Client Access
Insurance
Hoover Financial AdvisorsFebruary 4, 2016
Insurance
One of the most important aspects of any financial plan is addressing and covering risk. In working with clients we uncover risk in many forms – investment risk, the risk of not saving enough, and the risk of not properly organizing your affairs for when you are gone. One of the most effective ways to cover the risk of loss is through the use of insurance.
Term vs. Permanent
There are two broad categories of life insurance: term and permanent. Considered temporary life insurance, a term policy is typically selected to cover specific needs for a period of time. On the other hand, permanent insurance policies generally cover a need in conjunction with providing a “return” of some form in the event the policy is never used as originally intended. For instance, some policies may have the ability to provide investment returns through underlying policy investments or through the return of cash at some point. Following are some basic features of both types of insurance:
Term Insurance |
Permanent Insurance |
Features |
|
| ▪ Temporary life insurance | ▪ Permanent life insurance |
| ▪ Two types: level premium term (premiums remain the same) and annual renewable term (premiums change each year) | ▪ Many different types exist, including: whole life, variable life, universal life, and variable universal life |
| ◦ Note: in the event the term ends on a level premium policy, it typically converts to an annual renewable term, if desired | ▪ Premiums may be fixed or flexible depending on the type of policy |
| ▪ Provides specified death benefit | ▪ Can provide a specific or variable death benefit |
| ▪ Contract is for a specific period of time, generally 10, 15, 20, or 30 years | ▪ Typically features “cash value” – an amount of cash the policy owner is entitled to, even if the policy is terminated |
| ▪ May have the option to convert to permanent insurance | ▪ Generally separated into two accounts – one for the death benefit, another for the cash value |
| ▪ If the insured lives past the term, no payment is made at death as the insurance is technically no longer in force | ▪ Investments in the market can sometimes be made with some funds depending on the structure of the policy |
| ▪ Guaranteed insurability for the life of the contract | ▪ Some policies provide the insured with the ability to take withdrawals or loans against the policy |
| ▪ May sometimes be used as a component of gifting/estate planning strategies | |
| ▪ May sometimes be used for additional investment/savings opportunities for high net worth individuals | |
Pros / Cons |
|
| ▪ Pro: Ability to receive a substantial amount of coverage at a relatively minimal cost | ▪ Pro: Builds living benefits through the use of cash value, providing possible funds for other uses |
| ▪ Con: Over time, term insurance becomes more expensive. The cost of insurance as one ages can become cost-prohibitive. | ▪ Con: the cost of maintaining these policies can be exorbitant |
| ▪ Con: Pure death protection only | ▪ Con: In some cases, the policy owner may face investment risk just as one would see in the market |
Addressing Your Risk
So is term or permanent insurance best for you? While one answer does not exist for every situation, consider these factors in analyzing your options:
As always, make an effort to work through this issue with the professionals you engage. Hopefully, you are working with a financial planner (or other professional operating under the fiduciary standard) that can walk you through a detailed and thoughtful analysis. At the very least, find an insurance agent you trust to talk through your concerns and identify the best fit for you.
In summary, life insurance is an extremely personal topic and choice. There are many different factors that weigh into the decision-making process that can seem daunting. If you would like help analyzing or discussing your personal situation please feel free to contact our office. We would be happy to help you sort through your options and provide professional guidance.
112 Moores Rd, Suite 100, Malvern, PA 19355 P: 610.651.2777 | F: 610.651.2797 | E: info@hfaplanning.com 112 Moores Rd, Suite 100, Malvern, PA 19355 © 2020 Hoover Financial Advisors
