Similar to your investments, your insurance needs and related strategies change over time. As part of a smart financial strategy, it’s critical to review and adjust coverage at different life stages to make sure that you’re protected.
“I refer to insurance as one of the cornerstones of an effective financial strategy,” says Peter Landry, Manager Wells Fargo Advisors Life Insurance. “You can have the best investment strategy, and you can have the best rate on your loans, but it’s also important to have the right type of protection in place. Insurance is an important asset protection tool for any good financial strategy.”
Landry outlines four basic life stages that should trigger a reassessment of your insurance strategies.
Life stage: Starting out
When you’re launching a career, your insurance needs tend to fall primarily into the category of income replacement: helping ensure that critical expenses like the mortgage and college tuition are paid if you pass away.
During this stage in life, as you’re dealing with multiple expenses and trying to build wealth, it’s important that your insurance strategies are properly aligned with your budget and timeline.
“You may want to consider term life insurance—a good, relatively affordable solution that covers you until you reach your peak earning years and when you might see an overall reduction in your expenses as well,” says Landry. He suggests a level premium term policy that’s maybe 20 or 30 years.
Life stage: Pre-retirement
At around 45 to 60 years old, it may be appropriate to think about leveraging life insurance to help with retirement planning. “Several individuals in this age range may have maxed out what they can contribute to a 401(k) on an annual basis,” Landry says. “They may not have options from an income perspective to contribute to an IRA either.”
Individuals in this situation who have a need for life insurance may want to consider insurance strategies such as an indexed universal life product or a variable universal life product. Several of these products are designed to accumulate cash value in the early years of the policy.
Landry says this approach is not necessarily geared toward funding a particular death benefit, but rather toward accumulating cash inside of the policy.
“The life insurance helps provide for your protection needs, but when properly structured, cash value may be assessed as part of a supplemental income strategy. In the right situation, these strategies can deliver a lot of value so as you get into retirement, you can seek to maximize things like Social Security and IRA withdrawals—and use that life insurance cash value as a bridge strategy.”
Note: Investments in variable universal life are subject to market risk, including loss of principal. Cash value will fluctuate in value based on market performance. Cash value is accessed through policy loans and withdrawals, which reduce death benefit.
Extended care planning
The third life stage involves insurance strategies based around extended care needs, an area where carriers have gotten creative with solutions, says Landry. Options include traditional long-term care insurance, a hybrid policy that combines life insurance and long-term care insurance, and a life insurance product with a long-term care rider.
Landry says that while some people are hesitant to use long-term care insurance strategies, if positioned properly they can be an effective estate-planning tool.
“The knock on long-term care coverage is, ‘If I never need it then I don’t really get any value from it.’ But in many cases, you can marry it with a life insurance product solution. You have a life insurance product, and if you need long-term care, you can draw upon that policy,” Landry says. “It reduces the face amount of the policy, but you are able to cover your costs related to long-term care services, and if you never need long-term care, well, you have a life insurance policy that you can leverage for your estate planning purposes.”
The last life stage is legacy planning: using life insurance strategies to create leverage—in a tax-efficient manner—so you can leave a gift to your recipient of choice, such as a family member or charitable organization. These solutions tend to be individually tailored.
Your financial advisor can work with insurance specialists and estate planning attorneys to put together life insurance solutions that can help meet your needs as you move through life’s stages, Landry says.