Haris Ashley
Money expert Clark Howard offers a range of recommendations and insights for those seeking to purchase life insurance. Howard's advice covers various aspects, including the type of insurance, the amount of coverage, the duration of the policy, and the choice of insurance company. He emphasizes the importance of understanding the differences between term life and whole life insurance, advocating for term life insurance in most cases due to its simplicity, affordability, and efficiency in replacing income. Howard also suggests opting for a reputable company with high financial stability, as indicated by ratings from credit agencies like A.M. Best, and shares his thoughts on instant-issue policies and the role of salespeople. Additionally, he advises against unnecessary insurance policies, encouraging individuals to focus on the big things in life.
What life insurance does Clark Howard recommend?
| Characteristics | Values |
|---|---|
| Type of insurance | Term life insurance |
| Type of company | Traditional "mega insurers" with an A++ rating from A.M. Best |
| Company examples | MassMutual, New York Life, Northwestern Mutual, State Farm |
| Policy duration | 10, 20 or 30 years |
| Who is it for? | People with others depending on their income |
| Coverage | 10 times the policyholder's current salary |
| Additional recommendations | Buy online without a salesperson, consider companies that offer instant-issue policies |
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What You'll Learn
Term life insurance vs. whole life insurance
Money expert Clark Howard recommends term life insurance over whole life insurance in almost all circumstances. Term life insurance is a simple, efficient, and cheap way to replace lost income and provide for dependents. However, whole life insurance may be a better option for high-income earners seeking tax benefits or investment opportunities.
Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. During this term, the policyholder pays monthly premiums, and their beneficiary receives a death benefit if the policyholder passes away. Term life insurance is designed for individuals who want coverage while they are earning an income that others depend on. It is often called "level term life insurance" because the premiums remain the same throughout the policy's duration. Term life insurance is purely insurance and does not include any investment components.
On the other hand, whole life insurance offers permanent coverage until death. It includes an investment component called "cash value," which allows policyholders to borrow money tax-free against their policy up to the amount they have paid. The cash value of a whole life policy is also tax-deferred by the IRS. However, whole life insurance premiums are much more expensive than term life insurance premiums.
When shopping for term life insurance, Clark Howard suggests following a two-step process. First, check the company's rating with the credit rating agency A.M. Best and only consider companies with an A++ rating or A+ for shorter-term policies. Second, price shop and choose the cheapest option among the highly-rated companies. Clark emphasizes that financial stability and price are more important than brand recognition when selecting an insurer.
Additionally, Clark recommends buying term life insurance online without a salesperson, as the process is relatively simple. He also suggests opting for instant-issue policies, which provide faster access to coverage without requiring a medical exam. This option can be especially beneficial for individuals with pre-existing health conditions.
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How much coverage do you need?
When it comes to life insurance, Clark Howard recommends term life insurance for most people. Term life insurance is a simple and efficient way to replace income at a low cost. It is a type of insurance policy that guarantees coverage for a specific period, usually 10, 20, or 30 years. During this time, the policyholder pays monthly premiums, and in the event of their death, the policy pays out a death benefit to the beneficiary.
Now, how much coverage do you need? According to Clark Howard, you should opt for a coverage limit that is ten times your current salary. For example, if you earn $80,000 per year, you may want to set your benefit amount at $800,000. This amount is recommended to account for inflation over the life of the term, especially for longer policies such as 20 or 30 years.
When deciding on the coverage amount, it is important to consider your financial obligations and goals. The death benefit should be sufficient to cover expenses such as paying off a mortgage or funding your children's education. For instance, if you have a young family and want to ensure their financial security, you may want a higher coverage amount to account for future expenses like college tuition. On the other hand, if you are closer to retirement and your children are already in college, a smaller coverage amount may be more suitable.
Additionally, the length of the coverage also plays a role in determining the amount of coverage you need. If you are young and have a long working life ahead of you, a 20 or 30-year policy might be appropriate. In contrast, if you are closer to retirement, a 10-year policy might be sufficient to cover any remaining financial obligations.
When shopping for term life insurance, Clark Howard suggests following a simple two-step process. Firstly, check the company's rating with the credit rating agency A.M. Best. Look for companies with an A++ rating or A+ if you are considering a shorter policy. Secondly, price shop and choose the cheapest option among the highly-rated companies. This approach ensures financial stability and affordability.
In summary, when determining the coverage amount for term life insurance, consider your current salary, financial obligations, and the desired length of coverage. By following Clark Howard's recommendations, you can ensure your loved ones have the financial support they need in the event of your untimely death.
