk due to foreclosure or bankruptcy when a spouse’s income disappears.
Your family will likely have to sell your home, move to a new area, move to new schools, move away from friends, and move to other living arrangements.
This often means renting an apartment or moving in with other family members. This is preventable with an affordable life insurance policy intended to protect your home mortgage.
What you do in life is magnified in death. When you die and your home is paid for with a life insurance policy, it will affect your family for generations to come. When you die and your home is not paid for with a life insurance policy, your family loses your home, and it will affect your family for generations to come.
Pay Off Debts
It’s an unfortunate fact that many people have credit card debt. The average individual credit card debt in America is just over $8,000. If you are married and your spouse dies, you will be solely responsible for paying back any accumulated credit card debt.
Having a portion of your life insurance proceeds dedicated to paying off credit card debt is a smart thing to do.
Allowing your spouse and family to have a clean slate after your death and have no credit card debt is a gift that will last generations.
Pay Off Automobiles
With cars and trucks ranging in price from $25,000-$75,000, an automobile loan is no laughing matter when a loved one passes away unexpectedly.
We need our vehicles to get to work, to haul the kids around, to get groceries, visit friends, take vacations, and more. If you have made no provisions for your auto to be paid for when you die, your family will likely lose their vehicles.
Having a portion of your life insurance policy dedicated to paying off existing car loans makes sense for many families. Most family members would not like to purchase an older used car after your death just to get out from underneath an automobile loan.
Pay Estate Taxes
In many states, depending on your income, you will have to pay estate taxes when a loved one dies. Life insurance helps protect assets. Many people have had to sell an asset of the deceased family member to pay the taxes due upon death.
This was not what the person intended when they named you in their will as the beneficiary for this asset.
Having life insurance funds available to pay any necessary taxes solves this problem.
To have money to send to family and other countries
We help immigrants in foreign nationals get insurance in the United States. Many people we help have family in other countries for whom they provide financial support.
Having an affordable life insurance plan in place not only assures you can protect your family, but your extended family in other countries, too. Life insurance can be one of the greatest gifts you purchase for your loved ones.
Many immigrants and foreign nationals we work with are just starting their lives in the United States and have little disposable income.
If their children go to college, often, it has to be financed with college loans. And in even more cases, the parents must co-sign for these college loans. As a cosigner, the parents will be responsible for all debts should the college student die with a loan balance.
Having a separate life insurance policy in place is a wise decision if your children have college loans and you are a cosigner.
Many plans are available with low premiums if you purchase these policies before your child turns 18. Most policies are issued with minimal underwriting from the insurance company.
Most policies are transferable when the child turns 25. Most policies allow for the child to increase the premium with no evidence of insurability.
Paying For College
For many adults, having their children go to college is the ultimate dream. If you are alive and earning income, you may be able to pay for your child’s education. If you die before your children get to college, your ability to produce income and pay for their college dies with you.
The average tuition for an in-state college is around $24,000 per year; a moderately priced private college is around $49,000 per year. For many families, the dream of sending their children to college is out of reach financially.
A $100,000 life insurance policy would fund your child’s education for a full four years at an in-state college.
Most adults looking at college life insurance are younger, so the life insurance plans are affordable.
If you had a $100,000 college life insurance plan in place and your child was already two years into school when you died, the insurance policy would still pay $100,000.
Your child could use the extra $50,000 to pay for the remaining two years of college and have an additional $50,000 to spend on whatever else they needed.
They could use the remaining $50,000 as a down payment on a home, to buy a new car, to take a vacation trip of a lifetime, or whatever else they needed.
Immigrants to the United States are one of the hardest working groups of people we know. Most are entrepreneurial and are not afraid of long hours and hard work. Many do not have the financial means to start a business without taking out a business loan.
Example: you take out a $75,000 loan to purchase a truck, tools and equipment, and office equipment to start a painting company.
If you had $75,000 in the bank, you wouldn’t need a $75,000 loan to start your business. Because you don’t have $75,000 in the bank, you take out a loan to start your business. The bank will be concerned that, if you pass away, they will not get repaid.
Here, the bank may require you to get a $75,000 life insurance policy, with them named as a primary beneficiary.
If you died right away after taking the loan, the bank would get the entire $75,000 life insurance policy proceeds. If in five years, if you paid the loan down to $50,000, the bank would get the $50,000 to pay off the business loan. Your family, as the contingent or secondary beneficiaries, would get the remaining $25,000 of the life insurance policy.
Business Continuation Plans
If you own a business, its ability to survive is threatened after your death. Usually, you are the key person that drives the success of the business. If your family wants the business to continue, they will have to find somebody to run the business in your absence.
This will take time and money.
Cross Buy Sell Agreement
Many immigrants to the United States start businesses with family, friends, or business colleagues. If there are two owners of the company and one owner dies, the surviving business owner may want to buy out the other portion of the business.
This can be a smart move, as the other business owner’s family members may not be ideal business operating partners going forward. This could severely impact the success of the business.
By having an affordable life insurance policy in place that would allow either business owner to buy out the other owner’s business interest should one of them die solves this problem.
The surviving business owner would then have 100% ownership in the business, following the death of the other business owner.
Many individuals would like to help their favorite charity in a big way in life, but cannot do so. If you wanted to make a big difference in a bunch of people’s lives, you could purchase a life insurance policy on yourself and have your favorite charity named as the beneficiary.
If you took out a $100,000 life insurance policy and had your charity named as a beneficiary, when you passed away, your charity would get a check for $100,000; imagine the impact this would have on the lives your favorite charity helps!
Even if you don’t take out a dedicated life insurance policy to help a charity, you can still allocate a portion of your current life insurance proceeds to help your charity.
Example: You purchase a $250,000 life insurance policy and will $50,000 of your life insurance proceeds to help your favorite charity upon your death.
The unfortunate reality in America is that most people don’t die quickly. Many deaths result from sickness or illness that can generate thousands, if not hundreds of thousands, of dollars in medical bills.
Although we don’t recommend having a life insurance policy specifically for medical expenses incurred in death, we think it’s smart to have a portion of any life insurance policy that could be used in case of this.
Life insurance policies are flexible, and your family can use the money for whatever purposes they want, once they get the check from the life insurance company.
Medical expenses can cripple a family’s financial future after your death. By planning beforehand, you can minimize the risk to your family.
The average funeral these days is costing $8000-$10,000. When a loved one dies, the remaining family is left scrambling, trying to figure out how to pay funeral expenses.
For many people, the last thing they want the family to worry about after their death is how to pay for a funeral. Whole life insurance plans for funeral expenses and final expenses are very affordable at almost every age.
One of the greatest gifts you can give your family members upon your death is the peace of mind, knowing they need not suffer financially by paying for your funeral as well as suffer emotionally after losing you.
Providing funding for special needs child or adult
Many families are caring for children or parents who need constant around the clock care. If the caretaker dies, the special needs child or adult will still need care; it will cost a lot of money to hire people to provide this care!
Having life insurance in place to protect your special needs child or adult is one of the greatest gifts you can provide for your loved ones. Knowing they will be taken care of after your death through a reasonably priced life insurance policy is the perfect outcome for many life insurance shoppers.
These are just some ways immigrants and nationals can use life insurance every day. There is no right or wrong way to use your life insurance policy or proceeds.
If you need help determining what you should insure, and how much life insurance you need, call us, and we will help you understand your best options.