Asked to come up with a topic that is both intriguing and exciting, most people would not place life insurance at the top of the list. Whether this negative perception is due to its reputation as being boring or to the unease created by an association with facing one's mortality, there is no doubt that life insurance is one of the most maligned financial products.
However, the reality is that life insurance can be a foundational piece of a solid financial strategy and can offer necessary protection from potential financial disaster due to lack of coverage. Most people have health insurance, home insurance, car insurance and even disability income insurance. All of these products are designed to offer protection from catastrophic costs due to unexpected events.
Not having life insurance carries its own unique set of risks from lack of coverage, but the difference is the financial impact or damage from going uninsured is often incurred by those left behind. Comprehensive financial strategies that have been nurtured through years of investing, allocation and budgeting can come quickly undone when a primary breadwinner and/or caregiver passes away.
Also noteworthy is that life insurance is not for just one stage of life. Rather, it creates an added layer of protection through the years. Consider the following potential uses for different life stages.
Singlehood. For those who are single, whether old or young, there are special considerations to keep in mind when thinking about life insurance. For example, a younger person just starting out may carry a significant amount of debt via college or other loans. Unsettled debt at the time of death can become a burden to those left behind if they co-signed on the loans. The proceeds from a term life insurance policy can be used by survivors to pay down that debt or settle other estate matters.
Another benefit of addressing life insurance at a younger age is reduced premium costs that make coverage more affordable later in life when family or health concerns may make insurance more of a necessity. For those who are older and single, life insurance proceeds can be used to help fund a legacy of their choice and allow for a smoother transfer of assets since life insurance proceeds can be received by the designated charity free of federal income estate taxes, probate and administrative costs and delays, brokerage fees or other transfer costs.
Marriage. Protecting a spouse, partner or significant other is an important step in establishing joint finances. There are many milestones to think about that carry their own considerations. Buying a home, saving for retirement and seeking the overall financial freedom to meet your goals, are all critical at this stage of life. Life insurance can help ensure those milestones and goals are not derailed. Term life insurance products are very reasonably priced at this stage (assuming the purchaser is in good health) and the premium cost is likely to be small enough as to not impede a monthly or annual budget.
Married or single with children. At this point in life, some may have young children while others may have teenagers. For those with young children, the cost of daycare can be a significant expense. If one income is removed due to the death of a spouse and no protection is in place, making ends meet to maintain the existing schedule or routine can be challenging. Life insurance also allows for the possibility of the surviving spouse to leave the workplace at their discretion to care for children full time.
Parents of a teenager attending college need to think about protecting and providing for their older children to help ensure their education can continue. At the same time, keeping up with your own concurrent long-term expenses, such as funding retirement, is not something that should be ignored.
Certain insurance products, such as fixed-index universal life, have the ability to provide protection as well as the potential to accumulate cash value tax deferred that can be accessed income-tax free. This additional cash value can be used for future needs such as supplemental retirement income, supplemental college funding or emergencies, even while the policyholder is still alive. Keep in mind that any cash value taken from the policy is accomplished through policy loans and withdrawals.
Taking policy loans and withdrawals against a life insurance policy will decrease any available cash value and death benefit and could cause the policy to lapse and result in adverse tax consequences.
Empty nest and the golden years. With working years winding down, the need to protect loved ones does not go away. Now is the time to think about how the proceeds of life insurance policies can help fulfill your legacy, either through leaving money behind for a beneficiary or via donation to a favorite cause or organization. As noted above, life insurance is a favored means of making charitable contributions. In addition, people can access any available cash value income-tax free from fixed-index universal life policies at this stage to help meet selected financial needs and expenses to help prepare for and/or supplement expenses in retirement.
Looking past any preconceived notions or aversion to life insurance is a critical step in creating a sound financial strategy. Adding that layer of protection to prepare for the unexpected can be a foundational piece of the puzzle that should exist in any comprehensive financial strategy.
So, despite any adverse initial reactions, make the time to contact a financial professional and take a closer look at life insurance in 2017. It could be the missing component to helping you feel better prepared for your financial future.
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