The fact of the matter is: you should consider a life insurance policy now, even if you’re young and healthy.

Life insurance is a difficult – yet necessary – topic to discuss with loved ones or to face yourself. But gaining a better understanding of the role that this type of  insurance plays in your financial plan, can lead to easier and more productive conversations.

The fact of the matter is: you should consider a life insurance policy now, even if you’re young and healthy. It’s understandable why young and middle-age adults may resist exploring life insurance during their prime. But unfortunately, many people wait to consider policies until they’re older or ill – making insurance more expensive and harder to secure.

Starting the process earlier gives you peace of mind when organizing:

• How your family will be financially cared for
• Coverage for funeral and burial costs
• How liquidity, estate taxes and transfer taxes will be managed
• How your savings should be allocated to charities or causes  

Plus, some life insurance policies accrue funds over time to steadily build a nest egg, or even allow you to withdraw funds. Finding the type of policy that works for your lifestyle and circumstances is a critical step.

There are two types of life insurance – Term and Permanent – and choosing a policy isn’t a one-size-fits-all affair.

Term Life Insurance – This high death benefit and lower premium option comes with a time limit for your policy, usually 10, 20, or 30 years. If you die within the chosen time period, your heirs receive a monetary death benefit. On the other hand, if you live longer than the limit, there is no benefit payable and the premiums paid over several years are a sunk cost. However, you may renew the policy at the end of the term if you choose to at a higher premium.

Permanent Life Insurance – These policies do not expire if appropriately funded, meaning your heirs are guaranteed a payout upon your passing. They can be lower cost overall during your lifetime. Another potential benefit is the income and estate tax advantages. There are three types of permanent life insurance:

Type 1: Whole Life Insurance

• Provides coverage for the life of the insured party
• Payout in the event of your death
• Savings component where cash value may accumulate tax-deferred or even tax free
• Premiums are fixed and the costs are not itemized
• Policy owner can withdraw or borrow funds tax-free if the policy stays in force
• Cash value rate of return is like bank CDs and there’s a minimum guaranteed return

Type 2: Universal Life Insurance

• Provides flexible premiums and offers an investment savings element
• Costs are itemized and transparent
• If cash value accumulates, insured may withdraw or borrow a portion of the funds tax free; this may affect the death benefit
• Policy holders can adjust their premiums and death benefits
• Cash value rate of return (and risk) is similar to bond market

Type 3: Variable Universal Life Insurance

• Comprised of separate accounts containing different investment funds, such as bond funds, equity funds, or money market funds
• Offers tax benefits, including tax-deferred accumulation of earnings and potentially tax-free distributions
• Costs are itemized and transparent
• The death benefits may be dependent on the performance of investments in the policy
• Provides similar rate of return as Whole Life or Universal Life
• Variable Universal Life policies offer a cash value rate of return (and risk) similar to regular investment accounts containing a diversified array of stocks and bonds.

When choosing your life insurance policy, it’s important to understand the various benefits and requirements, and how they might affect your life circumstances. A financial planner can help determine the type of life insurance that best aligns with your short- and long-term goals. Before making a decision, consider the following:

• Death and Disability Benefits – Some life insurance policies offer death benefits in addition to disability and long-term care benefits. The death benefit is the payout your heirs would receive if you passed away, helping them pay the mortgage, put food on the table, and maintain their quality of life.

Disability benefits add to the cash value accumulation if you’re unable to work for an extended period of time due to disability or a medical condition. Long-term care benefits are paid out to you and reduce the death benefit amount if you need to pay for daily assistance.

Term insurance only pays the death benefits, while permanent life insurance pays death benefits and can also pay disability and long-term care benefits. A permanent policy makes the death benefit available to your heirs, and the disability and long-term care benefits are available to you, the policy holder.

• Your Health Impacts the Cost of Insurance

Because healthier people generally live longer, the healthier you are the lower your life insurance cost will be. This drives home the importance of purchasing life insurance when you’re younger and in good health.

With term insurance, healthy people will most likely outlive the term of their policy and the insurance company will never need to pay out. For permanent insurance, the inevitable payout is far in the future and when that time comes, the accumulated cash value will be higher and the risk lower.

• The Cost of the Insurance and Your Premium

Contrary to what many believe, the premium and the cost of the insurance are not the same thing. The cost of insurance is how much the company charges you to hand administrative, investment, and sales expenses. It also accounts for the risk they take in writing your policy. Sales expenses are partially implemented by the insurance company to compensate the advisor recommending the policy to you.

The premium is the amount you contribute each period. For term insurance, your premium and cost of insurance are the same. When it comes to permanent insurance, the premium builds up a cash value, earning a rate of return. Then, the cost of the insurance is deducted from the accumulated funds.

The intricacies of life insurance and various policies can be complex. Enlisting the support of a financial planner can help you achieve a greater understanding of your current situation and goals – and how life insurance fits within an overall, well-balanced financial plan. In addition, life insurance is an invaluable investment in you and your loved ones’ wellbeing. Knowing that they’ll be taken care of well into the future offers the greatest peace of mind.

Bill Kelso, CPA, CFP®, is a financial planner* at Pinnacle Financial Advisors, which assists individuals, families, and businesses with financial planning and wealth management in Sedona and the Verde Valley. He is a Registered Representative offering Securities through UNITED PLANNERS FINANCIAL SERVICES, Member: FINRA, SIPC. *Advisory Services offered through SEROS FINANCIAL, LLC. Pinnacle Financial Advisors, Seros Financial, and United Planners are independent companies.