Protect Your Financial Future: Will and Life Insurance
In a recent post, (Personal Finance-Part 1, “Direct Your Personal Health Towards Prosperity”) we showed you how to monitor your financial health, and understand the various metrics which help you improve your current situation, and ensure a healthy financial future for you and your family. Awareness of your current status, an understanding of both personal and outside factors, and a solid plan are key components. But there’s more you can do to support your plan.
No personal financial plan would be complete without reviewing your will and life insurance periodically. Both are important when your goal is to expect the unexpected, and be prepared to weather changes which could threaten the financial health and well-being of both you, and your family.
Why You Need Life Insurance
You’re probably aware life insurance protects you and your family’s encumbered assets upon the death of the responsible parties. It ensures mortgages, loans, and credit card debt are paid upon your death so your heirs will not have to sell the house or liquidate other assets to satisfy your debts. Depending on the type of life insurance you choose, it may also cover final expenses such as:
- Outstanding medical bills
- Estate taxes
- Funeral costs
Part of your financial planning process will be to determine which form of life insurance best suits your needs, and to review it regularly to ensure it continues to provide the best coverage possible. What may be the most reasonable option when you’re single, or your income is lower may not be the best choice when you’re married, have children, or own a business.
Consider these questions before making decisions about the type, and amount of insurance you need:
- Is a spouse or children relying on you for financial support?
- Do you want to cover the costs of final expenses?
- Do you have a joint mortgage and/or significant debt?
- Are you a business owner?
Choosing the Right Policy
There are two basic types of life insurance:
- Term
- Permanent
Term insurance is for a specific period of time, and only provides death benefits. It may be inexpensive at first, but when the term ends, typically in 10-15 years, rates will increase with each renewal, as it will be based upon your age at the time of renewal. You will also have to to a new medical examination. If your health has changed over the last 10-15 years, your new premiums will reflect this increased risk.
Permanent life insurance comes in three flavors:
- Whole life
- Universal
- Variable
Whole life insurance has a set payout. Initially, premiums are usually higher than Universal or Variable policies but remain constant over your lifetime. The premium also contains a savings component, or cash value over time which:
- Earns interest on a tax-deferred basis
- Can be withdrawn or borrowed against for college tuition, home improvements, or retirement income.
Universal life insurance is a combination of two factors:
- A portion that pays your annual insurance premium, and offers some flexibility in both face value, and premiums. For example:
- You may reduce, defer or increase annual Premium Payments without impacting the Face Value of the Policy and it will only affect your Cash Surrender Value
- Death benefits can also be changed as your needs, or circumstances change. However, death benefits can be decreased but not increased. An increase would be subject to a new medical exam.
- The excess over your annual insurance premium is invested in interest-based funds which earn money tax free, and add to the Cash Surrender Value of your policy.
Variable life insurance is a more recent take on Universal Life. The difference is, with Variable policies, the excess paid over the annual insurance premium is invested, income tax free, in stocks.
Regardless of the type of Life insurance you choose, upon your death, the proceeds will go to your estate. This increases the value of your estate. For example:
If you have a $5M estate, and $5M in Life insurance, your estate is now worth $10M. Depending on the size of your estate, and the value of your life insurance policy, your taxable estate could increase. There are other alternatives, which would allow your heirs to receive the insurance proceeds without resulting in adverse tax consequences.
HKMP’s advisors can help you navigate the pros and cons of life insurance options, and help you determine the payout and premium best aligned with your budget, circumstances, and financial plan.
Set Your Intentions With a Will
A will is often overlooked as part of the financial planning process, especially in your younger years. It’s your opportunity to make legally binding decisions while you still have a say in the matter. So why do you need a will?
- A will is a legal document that spells out your wishes regarding the care of your children, as well as the distribution of your assets after your death.
- Failure to prepare a will typically leaves decisions about your estate in the hands of judges or state officials, and may also cause family strife.
Don’t go blindly into preparing your will. It’s important you understand:
- You can prepare a valid will yourself, but you should have the document witnessed to decrease the likelihood of successful challenges later.
- To be completely sure everything is in order, consider having your will prepared by a trusts and estates attorney.
- Health proxy’s and other matters should also be addressed by your attorney.
- Both spouses should have executed wills. Provides consistency among other issues
HKMP is here to help you compile all assets which belong in your will, and where applicable, determine your share of those which are jointly owned.