EXPAT LIFE INSURANCE
What is it and why do I need it
The first question around life insurance is usually “why do I need life insurance”? Life insurance is just used to solve problems, and depending on your situation and preferences, you may or may not “need” to solve those problems.
If you just don’t care what happens to your family and dependents when you depart this world, then life insurance is probably not for you. These same people often don’t have a will or legal documents in place either. This article is not for those people. But for the rest of us, the lifelong challenge of preparing for the future might include considering life insurance as part of the plan.
There are two kinds of life insurance: term and permanent. On a simplistic basis, term covers your life for a defined length of time, the “term”; and permanent covers you for the rest of your life. These are two very different animals and I will try to explain the basics in this article. Beyond that, the intent of this article is to guide the expat, or soon-to-be expat, with some of the unique differences of obtaining and holding a policy while living outside the US.
Okay, so why have life insurance? The basic idea here is you pay premiums and if you die while the policy is still in effect, your beneficiaries will receive a death benefit. The first benefit for those you leave behind is that they now have some money to take care of all the expenses of your funeral. They can also use it pay off any minor debt you had, and to file a final tax return. Anything left over from all that they can then use for living expenses into the future. You have left a legacy for them. This is typically what a term policy will take care of. You have to die to get a benefit.
A permanent policy offers another set of benefits. The company takes some of your premium and sets aside some of it into a cash account, thereby creating “cash value” inside the policy. You can access this cash while you are alive in a number of different ways, I’ll just mention a few key ones here. There are different ways of structuring these policies and it is very important to work with an agent that designs the policy to what you want to get out of it. So, creating a policy to provide the maximum tax-free income later in life is quite different than one to guarantee the highest death benefit when you die. Agents have access to specialized tools to custom design these policies to what the client wants out of it. Again, working with the right agent is key here.
To summarize the above, here are the pros and cons of term and permanent life insurance.
|Death benefit tax-free to beneficiaries||Huge premium increase after term ends|
|Low premiums for defined term (usually paid 10-20 years)||No access to cash|
|Simple to understand||Must die for any benefit|
|Flexible death benefit||More complex product|
|Safe ways to grow cash||Self-discipline on premiums|
|Access to cash while alive||Some management required|
|Provide tax-free retirement income|
|Can achieve “paid-up” status|
|Tax-free death benefit|
There are benefits of getting a policy issued before you start planning your expat move out of the US. One of the questions on most life applications has to do with whether you live in the United States. In most cases (on domestic policies) if the answer is no, then the process stops and you simply can’t apply. If you apply and get a policy issued before you start planning your exit, then you are fine. This whole issue is why we started looking for companies in the international arena that specialize in insuring lives of US citizens (and elsewhere) that live abroad. There are a number of excellent companies that work this niche and have, surprisingly, excellent products to boot. Besides just having the ability to underwrite these policies, they offer the expat other benefits that are truly valuable in the long run. The servicing needs of these policies are different than domestic policies. They are geared to handle all the issues abroad that domestic companies don’t. You will have more flexibility if you can start this planning process while still living in the US, and before you have plans to leave. If you are past that point in time, there are still options open to you.
There is also a whole group of smaller life products commonly referred to as “final expense” policies. Often with little or no underwriting, they offer a smaller death benefit that is meant to help the survivors with your final expenses. The funeral, the flowers, the final tax return, those kinds of things. Often sold to those at 65 when figuring out their Medicare strategy, these products are definitely worth a look especially if you have nothing else in place.
A few final thoughts. Whether a life policy is right for you or not, we expats have a unique situation of keeping our loved ones in the loop as to our wishes after the final event. I have found this point so lacking with so many people I have talked to through the years. You need to have a safe and known place that you keep these types of documents. Consider sharing a safe deposit box in the US with a close relative that you trust, and keep them informed of what is in the box. Your will and life policies should be in that box, as well as all other related documents, health directives, etc. Also keeping combinations of any safes, as well as passwords for all key accounts is a wise idea. The whole idea is to give the ones you love the money and the tools to take care of your business after you pass away.
If you have questions about anything in this article, or would like to schedule a phone consultation, please email me at firstname.lastname@example.org.
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