As we celebrate Life Insurance Awareness Month, we want to invite you to reflect on how your family would be impacted if you were to die unexpectedly. We get it. That sounds like a lousy invitation. Unfortunately, for many of our team members who have worked with families that failed to reflect on the answer to this question, the result can be devastating. On the other hand, when the unexpected happens (and sadly we have been through this a time or two) there is nothing more rewarding for our team than being able to tell loved ones that they will be okay from a financial standpoint and can focus on the grieving process without that burden.
The one thing that everyone can count on is that one day you will die. That day might be tomorrow, or it might be fifty years from now. You and your family might be able to prepare for it, or it may happen unexpectedly, blindsiding the people that are left behind. Aside from the emotional impact of an unexpected loss of life, too many loved ones are also faced with significant financial loss. Too often, families are ill-prepared to cover burial expenses and struggle to make ends meet without the contribution of their loved one to support the family.
One way to prepare is to have a life insurance policy. But what exactly is that and how can it help you?
What is Life Insurance?
Life insurance is a promise from the insurance company to pay out a sum of money upon the death of the person insured. Simple enough, right? Wrong! There is so much more to it than just that. There are many types of life insurance and understanding them can be a challenge. Here are a few basic terms to know:
Term life insurance is a type of insurance that pays a specific lump sum to your loved ones, if you were to pass within a specific period of time. If the owner does not die in that time, the policy expires, and no money is paid out. Term policies typically cover ten to thirty years. These policies are affordable and often a good option to cover lost income and other living expenses.
Whole life insurance is a type of permanent life insurance that offers lifelong coverage and consistent premiums. These policies include a cash value account, which allows for the accumulation of equity within the policy that can be accessed during your lifetime. At your death, your beneficiaries receive a tax-free death benefit.
Universal life insurance is another permanent life insurance that offers lifelong coverage and typically allows for flexible premiums. You can adjust premiums and death benefits. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a savings component, known as the cash value. COI is the minimum amount of premium payment required to keep the policy active. COI includes the charges for mortality, policy administration, and other directly associated expenses to keeping the policy in force. COI will vary based on your age, insurability, and the insured risk amount. Collected premiums above the cost of insurance accumulate within the cash value portion of the policy. Over time the cost of insurance increases as you age. However, if sufficient, the accumulated cash value covers the increases in the COI.
Variable life insurance is a permanent life insurance policy that offers lifelong coverage with an investment component. Each variable life policy comes with a prospectus detailing option for investing the cash value, and the cash value investment options are like mutual funds in that there’s a particular set of securities that the money would be invested in. The cash value account has the potential to grow as the underlying investments in the policy's sub-accounts grow. At the same time, as the underlying investments drop, so may the cash value. Whatever option you choose, you are charged management fees, like expense ratios for mutual funds. These fees vary according to the securities invested in. The death benefit is typically a "target" using an assumption of cash value performance, such as a 4% annual rate of return. The insurer projects that, assuming it meets this rate of return, the cash value will equal the policy’s face value when you die. If your cash value significantly underperforms, it may reduce your actual death benefit, depending on your policy’s terms.
How does it help you?
When you die, a lump sum is paid to your designated beneficiaries tax-free. This money can be used by your beneficiaries to fill the financial gap created by your death. This might mean paying hospital and burial expenses, replacing an income stream, paying off debts, saving for the future or simply providing breathing space to your family to figure out the next steps without you. So again, we invite you to reflect on how your loved ones would be impacted financially by your death this month. If you’d like to discuss this with our team, please contact us at First Citizens Wealth Management at wealth@myfcb.bank or 641-422-1600.