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Basics of Life Insurance

Hello. My name is Scott Johnson.

In this episode of the Financial Success Academy, I'll be discussing the critical role that life insurance plays in protecting your loved ones against catastrophic economic loss if you pass away unexpectedly.

It's important to view life insurance as a needs-based product and not as an investment. What we mean by this is that life insurance is generally needed starting early in life when children are young, mortgage balances are large, and debt-to-equity ratios are high. If you pass away unexpectedly at this stage in life, and your family loses your income, it could financially devastate a surviving spouse and children.

However, as you age up in life, your need for life insurance typically starts to diminish. Children start leaving the nest, debt-to-equity ratios fall as you pay down your mortgage and accumulate home equity, and pension benefits and retirement balances rise as you approach the end of your career. Your unforeseen passing during these later stages of life would have far less of an economic impact on your dependents, and your need for life insurance coverage may no longer exist.

There are two types of life insurance policies that you can purchase: permanent life insurance, which provides coverage for your entire life, and term life insurance, which covers you for a defined period of time, typically 20 or 30 years. Permanent life insurance comes in three primary types of policies: whole life, universal life, and variable life. These products are often marketed to consumers as investment products with certain tax advantages, but they can have high annual fees, surrender charges for up to ten years after purchase, and the premiums are typically much higher than term life insurance.

Term life insurance is designed to provide economic protection to your dependents when this protection is truly needed, and then the policy expires or it can be canceled once that need no longer exists. For the vast, vast majority of you, term life insurance is the only life insurance you will ever need, and we tend to discourage the purchase of permanent insurance in most circumstances.

Lastly, purchasing life insurance requires health underwriting, and your premiums to purchase a policy can range wildly depending on your health and family history of cancer and heart disease. We encourage you to purchase term life insurance early in life when you are young and healthy so that you can pay the lowest possible premiums throughout the term of the insurance policy.

We hope this information about life insurance has been helpful. We don't sell life insurance at Decision Point because we're a fee-only firm, but we can advise you on how much coverage you may need to adequately protect your family, as well as where to purchase it. Just call our office if you would like to discuss your specific situation.

Thanks for tuning in, and stay safe.