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What kind of life insurance do you need?

March 11, 2018

Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to yourmoney@enquirer.com

 

Tyler from Oakley: My wife and I have a 6-month old daughter. What type of life insurance should we be getting? 

Answer: Life insurance is there to protect your family financially in case you were to pass away; and it does that by protecting your stream of income. When selecting the right life insurance policy for you and your family, there are a few things you want to consider. 

You first want to determine how much your family would need annually to support their lifestyle. You also want to factor in any debts that will need to be paid off, such as the mortgage or education for your daughter. Once you’ve determined the correct amount, you have two general options: permanent life insurance and term life insurance. 

Term life insurance is suitable for most families if there’s a need for protection. With term insurance, you select a certain period of time you would like to protect. The most common policies are for 10, 20, and 30 years. So, for instance, if you think your daughter will be out of house, her education will be paid for, and the mortgage will be paid off in 20 years, you might opt for a 20-year policy. 

Permanent life insurance, also sometimes called ‘whole life,’ is more expensive and covers your entire lifespan. It can also be more complicated. This type of policy is most appropriate if you have a child with special needs, a large estate, or business needs. 

As a word of caution: this type of life insurance is sometimes sold as an ‘investment.’ However, the extra premium you pay for permanent insurance should never be considered an investment. You’re essentially betting that you’ll die sooner than the insurance company actuaries think you will. They have carefully calculated the time value of your excess payments (net of their profit and commissions paid) and return that at death with a little interest added on. 

There’s also an option called ‘self-insuring.’ As the name implies, this is when you have enough in savings to cover your family and their expenses, so no insurance policy is needed. 

The Simply Money Point is that if you’re looking for a more affordable option, term life insurance may be the way to go. However, since everyone’s situation is different, Simply Money Advisors recommends working with a trusted financial planner (preferably a Certified Financial Planner™). A personalized financial plan can help determine the best type of insurance – and the amount – to meet your family’s needs. 

 

Anthony and Becky from Western Hills: Should tax reform change how we think about saving for retirement? 

Answer: As of right now, the Tax Cuts & Jobs Act doesn't have too much of a direct impact on your retirement savings accounts. But there are a few considerations to keep in mind as you plan for retirement. 

First, there’s a good chance your take-home pay is now a little higher since this new law lowers tax rates. Use this to your advantage and save that money. Even better, save the money in a Roth IRA if you’re eligible (or Roth 401(k)) – you pay taxes on the contributions now, but you’ll get tax-free growth. This essentially ‘locks in’ your tax rate at these lower tax rates. 

Second, there’s been a big change to what’s called a Roth IRA ‘recharacterization.’ Under the new law, recharacterization will no longer be allowed. Here’s what that means: As explained above, with a Roth IRA, you contribute after-tax dollars, meaning when you take a distribution at age 59 ½, you don’t have to pay taxes on your earnings (assuming you’ve also held the account for at least five years).  

In the past, some retirees would convert their traditional IRA assets (and its pre-tax money) into a Roth IRA account at the beginning of each year and pay the taxes on that conversion. However, if the market didn’t do well, or an increase in income bumped them into a higher tax bracket, they could decide to recharacterize that money – essentially, undo the conversion. 

Now, if you do a Roth conversion, you must be 100% sure that’s the direction you would like to go and it makes sense for your financial goals and objectives. There are no longer any chances for do-overs. 

The Simply Money Point is that no one fully knows the direction tax laws will take in years to come, so it’s important to save what you can now and take advantage of tax-favored accounts, such as a Roth IRA or Roth 401(k). Work with a trusted financial planner to strategically plan as much as possible.

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.

 

Financial Planning