Who needs life insurance and why?

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People in all walks of life need life insurance, including: 

• Breadwinners with children or other dependents who rely on their income need life insurance. Their families would suffer financially without their income. Their beneficiaries can use the life insurance death benefit to replace the lost income and cover living expenses, education costs, and other needs.
• Business owners with partners or family involved in the business need life insurance. A policy enables them to buy out their interest in the business from their partners or to provide operating funds to transition the business through the loss of a key person.
• Gen Zers with student loans need life insurance if they have a family or expect to get married. If they pass away unexpectedly without life insurance, loved ones could inherit their financial obligations. Life insurance protects against that risk.
• Millennials with a mortgage need life insurance so their family can continue living in their home. Additionally, their family can continue saving for college and retirement even with the loss of household income.
• Baby Boomers need life insurance when their home, real estate, retirement plan, and other investments are subject to estate taxes, since life insurance isn’t typically subject to these taxes. Such a policy prevents the federal government from becoming a primary beneficiary of their estate and can balance the estate among heirs.

What factors should people consider when purchasing coverage?

People need to consider what type of policy they want, how much coverage to buy and how long they want that coverage for. The reasons why you want life insurance in the first place goes a long way in determining the type, amount and duration of the policy you buy. 

Policy type

The two main types of life insurance are term and permanent life insurance. 

Term life insurance provides the most affordable and simplest protection, but only for a specific period less than your life expectancy — such as 10, 20 or 30 years. Because of this, term life insurance is most cost-effective for family protection, mortgage or other debt repayment, and college funding. It may also be the best option if your budget is limited and getting coverage for now is more important than lifelong coverage or tax-favored wealth accumulation.  

On the other hand, permanent life insurance lasts your entire life and allows for tax-favored wealth accumulation. You can find out more about the different types of life insurance here. But the basic types of permanent life insurance include indexed universal life (IUL), whole life (WL), universal life (UL), and variable life (VL). However, premiums for a permanent life policy are higher since coverage is designed to last a lifetime. 

I’ll explain what policies are right for which age groups later in this article.

Policy length

Essentially, coverage should last as long as your financial obligations or until you’ve accumulated enough in your retirement plan, investments, or real estate to sufficiently provide for your family in the event of your passing.

If you’re getting coverage to pay off debt, then you’ll only need life insurance for the length of the loan. Similarly, if you’re buying coverage to fund college or retirement, then you’ll only need life insurance for the length your kids will be in college or until you plan to retire.  

On the other hand, if the reason you’re getting life insurance is to buy a partner out of a business, to fund the continuation of a business in your absence, or to pay estate taxes due upon death, then you may need coverage for life. For instance, if liquidity is unpredictable and could arise anytime over your lifetime, then you might need permanent coverage.

Alternatively, if you’re using life insurance for tax-favored wealth accumulation, then the type and amount of coverage depends on your savings budget, investment risk tolerance and tax rate more than the above traditional life insurance needs. 

Death benefit amount

There are a lot of variables to consider for how much coverage to get.

If you’re buying coverage to pay off debts like a mortgage or student loans, fund your children’s education costs and future expenses, and replace your earning power, getting at least five to ten times your earned income is recommended.

But budget to ensure you can afford the premiums. While premiums are the cost for most term life insurance products, the premium is not the cost for permanent life insurance products. Instead, the premium for most permanent-type products is an estimate but it is not guaranteed. The premium covers cost of insurance (COI) charges and other policy expenses over your lifetime, which the insurer can generally change in their sole discretion over the life of the policy.  

Who should get a term life insurance policy and why?

Term life insurance is a good option for many people: 

• Gen Z: Term life insurance offers the greatest amount of pure protection when coverage is needed most and when earning power is likely at its lowest at the beginning of a career.  
• Millennials: Term life insurance offers the greatest amount of pure protection when the budget for life insurance may still be limited due to mortgage payments and funding for college and retirement.  
• Families with a single or predominant breadwinner: Term life insurance can be used to pay off a mortgage, fund the costs of educating children, and provide for a spouse before retirement.
• Businesses with a key person: Term life insurance can be used to fund the replacement of a key person on short notice, the training of the new key person, and any revenue loss due to the loss of a person.  
• Stay-at-home parents: Term life insurance can fund childcare costs or any other services stay-at-home parents provide, such as cooking, cleaning or daycare services.

Who should get a whole life insurance policy and why?

People in many different life stages would benefit from whole life insurance coverage.

