Like many things in life, when it comes to planning life insurance, the sooner you start, the better. Life insurance on its own is both a reliable and worthwhile tax-free investment — as long as you know what you're paying for.
"Everyone should have life insurance. There's no better investment in a world that isn't guaranteed payoff," said Peter "Coach Pete" J. D'Arruda, president and founding principal of Capital Financial Advisory Group. "As long as you make your premium payments, life insurance is a hundred percent guaranteed to pay your beneficiaries and generate more money than you started with."
Coach Pete said life insurance is just one of the several options available when planning for the future. A combination of wealth management methods can help ensure financial comfort in retirement.
One alternative to life insurance is self-funding, where individuals create a savings account for their family to use after they pass away. The problem with that, however, is since it's a regular savings account, there are no rules set in stone about when the money can be used — so there's always the temptation to dip into the funds.
Another alternative Coach Pete recommends is annuities.
"Annuities are savings accounts offered by life insurance companies, and in the future they can turn into a lifetime stream of income. If you set them up correctly, you get an income stream, but then if you pass away, whatever balance is still there goes on to your family. Unlike life insurance, though, that is a taxable event," D'Arruda said.
For young people, life insurance planning is probably not at the top of the to-do list. But according to Coach Pete, the sooner you start planning, the better — and the more you know beforehand, the better you can set yourself up for the future.
"The beauty of life insurance is as long as you get the correct policy, whatever your premium payment is today, it will never go up in the future. And a lot of people say, 'I should just wait until like a couple of years before I'm going to die to get life insurance,'" D'Arruda said. "Number one, we don't know when we're going to die. And number two, the older you get, the more expensive it is to start a life insurance policy — and you may not even qualify since your health is your biggest equity when it comes to life insurance."
Not all life insurance is as good as it sounds, though. Some policies only last for a certain amount of time, whether it's a set amount of years or as long as your employment at a company lasts, meaning you'll likely have to pay more for coverage once the term is up.
"Life insurance companies love to sell term insurance, because most people do not pass away during the term. Then when you want to renew it after the term expires, it's a lot more expensive, and you have to requalify again," D'Arruda said. "I like a permanent policy, which is usually either called whole life insurance or universal life insurance."
With whole life insurance, individuals are entitled to coverage for their lifetime as long as they make their fixed, regularly due payments. The increasing cash value of the account can also be accessed while alive if necessary. Similarly, universal life insurance also builds up cash value, but allows more flexibility with payments.
For Coach Pete, the benefits of permanent life insurance policies are best explained with a simple metaphor.
"Imagine there was a way that I could go back to 1980 when I started my paper route, and buy candy bars again for a dime each. When I bought those candy bars, they gave me a contract saying that I can buy candy bars for 10 cents forever — no matter how expensive they get in the future," D'Arruda said. "It's the same thing with life insurance. The younger you are, the better it is to lock into a permanent policy. Once you're in, you never have a rate increase, and certain policies will pay for themselves down the road."
If term insurance is the only option, then Coach Pete recommends putting money into the policy and investing the rest. Even with permanent policies, self-financing through investments can help make retirement more comfortable.
Life insurance can be complicated to tackle on your own, and Coach Pete recommends meeting with a professional to find the best plan for your specific needs .
"It's important to get a review, because life insurance is not one size fits all. The most important part is that people get an understanding and see how beneficial life insurance would be from someone who really understands it — not a salesman," D'Arruda said. "Meet with a fiduciary, and put a plan together. Then, we can figure out how much life insurance we need to make sure that the life of that person in our family will be continuously profitable and prosperous."
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