As any parent will tell you, bringing a baby into this world is a gift. In your hands you hold a tiny life — a miracle — that lives and breathes and will be able to talk, to walk, to grow, and to learn. Your baby will have his or her falls, scrapes, scars, and stitches, but he or she will experience life to the fullest.
Yet life is something that is not guaranteed. It’s precious, and in the end, fickle. No one knows when your time will come. We all hope to lead a long life with those we love, grow old, meet our grandkids, and live life to the fullest. Yet, unforeseen events happen daily. From car accidents to heart attacks, your amazing life could end. Since you don’t know when you’ll die, you need to prepare for the worst and hope for the best. And as the breadwinner of the family or even just a stay-at-home mom, you’re irreplaceable in your family’s eyes. You can’t fill the hole in your loved one’s hearts if you leave this earth unexpectedly, but you can take care of them when you’re gone through life insurance. Life insurance, especially term insurance, is cheap. It’s something everyone should have, especially if you have children. You need to let go of your hubris and prepare for the worst. None of us like to think about death, especially our own deaths, but in order to take care of your family, you have to be prepared. Wealth CAP, an online investment company, believes life insurance is a great benefit and should be a part of your overall retirement planning with your investment consultant. Below, we’ll detail why life insurance is important, the different types of life insurance, and how to obtain a life insurance policy. Contact Wealth CAP today for more information!
HISTORY OF LIFE INSURANCE
Traditionally, ancient peoples cared for each other. Towns were small, everyone knew each other, and death at a young age was common. It was custom to care for those who couldn’t take care of themselves. However, as society grew, this became impractical, as well as undesirable. The wealthy did not want to care for so many poor (nor could they) and the poor were unable to care for so many as well.
The first concept of life insurance began with the Greeks and Romans in 600 BC who created benevolent societies to care for families of deceased members, as well as help with funeral expenses. These were centered around guilds, so once again small groups of people got together to care for one another in more manageable groups. This concept continued throughout the Middle Ages and into the late seventeenth century. Religions around the world promoted care of widows and the poor, which helped care for those left behind by sudden deaths.
England was the source of what we’d call modern life insurance. In 1706, people again formed into a group who each paid a share every year based on age of the members. At the end of the year, the collective monies was divided amongst those who had lost a family member. It took another 50 years or so for life insurance to be able to reach sophistication with calculations based on your age and risk factors to determine premiums. Soon after, life insurance spread to the US, with life insurance really taking off after the Battle of Little Big Horn, where many soldiers were killed who left behind families.
HOW LIFE INSURANCE WORKS
Life insurance is a contract between you and a company that says if you pay your premiums (determined when you take out the life insurance policy) and something happens to you, the company will pay your designated beneficiaries a certain amount.
TOP REASONS WHY YOU NEED LIFE INSURANCE
- Replace lost income. If you die and you’re the breadwinner, your family could suffer severely without a life insurance plan or other source of funds available to them, such as adequate savings.
- Pay for burial expenses. Dying in the United States (even if you elect for cremation) is not cheap. Burial expenses can run into the thousands of dollars, depending on the circumstances.
- Pay off debt left behind. This reason goes hand in hand with replacing your income. For instance, if both you and your spouse are on the mortgage, the death of one makes the other immediately responsible for the entire mortgage, as well as any other debt that is co-owned.
- Care for your kids. If you pass, your kids will be left not only with an emotional burden, but also a financial burden. Paying for college is one big reason to take out a life insurance policy.
- Diversify your investments. Some permanent life insurance policies have cash values that can either be used in your lifetime or by those you leave behind. Universal life insurance policies can be tied to the stock market and can potentially earn much more than the value of the life insurance policy itself.
- Security for your business. Most businesses are started by one person. This person is vital to the organization and if something happens to the founder, the whole company can collapse, if it has not grown to a sufficient size. This will also cover your business debt, so your personal family is not impacted by the business in the event of your death.
- Estate taxes. Even in death, you have to pay taxes — taxes on your estate and your investments. Your life insurance policy can help pay your debt for your family.
- There’s no reason not to have coverage. Life insurance is cheap for what it gives you, especially if you’re young and healthy. For less than the price of a latte a day, you can have a nest egg for your family in the event of unexpected death.
- Peace of mind. You can rest easy knowing if you didn’t make it home one night after work, you’re family is taken care of.
DIFFERENT KINDS OF LIFE INSURANCE
There are two major categories of life insurance policies: protective and investment. Protective is what most people think when they think of life insurance — a contract that pays a beneficiary, usually a lump sum if a certain event (usually death) occurs. This is the more popular of the two. The other type of life insurance, investment life insurance, is used to grow wealth by paying regular premiums. Some of these include whole life, universal life, and variable life policies.
Some specific types of life insurance include:
- Term life insurance. This is the most popular form in the United States and the most affordable. Term life insurance is life insurance for a specific term (say 30 years), and then it expires, and you’ll either have to invest in another term life insurance policy or a permanent life insurance policy.
- Permanent life insurance. Just like the name implies, this life insurance policy covers you for the rest of your life. These are more expensive, especially the later in life you take them out, because your risk factors in the years to come are difficult to determine. Most of these also have a cash value, meaning you accumulate cash as you pay your premiums. This allows you to access the cash in the future or even to turn your life insurance policy in (known as surrendering) for a predetermined cash value as well.
