The Importance of Insurance in Building Your Legacy

We talk all the time about the wealth-building potential of homeownership, and how it’s the number one way that families create wealth that can be tapped by future generations. But what else should you be thinking about as you pursue long-term financial and economic stability? How do you protect against the unexpected?

The answer is insurance. Not just homeowners or even auto insurance, but life insurance. Here’s a primer on insurance based on a recent episode of the Welcome Home Podcast.

Let’s start with homeowners insurance. Experts we spoke with stressed the need to understand your policy. Most people learn what their insurance covers when they have a problem – and find out it doesn’t cover that problem. Ask questions and discuss things in detail with your agent. If you don’t feel heard, find an agent that will hear you. Don’t forget about understanding your liability coverage, and if you need to reduce your premium, look into increasing your deductibles. If you don’t yet own your own home, renters insurance is important if you want to avoid any potential financial setbacks.

A second, but arguably equally important type of insurance to consider is life insurance. This is intended to replace family income if it’s lost due to death. Most people need an amount that will cover their outstanding mortgage amount as well as any credit card debt being carried. The earlier in life you get a life insurance policy, the lower the premiums will be. And getting coverage early insures you when the potential need for income replacement is greatest. You’re protecting your family against the unexpected, and you’re safeguarding your family’s collective dreams such as sending your kids to college or accessing generational wealth to help a child with their own home purchase. Importantly, life insurance payouts are paid out on a tax-free basis.

Life insurance is generally available in two forms – term life and whole life. Term life is straight-up protection against the unexpected. Premiums are steady during the term (usually a set period of ten to twenty years), and when the term is completed, the policy generally ends. Whole life is a policy that builds equity over time and is structured more like an investment. You deposit a set amount of money, and that money generates dividends. Returns are guaranteed, and you can borrow against the equity. Meanwhile, once the coverage period ends, you receive all of your investment back. In sum, term life is best for those on a more limited budget, while whole life is a wealth-building asset for those with the funds to set aside.

Here are a few other things to be thinking about when it comes to preparing for the unexpected:

• Life Insurance Through an Employer – Many employers offer a basic life insurance policy as an employee benefit. This is great, but if you get sick and can no longer work, you lose your access to this benefit. And now you can’t get a policy on your own because of your pre-existing condition.
• Life Insurance on Child – This is especially important to consider if you’ve cosigned student or other loans on behalf of your child. If your child were to pass away unexpectedly, you would be on the hook financially for these loans. Consider coverage that would take care of any such cosigned loans.
• Keep Your Beneficiaries Updated – When you purchase a life insurance policy, you designate the beneficiaries who will receive the proceeds in the event that you die. But life is full of changes, such as divorce or the death of a beneficiary, and failing to keep your beneficiaries updated could result in the funds going to folks other than those you would have intended. (This is good advice for any retirement plan assets you may hold as well.)
• Consider a Will – Among many other things, a Will can direct what happens to your home when you die. Let’s say you die, and an heir continues paying the mortgage and living in the home. In this scenario, that heir has no claim to the house despite the fact that they are paying the mortgage. Rather, the home goes to the owner’s legal estate, which can consist of many more individuals than the heir paying the mortgage.
• Consider a Trust – Trusts are especially useful with dependents. For example, when leaving a child funds, a Trust can dictate specific terms such as the age at which the funds can be accessed.

For a more in-depth discussion on the importance of insurance in building your legacy, see this episode of the Welcome Home Podcast.