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Which companies should you buy from?
Money expert Clark Howard recommends a two-step filter when shopping for the best term life insurance company. Firstly, he suggests checking the company's rating via the credit rating agency A.M. Best. He advises only considering companies with an A++ rating or A+ if you're buying a 10- or 15-year policy. Secondly, he recommends shopping for the best price, suggesting that consumers opt for the cheapest A++ company available.
Clark also recommends buying term life insurance from one of the best term life insurance companies. He says:
> "There's no more efficient way that exists to replace income than with a level term life insurance policy. They're cheap, they're simple and the amount of coverage you can buy for a very small monthly amount is fantastic."
He also suggests that consumers opt for a coverage limit that is ten times their current salary. For example, someone with a salary of $60,000 should consider $600,000 in coverage.
Examples of companies that offer term life insurance include MassMutual, New York Life, Northwestern Mutual, and State Farm. Clark has also recommended USAA for years, although only those with military ties are eligible for its term life insurance.
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What are the tax implications?
When it comes to the tax implications of life insurance, there are a few things to keep in mind. Generally, the death benefit paid out from a life insurance policy is not considered taxable income by the IRS. This means that, in most cases, the beneficiary of a life insurance policy will not owe income tax on the payout they receive.
However, there are some situations where the death benefit may be taxable. For example, if the policy was transferred for value, such as selling the policy to a third party, then the payout may be subject to income tax. Additionally, if the policy is part of your estate and the death benefit exceeds the estate tax exemption, then it could be subject to estate taxes.
Another tax consideration when it comes to life insurance is the cash value of the policy. If you have a permanent life insurance policy, such as whole life or universal life, the policy may build up cash value over time. This cash value can be borrowed against or withdrawn, and there can be tax implications associated with these transactions. For instance, loans taken out against the cash value of a life insurance policy will need to be repaid with interest. If the policy is surrendered or lapses, there may be tax consequences if the amount received exceeds the cost basis.
Additionally, withdrawals from the policy may be subject to income tax if they exceed the amount of premiums paid. It is important to be aware that tax laws regarding life insurance can be complex, and there may be specific state or local taxes that apply in certain circumstances. Consulting a tax professional or financial advisor is advisable to gain personalized guidance and a comprehensive understanding of the potential tax implications associated with your life insurance policy.
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Is accidental death insurance worth it?
According to money expert Clark Howard, people often worry about insurance on narrow things instead of the big things in life they really need it for. He recommends that you should never insure something that is a consumer item.
Accidental death insurance, or AD&D, is a type of life insurance policy. However, it is considered narrow coverage as it only pays out if the insured person is injured or dies from a covered accident. It does not cover natural causes or illnesses. AD&D coverage differs from company to company, and it is important to understand the details of your policy. Some common exclusions include high-risk activities and medical events like heart attacks and strokes.
AD&D insurance is typically cheaper than other life insurance policies, but it offers limited coverage. It is not a substitute for standard life insurance, which covers most causes of death. If you already have life insurance, adding an AD&D rider can be a more affordable option than purchasing a standalone AD&D policy. This rider increases your life insurance death benefit if you pass away from a covered accident and provides coverage for certain accidental injuries.
Whether accidental death insurance is worth it depends on your individual circumstances. If you have dependents who would suffer financially if you died, it is recommended to buy life insurance first. AD&D insurance can be a good addition to your standard life insurance policy if you are in a high-risk profession or have risky hobbies. It can provide coverage specific to your situation and help with the costs of serious accidental injuries. However, it is important to note that AD&D insurance may not be available to those in certain high-risk jobs, such as firefighting or law enforcement.
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Frequently asked questions
Clark Howard recommends term life insurance for most people. Term life insurance provides coverage for a specific period, usually 10, 20, or 30 years. It is simple, cheap, and offers a high level of coverage for a small monthly amount.
The first step is to decide how much coverage you need. Clark Howard recommends a coverage limit that is ten times your current salary. The second step is to decide how many years you want the coverage to be guaranteed.
Whole life insurance is permanent and offers coverage until death. However, it is more complex and has higher monthly premiums. Term life insurance, on the other hand, is simple and cheap, making it a more efficient way to replace income.
Clark Howard recommends buying term life insurance from companies with high financial strength. He suggests checking the company's rating through the credit rating agency A.M. Best and choosing companies with an A++ rating or A+ for 10- or 15-year policies. Some companies that meet this criterion include MassMutual and USAA.
