Insurance Protection, Part 1: Personal Insurance
Insurance protection is an essential needs analysis of any financial plan and is a topic that should always be addressed. Not everyone needs every kind of insurance available, so it is beneficial to know the different insurance options and what is necessary for you, your family, and your business. In this Part 1 article we will discuss some of the different types of personal insurance that we are able to offer our clients. Next week we’ll post Part 2 where we discuss the various types of business insurance that need to be considered. (Please note, this information is intended to be general in nature and should not be taken as individual tax advice. We suggest that you reach out to a qualified tax advisor to discuss your specific tax situation.)
- Term Life Insurance: This type of insurance is written so that you have coverage for a specific death benefit (also known as face or coverage amount) for a specified amount of time. Premium payments will be due for the length of the term. For example, Joe has a 20-year term policy with $500,000 in coverage that was issued on 1/1/2020. If Joe is alive at end of the term (or after 1/1/2040 in this example), then the coverage expires, and the premium payments would end. If Joe were to pass way anytime during the 20 years (or before 1/1/2040) his beneficiary(s) would typically receive a tax-free payment of $500,000 (there are only a few circumstances that would cause this payment to be taxable).
- Whole Life Insurance: This type of insurance can be a complex topic with many different options and features. In its simplest form, this type of policy will provide coverage for your whole life (often referred to as permanent life insurance) and does not expire as long as you continue to pay the premium (which is typically higher than a term insurance premium.) Similar to term life insurance, there is a death benefit that is paid to the beneficiary tax free at the death of the insured. Unlike term insurance, however, a whole life policy builds up cash value with each premium payment. The growth of the cash in a whole life policy is not taxed until you take it out so these policies can provide another way to save with tax advantages. Since there are many optional features that come with whole life policies, it is best to review your options with a financial advisor to discuss your needs.
- Long-Term Care Insurance: With the rising costs of health care every year, this type of insurance can be very important to help pay for services that are not typically covered by traditional health insurance or Medicare. This includes assistance with what is known as the “activities of daily living” (or ADL’s): bathing, dressing, eating, transferring, toileting, and continence. With most polices, if you are not able to do 2 out of 6 ADL’s your long-term care policy benefits will begin. Many long term care insurance policies will also pay for home health services which allows you to stay at home as long as possible while still receiving the help that you need.
- Long-Term Disability Insurance: This type of insurance will provide you with a monthly benefit payment if you become sick or injured and are not able to work. It essentially protects your income. You can typically purchase disability insurance to cover up to 60% of your gross income and the benefit is received tax free as long as you, not your employer, paid the premium. The monthly benefit payment will continue to pay for the length specified in the policy - usually a certain number of years or until a certain age. There are several features that can be added to your policy so it is important to review your options and consider what your family will need compared to the cost of the insurance.