- Whole life insurance. Whole life insurance is the most popular form of permanent life insurance. Usually, the premium and death benefits are fixed, and the cash value is guaranteed a minimum interest rate. Some of these even pay out dividends.
- Universal life insurance. A relatively new entrant to the life insurance industry, universal life insurance aims to provide greater benefits and flexibility in payments than whole life insurance offers. Typically, the death benefit can be increased and the premiums can be lowered.
- Variable universal life insurance. Variable universal life insurance is almost identical to universal life insurance except the cash value can vary because the investment instruments your money is invested in can vary.
- Indexed universal life insurance. This universal life insurance product comes with no guaranteed interest rate earned, but usually stipulated a minimum interest rate earned.
HOW LIFE INSURANCE CAN BE USED AS PART OF A RETIREMENT STRATEGY
Life insurance policies can be used as investment instruments. Some use the stock market to invest in, and some are more conservative, using savings instruments instead. Investments in cash-value life insurance policies grow tax-free, and withdrawals in retirement are untaxed if taken as loans against the policy’s cash value. These loans never have to be repaid because the loans would just be applied to the life insurance pay-out upon your death. If you choose to repay the loan, these funds will grow tax-deferred. Term life insurance policies, on the other hand, expire, leaving you with no accumulated value whatsoever. In general (and every person’s needs are different), term life insurance policies are recommended when the kids are young and you are still building a career and wealth. A permanent life insurance policy is recommended when you need a death benefit.
Indexed universal life insurance is indexed on the stock market, offering the most opportunity for higher-interest growth like ten percent or more. These usually offer a bare minimum interest rate as a safeguard, and they usually safeguard the principal amount as well.
Using life insurance policies to build wealth has its caveats, the most important being it’s hard to change your life insurance policy, and fees are usually involved to do so. It’s not like your 401k where you can change the investments with a click. It’s important to shop around because life insurance policies vary. Choose one that has the most flexibility in investment choices and investment control. Find an investment professional (a broker) who can offer many different kinds of life insurance products from many different companies. This person will have the most variety and, odds are, the least amount of vested interest in which one you choose.
Wealth CAP believes in using life insurance as part of a broad retirement income plan. Life insurance is important to protect against accidental death, but can be used as a great complement to your retirement strategy.
HOW TO BUY A LIFE INSURANCE POLICY
Like all financial instruments, you have to be licensed to sell life insurance by your state. This usually entails taking a course and passing a state test as well as a background check. There is ongoing training required to renew your life insurance license as well. This is for the consumer’s protection, so you know you’re buying a legitimate policy from someone who knows what he or she is selling you.
There are three ways to buy life insurance: from the issuing life insurance company itself, from an independent life insurance broker, or from an online independent insurance broker. You should always purchase your life insurance policy from an independent broker who won’t have a conflict of interest in which insurance product to sell you, and who will have many different life insurance products and companies to meet your particular needs.
- Determine which kind of life insurance to buy: either term life insurance or permanent life insurance.
- Find a licensed and reputable life insurance broker. This will entail an interview process as you want to be able to trust the person and be comfortable asking him or her questions when you have them.
- Review the life insurance products recommended by the life insurance broker.
- You’ll be contacted for a medical exam, which will determine in part your life insurance premium. Factors that help determine life insurance premium are age, health condition, if you smoke, your current weight, and your occupation. These are plugged into a complicated mathematical formula that will estimate when you are likely to die (morbid, we know). But it’s cool to know! You’ll be asked questions, and you may be required to give a blood or urine test.
- If it is determined that you are insurable, you will pay your first premium and any other fees. The life insurance contract can vary in terms of when it starts coverage. Some life insurance contracts are immediate, if you pay your premium up front. Other contracts wait until the results of the medical exam are determined. Be aware that in the first two years your life insurance company can be cancelled for a variety of reasons. This contestability clause can be explained by your life insurance broker.
When you’re single and living the high life and no one depends on you or is affected by loss of income if you die, then life insurance may not make sense. However, if you are married or if you have kids, you can’t afford not to have some life insurance in place. Many employers offer some form of life insurance such as group life insurance, but the coverage is insufficient to meet your family’s needs in the long term.
THE WEALTH CAP DIFFERENCE
Wealth CAP is an online investment company that cares deeply about people. We help people form a retirement income plan for life that will allow them to retire comfortably and worry-free. We offer dynamic bucketing portfolios (DBPs) that use a combination of safe investments, alternative investments, and market investments to offer our clients the best possible return on investment (ROI), security, and liquidity. All of our dynamic bucketing portfolios (DBPs) are created with you and your financial goals and needs in mind. We use innovative technology and incorporate low monthly fees that are transparent and easy to understand.
Wealth CAP offers you educational learning tools to further your knowledge of the financial system, markets, and products available. Our dynamic bucketing portfolios (DBPs) are self-directed, allowing you the greatest flexibility in creating a portfolio that balances risk with safety based on what stage in life you are in. We incorporate 401k and IRAs as well as life insurance and annuity products in our dynamic bucketing portfolios (DBPs). We are here to take the confusion, uncertainty, and financial anxiety out of your investment, insurance, and retirement planning. Our mission is to make your life easier by taking the burden off your shoulders of planning for your financial freedom. By having a financial and retirement plan in place, you’ll ensure your family is taken care of — both while you’re alive and beyond. Wealth CAP’s investment consultants are here to help you plan for your future. Contact us today for a free consultation!