For example, Baby Boomers who have substantial assets and don’t want the federal government to be a primary beneficiary of their estate or want to bequeath certain assets to certain children when they die will benefit from a whole life insurance policy that can balance bequests to other children. 

Likewise, high-income earners who invest in safe and secure asset classes like high-grade bonds and government-backed mortgages and whose interest income is therefore taxed at higher rates, can shelter that interest income inside the tax-deferred growth of policy account. If administered properly, they can even receive tax-free distributions. 

Additionally, anyone with a life-long financial obligation and a low-risk tolerance could use a whole life insurance policy to protect their family’s financial health. 

Who is a good candidate for other types of coverage, such as universal or indexed life insurance? Why would they need this type of coverage?  

• Guaranteed universal life is for individuals who want the simplicity of guaranteed premiums for a guaranteed death benefit for a guaranteed period of time of their choosing. I often refer to this type of coverage as flexible duration term or permanent term.
• Universal Life is for individuals who need premium flexibility but still have a conservative risk tolerance. Investments underlying account values are also required by regulation to be allocated mostly to high-grade bonds and government-backed mortgages. 
• Indexed Universal Life is for individuals who have a moderate risk tolerance and want to allocate the interest from high-grade bonds and government-backed mortgages to equity indexes (such as the S&P 500) for a potentially higher return.  
• Variable Universal life insurance is for individuals who need premium flexibility and also want the flexibility to allocate policy account values across a diversified family of funds, like in a 401(k), in response to changes in risk tolerance over time.  

What type of life insurance should you buy?

When choosing an insurer, you should consider its financial strength and ability to pay claims. You’ll also want to consider the competitiveness of costs charged inside the policy account, the reliability of the “quoted” premiums, whether account values can be accessed or are restricted, and the actual historical performance of invested assets underlying policy account values. 

Insure.com does a ranking of the best life insurance companies that takes into account a lot of these factors and can help direct you to an insurer. But, remember, the best insurance company for one person isn’t necessarily the best insurance company for everyone. 

Be sure to shop around and compare quotes from multiple insurers. Your health and each insurer’s underwriting process determines your coverage eligibility and how much you’ll be charged, so different insurers will charge you different rates. 

Overall, the healthier you are, the lower the rates you’ll be charged for life insurance. However, don’t wait to get coverage until you improve your health or quit smoking — you can always re-qualify for lower rates down the line.

How can someone determine what the best policy is for them personally?

The best policy for you is the one with costs that are justified relative to the benefits, has reasonable performance expectations, and aligns with your risk tolerance.

Speaking with a financial advisor is the best way to ensure you get the right policy for you. When speaking with an advisor, address why you need coverage, how much you need, and how long you’d like the coverage to last. 

You’ll also want to be clear on your budget and risk tolerance. 

Remember that for permanent policies, the premium is not the cost of life insurance. As such, be sure to request and receive full year-by-year disclosure of all policy costs and performance requirements.  

Anything else to add? 

Regulations in most states for most product types permit life insurance agents and insurers to “quote” low premiums, giving the appearance of low costs, while instead actually charging high costs. They often do this without disclosing the high costs or the risk of additional future premiums that are higher than the originally quoted premiums, or even total loss due to policy lapse even when all originally quoted premiums have been paid. 

Click here to be referred to a Veralytical Advisor near you who can benchmark the competitiveness of all policy costs and advise you on the right product type right for you, alongside the best-available rates and terms for each product type.  

Barry Flagg

Expert Advisor

 

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Barry D. Flagg is the inventor and founder of Veralytic®, the leading online publisher of life insurance pricing and performance research and product competitiveness ratings. Veralytic is the result of his unique background in both the fiduciary investment business where he became the now oldest, youngest Certified Financial Planner (CFP®) in history, and as a life insurance expert consistently recognized in the top 1% of the industry. He’s renowned for applying Prudent Investor Principles to life insurance product selection or retention and portfolio management. As a result, he serves as sub-advisor to thousands of irrevocable life insurance trusts (ILITs) as well as RIAs and wealth managers, is a regular contributor to Forbes for articles about life insurance, leads curriculum development and instruction for Applied Fiduciary Practices involving life insurance for The Center of Board Certified Fiduciaries at Wake Forest University, and serves as a volunteer to the CFP Board Professional Standards and Legal Department for complaints involving life insurance. Barry has authored numerous articles for national publications on managing life insurance as an asset according to established and proven asset management principles and frequently teaches continuing education courses about the same to attorneys, CFP®s, CPAs, and CTFAs.