The base of a solid financial plan starts with Risk Management. Protection from death, illness and injury all make up the complete financial plan.
Two basic kinds of life insurance policies exist: term and permanent.
What are your insurance goals?
- Pay off my mortgage or other long-term debt if I passed away
- Make sure my spouse and/or kids are taken care of if I passed away
- Protecting my business, key person insurance, or partnership buy/sell agreements.
- Paying estate taxes at death
- Leaving my family, kids/grand-kids a legacy
- Donating a policy to charity
Term Life Insurance
Term life insurance is the most straightforward option. You decide on a death benefit amount or how much money will be paid to your heirs upon your death. Next, you decide on a term or length of time you want the coverage to be in place. For instance, you may choose a 20 year term for a $500,000 policy. This is a common option if a temporary need such as covering a mortgage balance or paying tuition costs is required.
Business owners who have partners that plan to retire on a particular future date may also find that term life insurance is their best option. For instance, if Tracy and Tom both own a business together, they agree that if one of them passes away prior to their retirement date, the remaining partner would purchase the deceased’s portion of the business.
In this circumstance, they may each take out term policies naming the partner as the beneficiary. Therefore, if Tom dies, Tracy would receive a life insurance lump sum that she could use to purchase Tom’s half of the business from his heirs.
The main issue with term insurance is that it is only good for a particular amount of time. If you and your partner plan on staying in business forever and your term insurance expires after 20 years, you may be left with zero coverage. The rates with term insurance increase significantly as people age. In this scenario, you may prefer a permanent policy.
When I met Dustin and his Canadian Bar Insurance Association team I was paying the bank for mortgage life insurance. After Dustin found the appropriate policy for my family he was able to get us double the coverage for almost half the monthly premium. Karl Marsden – Lawyer @ Cherkowski Marsden LLP
Permanent Life Insurance
Permanent policies offer an investment component often referred to as “cash value”, along with the insurance. A portion of your permanent insurance premium covers the insurance component of the policy and another portion goes towards an investment.
On the flip side, term insurance is strictly insurance. Once you finish paying term insurance premiums and the term is finished, you receive nothing. Permanent life insurance policies however, will always have the investment component. Even if you choose to let the policy lapse, you still have the investment account at the end.
Of course, in terms of cost, the permanent insurance is significantly more expensive than term insurance. As long as the premiums are paid, the policy remains in place for your lifetime. These types of policies are beneficial for those who prefer to have insurance for a lifetime and not have to worry about it only being valid for a particular time-frame.
There are different kinds of permanent policies in place to allow different ways to invest your cash value or the investment component of the policy. Some choose to borrow against the investment portion and utilize the funds as they see fit. Others may choose to direct the insurance company to use the money in the investment account to cover the premiums.
In permanent insurance, once you die, your beneficiaries receive not only the death benefit but the investment portion of the account as well.
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Your Family Consideration
Life insurance will help younger families maintain a certain lifestyle level or protect them from loss of income in the event of an untimely death. Older couples may use insurance as a method to transfer a legacy or wealth to younger generations.
In some instances, families choose both a permanent policy and a term policy to satisfy all of their needs.
A younger couple with a $250,000 mortgage and 2 small kids may choose a $500,000 permanent policy that is valid until 100 years of age and an additional $1 million dollar term policy for 30 years to protect the family during the time the kids are young and the mortgage balance is high.
Life insurance is optimal for business owners for reasons that are very similar. If a key employee, owner or partner passes away, a business may deteriorate rapidly. Having the proper insurance in place can enable the surviving business partners to have enough capital to keep the business operating while a replacement is sought.
If an individual plans on being active until they die and the business will not operate without that individual, permanent insurance maybe the best case scenario.
Life insurance is also commonly used to buy out shareholders or partners in a purchase/sell agreement if one of the owners suffers and unexpected death.
I would endorse Dustin and his Canadian Bar Insurance Association team for helping my family get the right insurance in place for our financial plan. Dustin had initially recommended Critical Illness protection but we didn’t make it a priority, and after my husband’s recent health scare we now have a new appreciation for Critical Illness insurance. Elise – Lawyer
How Much Life Insurance Should I Buy?
The amount of insurance your business or family requires will depend on your general business structure, future expenses and debts and your expected income over your lifetime. For a free consultation to discuss your options, call Serviss Wealth Management today, at 778.484.1435.