At Quorum Private Wealth, we see two primary uses for life insurance: As a way to help surviving family in case you die unexpectedly and as a way to help minimize estate taxes when passing wealth on to your heirs.
Before we get into how life insurance can help you in these scenarios, let’s quickly look at the different types of life insurance available on the market today.
Term life vs. permanent life insurance
This is the biggest distinction among life insurance policies.
Term life insurance covers you for a set time period, or term. If you have employer-sponsored life insurance, it’s likely term life insurance, covering your period of employment. You can also buy term life coverage from an insurance provider or broker. Often, these policies are available for 10-, 20-, and 30-year terms.
Permanent life insurance, as the name implies, covers you permanently—it never expires. It’s often referred to as whole life insurance since it covers you for your whole life. These plans tend to offer more flexibility than a term life plan. For instance, while term life plans only offer a death benefit, with whole life plans, you may be able to borrow against the cash value of your policy and use the money while you’re still alive. These days, whole life insurance may include provisions to help with long-term care expenses, for instance.
The various perks of permanent life insurance come with a cost. Remember: If you follow the rules and pay your premium, the insurance company is locked into paying a death benefit, since everyone dies. Because of that, the premiums on these policies are significantly higher, and the policies themselves often come with strict rules.
At Quorum, we rarely recommend classic whole life insurance, because these side perks are rarely necessary. Generally, we can help clients achieve the same flexibility and benefits via financial planning, investment accounts, tax planning, and more. There’s one exception, however: second-to-die policies. We’ll get into that next.
Buying the right life insurance
If you’re purchasing life insurance as a way of providing for your family if you die expectedly, we recommend term life insurance. There are two reasons for this. The first, and biggest is that term life policies are much cheaper than whole life policies.
The second is that, with proper financial planning, you will have enough assets outside of an insurance policy to provide for your family when your term policy expires. Beyond that, any children you had when you bought the policy are likely to be financially independent, or close to it. There’s less of a need to supplement your income down the road.
If you’re purchasing life insurance as part of an estate plan, we often suggest second-to-die policies. As the name implies, these policies don’t pay a death benefit until the second covered spouse dies.
Because these policies cover a couple instead of an individual, the premiums tend to be lower than with a classic whole life policy. While some families use second-to-die policies as a way to provide for their heirs, at Quorum, we see a more specific use for this type of coverage.
If your estate is large enough—in the ballpark of $26 million or higher, depending on annual IRS rules—your heirs may be required to pay a tax on your estate. Second-to-die policies can be used to cover that estate tax. Death benefits tend to be paid tax-free, so incorporating this type of policy into an estate plan (and placing it into a trust) can create a tax-free benefit to cover any future estate tax, saving your heirs from the expense.
How much life insurance do you need?
We recommend basing your coverage on your goals. For instance, if you’re purchasing term life insurance to cover your family if you die unexpectedly, it’s a good idea to base your coverage on your income.
A $1 million policy—which has become a bit of a “gold standard” when discussing life insurance—means your family can withdraw $100,000 a year for 10 years, all things equal. Of course, your surviving spouse can invest the death benefit with the goal of maximizing the income stream. Still, that $1 million policy may not go very far.
As a general rule, think about your income now, and keep inflation, future expenses, and earning potential in mind. Then, multiple that number by 10. This back-of-the-envelope math can help you estimate what size policy you may need.
For Quorum clients, we’re happy to meet with you to help you land on a more exact number, based on your family’s unique circumstances and goals. While we don’t sell insurance, we can help you evaluate existing coverage or prepare to purchase a new policy.
If you’re purchasing a second-to-die policy to help your heirs cover a potential estate tax, consider working with a tax professional to get a better sense of what that tax burden might be. Not only does the threshold for what size estate triggers an estate tax change regularly, the size of the tax can also vary from 18-40%. You want to make sure you purchase a policy large enough to cover all or most of that potential tax.
What affects the cost of life insurance?
The cost of insurance policies varies based on multiple factors, not all of which fall under your control. While policies tend to cost less if you’re healthy, your age, gender, geographic location, and more can also impact your premiums.
Like many financial products, insurance providers are part of a wide market. If market rates go down, you may be able to purchase a policy for less.
The terms of your plan can impact pricing, too. Duration, how the benefit is paid, when and how you pay your premium—all of these details can impact your bottom line.
Where your insurance policy comes from can affect affordability as well. Policies offered through an employer are generally less expensive than policies obtained through the open market because employers typically benefit from group pricing.
Evaluating existing insurance
Our team has, unfortunately, come across many instances where people are sold expensive whole life insurance policies that don’t suit their needs. Insurance agents receive hefty commissions when selling whole life policies, meaning they’re financially incentivized to sell policies that may or may not be the best option for you.
When we help clients evaluate existing policies, our first question is: What are your goals? Why do you have this insurance?
Because we take a holistic approach to financial planning, we can evaluate your policy alongside your assets, with cash flow in mind. If the policy isn’t doing what you want or need it to do, we can suggest alternatives.
If you have any questions about your current coverage, or you’re curious to know what type of policy is right for you, don’t hesitate to reach out and schedule a time to talk.
