Here’s what we cover in this episode:
🛡️Types of Insurance & Their Purpose: Income, estate, and business protection
⏳ Term Life: Affordable coverage for working years
⏱️ Permanent Life: Coverage that adapts over time
🏖️ Retirement Shift: When insurance still matters, and when it doesn’t
🔍 Policy Reviews: Why in-force illustrations matter
⚠️ Common Mistakes: Overpaying, overcomplicating, or underinsuring
Executive Summary:
Life insurance plays a critical role in retirement planning, income protection, estate planning, and business continuity. The appropriate type and amount of coverage depends on life stage, financial goals, and financial assets. Life insurance is often viewed as a product, but it should be viewed as a strategy designed to accomplish specific goals. Purchasing life insurance without a strategy can lead you to overpay for coverage, or saddle you with inadequate coverage.
What Is the Purpose of Life Insurance?
Life insurance is commonly used for three primary purposes:
- Income replacement
- Estate planning
- Business continuity planning
Income replacement ensures surviving family members have financial resources if a primary earner passes away. Estate planning uses life insurance to provide liquidity for taxes, expenses, or equalization among heirs. Business planning relies on life insurance to fund buy-sell agreements or maintain continuity if a partner or key employee dies.
Each purpose requires a different approach, which is why selecting the right type of policy matters.
Term Life Insurance: Simple and Cost-Effective
Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. Premiums are generally lower because there is no cash value investment component—coverage is pure insurance protection. If the policyholder outlives the term, the policy expires with no remaining value.
Term insurance is often best suited for income replacement during working years, especially for households with children, mortgages, or limited savings. Terms and coverage are commonly structured to match major financial milestones, such as children becoming financially independent and retirement.
A common rule of thumb for income replacement is 10 to 15 times household income, though the appropriate amount depends on assets, expenses, and long-term goals.
Permanent Life Insurance and Cash Value
Permanent life insurance is designed to last for a lifetime and may include a cash value component. Cash value represents funds that accumulate inside the policy over time. This can be accessed through loans, which can have certain tax advantages. However, it’s important to remember that upon the insured’s death, the beneficiaries only receive the death benefit—not the death benefit plus cash value.
Permanent insurance is often used for estate planning, legacy goals, or long-term business needs. There are three primary types:
Whole Life Insurance
Whole life insurance offers guaranteed premiums, guaranteed death benefits, and predictable cash value growth. Premiums are higher in exchange for certainty. Whole life is often used in business planning or situations where long-term predictability is essential.
Universal Life Insurance
Universal life insurance provides flexibility in premium payments and death benefits. Policy performance depends on interest rates or underlying investment assumptions. Because outcomes can vary, guaranteed universal life policies are often used to limit the downside risk of worst-case scenarios.
Indexed Universal Life Insurance
Indexed universal life insurance links investment returns to a market index while offering downside protection. While this is appealing conceptually, the added complexity makes careful analysis essential. Caps, participation rates, and policy costs can significantly affect long-term results.
Using Life Insurance for Long-Term Care Planning
Permanent life insurance can include a long-term care rider, allowing the death benefit to be accessed early to pay for qualified long-term care expenses. This approach can be a cost-effective alternative to traditional long-term care insurance when permanent coverage is already appropriate.
If long-term care is needed, funds are paid from the policy while the policyholder is alive, reducing the remaining death benefit. This structure provides flexibility while protecting other financial assets.
Employer-Provided Life Insurance: Is It Enough?
Employer-provided life insurance can be a helpful benefit, but relying on it exclusively introduces risks. Coverage is typically tied to employment, meaning it may disappear after a job change, retirement, or health event. If insurability changes later, replacing coverage can become difficult and expensive.
Owning an individual policy ensures coverage remains in place regardless of employment status. Employer coverage can supplement personal insurance, but long-term planning typically requires policies owned outside the workplace.
Life Insurance in Retirement
Life insurance needs often change in retirement. Term insurance purchased for income replacement may no longer be necessary once assets can sustain retirement income and children are financially independent. Allowing unnecessary term policies to expire can often improve cash flow.
Permanent insurance may still be appropriate in retirement for estate planning, tax planning, legacy goals, or long-term care protection. This will depend on the policy’s original purpose in the context of current financial circumstances.
Why In-Force Illustrations Matter
Life insurance is not a “set it and forget it” strategy. An in-force illustration shows how a policy is expected to perform going forward, including premium costs, cash value accumulation, and death benefits. Reviewing this illustration can help determine whether a policy still aligns with your financial goals.
Policy reviews may reveal opportunities to reduce premiums, adjust death benefits, or even exit policies that are no longer needed. Regular reviews are especially important for universal and indexed universal life policies, where investment performance assumptions can change over time.
Common Life Insurance Mistakes to Avoid
The most common mistakes include having too little coverage, choosing the wrong type of policy, or buying overly complex products that do not align with actual needs. Life insurance should support a broader financial strategy, not exist in isolation.
The right solution always depends on goals, assets, and risk tolerance. Matching the right tool to the right job ensures life insurance enhances, rather than complicates, a retirement plan.
Authors:
Ryan Wyatt, CFP®, CIMA®
Nick Lewandowski, CFA®, CFP®
Resources:
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This communication is provided by Wyze Wealth Advisors LLC, a registered investment adviser. All material is for informational and educational purposes only and should not be considered personalized investment advice or a recommendation regarding any specific security, strategy, or product.
The assumptions and scenarios presented are illustrative and do not reflect actual investment results. Projections are based on current market conditions, which may change. Past performance is not indicative of, and does not guarantee, future results. All investments involve risk, including the potential loss of principal.
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