Life insurance products accounted for more than 20 percent of long-term savings in the U.S. during 2013, according to an article in the Milwaukee Journal Sentinel. Furthermore, life insurance companies paid out, on average, more than $1.5 billion in benefits every day, according to the article.
Yet, based on a 2013 study by the Life Insurance and Market Research Association (LIMRA), up to 30% of U.S. households had no life insurance at all and only 44% of homeowners had individual life insurance policies.
The Need for Life Insurance
The perceived cost of life insurance is the reason most Americans give for not owning life insurance, according to a 2015 study by LIMRA. Yet, About one-third of Americans believe they need more life insurance and more than 40% said they would “feel a financial impact within 6 months” if the primary wage-earner died, according to LIMRA’s study. In correlation, the average American should have enough life insurance to replace as much as 10 years worth of their annual salary, according to CNN Money.
In today’s market insurance agents need to communicate to their clients how the benefits of life insurance can outweigh its costs. Should they die prematurely, clients need to be able to answer financial questions such as:
- Would they have the money to pay for final expenses (e.g., funeral costs, medical bills, taxes, debts, lawyers' fees, etc.)?
- Would they be able to meet ongoing living expenses like the rent or mortgage, food, clothing, healthcare, etc?
- Would their family be able to maintain their current standard of living?
- Would their family be able to save enough money to put the kids through college or retire comfortably?
Investing in Life Insurance
However, more than half of respondents to the LIMRA study said it is unlikely they will purchase life insurance within the next year. According to the 2015 LIMRA study, 80% of consumers misjudge the price for term life insurance. Those aged 18 to 34 overestimate the cost by an average of 213 percent, while those in the accumulation phase, ages 34 to 54, overestimate by an average of 119%.
Advantages of Life Insurance
Fortunately for policy owners, life insurance provides benefits that may outweigh its perceived cost. As you may already know, along with a death benefit that is payable to heirs, life insurance has the ability to generate a large sum of cash value throughout the life of the policy. Cash value builds tax-deferred each year that the policy is in force. Owners have the ability borrow against the cash accumulation fund without being taxed.
Another advantage is the proceeds from the death benefit will be income-tax-free for the beneficiary. Nonetheless, premiums paid towards a policy by an individual for insurance on the life of his or her spouse are considered nondeductible personal expenses of the individual.
If beneficiaries inherit assets such as IRAs, tax-deferred annuities, and qualified retirement plans, they could end up losing up to 35 cents out of every dollar in federal income tax. On the other hand, since the owner of a life insurance policy used their regular-taxable income to pay the premiums on the policy, the face value that the policy has accrued has already been subject to taxation at regular marginal rates.
Purchasing a Life Insurance Policy
Ultimately, a person who wants to buy a life insurance policy should consider all their options and seek the advice of an independent insurance professional to decide which method is right for their personal situation.
As a financial professional, it is your job to help your client coordinate their portfolio to provide benefits and efficiently and effectively as possible. Take this opportunity to review your clients’ investment and protection plans and help them ensure that not only they have enough invested for themselves and their family but also that their current investments and protection plans are performing as intended.