Why is insurance an important component of your financial plan? A proper insurance plan is the difference between financial protection — or burden — for you and your family should the worst-case scenario happen. In this article, we’ll cover three important types of insurance you should consider including in your financial plan.
- Insurance is important for managing financial risks, providing peace of mind, and supporting retirement planning.
- Life insurance comes in various policy types, such as term, whole, universal, and variable, each serving different needs for coverage, savings, and investment.
- Disability and long-term care insurance help protect income and cover care expenses during times of illness, injury, or aging.
Why is insurance an important part of financial planning?
Ultimately, insurance planning helps provide a financial safety net by allowing you and your family to cover large expenses without derailing your overall financial plan.
Risk Management
If 2020 taught us anything, it’s that life is wildly unpredictable, and we should be prepared for events like accidents, illness, or natural disasters. Insurance helps you manage these risks by providing financial protection.
Peace of Mind
Knowing that you have insurance coverage for a variety of situations gives peace of mind. It allows you to focus on other financial goals, such as saving or investing, knowing that you and your family are protected from the burden of large, unexpected costs.
Retirement Planning
Life insurance or long-term care insurance play an important role in retirement planning by providing additional financial resources for covering needs as you age.
Which types of insurance should you include in your financial plan?
Life Insurance
Life insurance provides financial protection to your family in the event of your death. When you purchase a life insurance policy, you pay regular premiums to the insurance company. In return, the company agrees to pay a lump sum amount — called a death benefit — to your beneficiaries if you pass away during the policy’s term.
There are several types of life insurance policies:
Term Life Insurance:
Term life insurance provides coverage for a specific period of time, like 10, 15, 20, or 30 years. If you pass away within that term, the insurance company pays the death benefit to your designated beneficiaries. However, if you outlive the term, there is no payout.
Term life insurance is typically more affordable than whole life insurance, because it only provides coverage for a set period and doesn’t accumulate cash value like whole life insurance. If you’re on a budget but still want to provide financial security for your family in case of your death, term life insurance is an affordable way to get coverage.
Whole Life Insurance
Whole life insurance, on the other hand, is a type of permanent life insurance that provides lifelong coverage as long as you continue paying premiums. It also includes a cash value component that grows over time (tax deferred) and can be borrowed against or withdrawn (though this could reduce the death benefit). However, this option is more expensive than other types of life insurance.
If you’re looking for a life insurance option that serves as both insurance and as a tool for savings and investment, whole life insurance provides both benefits. Additionally, the lifelong component is ideal for anyone who wants to protect their loved ones no matter when you may pass away.
Another type of whole life insurance is called final expense insurance (or funeral or burial insurance). This offers a smaller death benefit intended to cover costs associated with a person’s funeral and other end-of-life expenses.
Universal Life Insurance
Universal life insurance is yet another type of permanent life insurance that allows you to adjust the death benefit and premiums over time. Like whole life insurance, it also includes a cash value component, but you can use it to adjust the policy to fit your financial situation.
If you want permanent coverage but also desire the ability to adjust your premiums to fit your changing budget, universal life insurance can offer you that flexibility.
Variable Life Insurance
Finally, variable life insurance is a permanent life insurance policy that offers both a death benefit and an investment component. Because it’s invested, the cash value and death benefit can fluctuate based on the performance of the investments.
If your goal is to build up a significant legacy for your heirs, variable life insurance offers a way to accumulate value in your policy and potentially provide a larger payout. Of course, this is dependent on the market, and you could be facing higher fees and costs with this type of life insurance policy.
Disability Insurance
Disability insurance provides income replacement if you’re unable to work due to illness or injury. It’s designed to help protect your income if you’re unable to earn a living because of a disabling condition, whether it’s short-term or long-term.
Disability insurance typically replaces a portion of your income (often 50-70%) for a period of time, depending on the type of policy. This can help you and your family cover essential living expenses like rent/mortgage, bills, and groceries while you’re recovering or unable to work.
Long-Term Care Insurance
Long-term care insurance helps cover the cost of long-term care services (like nursing homes or assisted living), which are often not covered by health insurance or Medicare. This can help ease the financial burden on both you and other family members as you age and need greater assistance.
Create your insurance plan with a Landmark Financial advisor
We’ll help you craft a plan that includes life insurance analysis and design, long-term care insurance, and disability insurance. So you can rest easier knowing that should the worst happen, you and your family are prepared and protected. Get started working with us here.
This material was created by Starling Digital for use by Landmark Financial, LLC and does not represent the views and opinions of Avantax Wealth Management or its subsidiaries.