A Quick Guide to Life Insurance

Few of us can say we’re fully prepared for our last day on Earth. But it’s important that your finances, at the very least, have the protection they need when that time comes. Life insurance is one of the most powerful tools for protecting your loved ones – and your financial plan – from the consequences of your death. Yet many Americans don’t have the coverage they need, often due to misconceptions about cost or complexity.

Others avoid addressing it because they don’t want to think about their own mortality. But like it or not, that’s a fate we all must face. The bright side is, it can become more comfortable to think about when you know there’s a plan in place that will take care of your loved ones when you’re gone. That’s why life insurance is a foundational part of a well-rounded financial strategy and it should be well integrated into your overall plan. Let’s learn the key elements that can help in securing the coverage that’s suited to you.

WHY LIFE INSURANCE MATTERS

According to research from LIMRA, people understand the importance of life insurance and acknowledge they should have the necessary coverage. But unfortunately, when it comes to life insurance coverage, a significant portion of the U.S. population is either underinsured or uninsured. In fact, 102 million Americans need – or need more – life insurance.

Life insurance is purchased for a variety of reasons, including:

• Income replacement: To ensure loved ones can maintain their standard of living in the event of a premature death of an income earner. Insurance in the amount of future income can help cover living expenses, housing costs and other needs.
• Funding education expenses: A premature death can derail college savings plans. Life insurance can help keep those goals on track.
• Estate planning needs: If an estate exceeds the federal estate tax limit, life insurance can provide liquidity to offset taxes or equalize inheritances among beneficiaries.

TYPES OF LIFE INSURANCE

There are two main types of life insurance – term insurance and permanent insurance. Let’s explore both.

TERM INSURANCE

Term insurance provides coverage for a specified period. If premiums are paid and the insured dies during the term, the insurance company pays a death benefit to the named beneficiary. It is pure insurance, designed to cover needs at an affordable cost.

PERMANENT INSURANCE

Permanent insurance provides lifelong coverage and includes a cash value component that grows over time. Cash value growth can be tied to a specific interest rate or the performance of investment subaccounts tied to the market. Unlike term insurance, it is designed to provide death benefit protection to age 100, and beyond (in most cases) if a sufficient premium is paid. The two primary types of permanent insurance are whole life insurance and universal life insurance.

Here’s a breakdown of the pros and cons of each type:

EVALUATING YOUR COVERAGE NEEDS

Determining the appropriate amount of life insurance coverage is an important part of your financial plan. Here are the key factors to consider:

• How much coverage is needed: For income replacement, multiply your net annual income by the number of years until retirement. This helps ensure your family can maintain their lifestyle.
• How long coverage is needed: At a minimum, coverage should last until the youngest child finishes school or until retirement. For some empty nesters, maintaining life insurance until retirement is needed.
• What type of insurance is appropriate:
  • Use term insurance for needs with a defined time horizon (for example, income replacement to protect family during working years).
  • Use permanent insurance for unique planning needs such as estate liquidity or legacy goals.
    • When considering permanent insurance, you may want to focus on policies that offer a no-lapse guarantee and are not designed to grow significant cash value. Keeping cash value minimal while ensuring a guaranteed death benefit helps keep premiums reasonable.
• Group term vs. individual term:
  • Most will find they can adequately cover their insurance needs with term insurance.
  • Compare the cost of coverage available through your employer to the cost of policies you could purchase on your own, but be aware – if you leave your job, group term insurance may be difficult or expensive to take with you.

WORK WITH AN ADVISOR TO PLAN FOR YOUR LIFE INSURANCE NEEDS

Life insurance isn’t just about preparing for the worst; it’s about ensuring your financial plan continues to support those you care about most. At Edelman Financial Engines, we believe that protecting what you’ve built is just as important as growing it. That’s why our advisors work closely with our internal insurance experts to help you evaluate coverage options, understand trade-offs and make informed decisions tailored to your unique circumstances.

Whether you're reviewing existing coverage or exploring new strategies, we’re here to help with additional resources and insights that support your long-term financial wellbeing and help ensure your financial plan stays on track - no matter what life brings.