Life insurance for the plan you’re building

What does life insurance do in a retirement plan?

More than most people expect. Depending on the policy, it can:

• replace income your family would lose if you died;
• pay final expenses, debts or estate costs, so your savings stay intact;
• leave a legacy to the people and causes you care about;
• with some permanent policies, build cash value you can use later in life;
• with some policies, include riders that help pay for long-term care.

Term or permanent: what’s the difference?

Term life covers you for a set number of years, such as 10, 20 or 30. It usually costs the least for the most coverage, and it ends when the term does.

Permanent life (whole life, universal life and indexed universal life) is designed to last your whole life, as long as the policy is kept in force. It costs more, and part of what you pay can build cash value over time.

Neither is better in general. Term often fits a need with an end date, like a mortgage or children at home. Permanent often fits a need that doesn’t end, like leaving an inheritance or covering estate costs.

How does cash value work?

With a permanent policy, part of each premium goes into the policy’s cash value, which can grow tax-deferred. How it grows depends on the type: a set rate with whole life, a declared rate with universal life, or interest linked to a market index, within a cap and a floor, with indexed universal life.

You can usually borrow against cash value or withdraw from it. Loans and withdrawals reduce the death benefit, can have tax consequences, and, if they grow too large, can cause the policy to lapse. They work best as part of a plan, not as an afterthought.

How much coverage do you need?

There’s no single rule. The answer comes from your numbers: the income your family relies on, what you owe, the people who depend on you, and what you want to leave behind. Your other savings, and when you plan to retire, matter too.

Richard works through those numbers with you, so the coverage fits a purpose rather than a guess.

What about the policies you already have?

They’re worth a review. Many people hold coverage bought years ago for a different stage of life, and some have policies through work that end when the job does.

If a different policy would serve you better, a 1035 exchange can move cash value from one life insurance policy to another without current tax. Replacing a policy has costs too, such as new surrender charges and new health questions, so it should only happen when the comparison clearly favours you.

What does applying involve?

Insurers look at your age and health, and price the policy accordingly. Expect health questions, and sometimes a short medical exam or a review of your records. Some policies need less, at a higher cost.

You’ll never be younger than you are today, and health can change, which is why it often pays to look sooner rather than later.