If you are reading this post, congrats, your life is definitely more complicated than when you just had to worry about you and yourself. It may be that things are getting serious with your significant other or maybe you already have a growing family and were too busy to incorporate life insurance into your planning. Life insurance is one of those touchy, but important subjects. Who likes to think about dying and your family having to deal with the fallout? I sure don’t, but I do rest assured knowing that my financial life is in order and my family will have the ability to continue reaching their goals even if I’m not there to see it in person. That’s the point of addressing this crucial topic now and not kicking the can down the road. If you’ve never looked into it, there are a bunch of things to be aware of: general features, how much do you need, what type do you need, and where you can get a policy.
Tax-Free: One of the great benefits of life insurance is that your beneficiaries receive the death benefit tax-free.
Life Insurance is Insurance: A big pet peeve of mine is that many insurance agents position life insurance as an investment. Even if there are unique bells and whistles that are tied to investments the primary reason you should ever buy life insurance is for insurance. Insurance is a really important need for most families and should be reason enough for most people to obtain coverage.
How Much Do You Need
This could vary substantially from family to family. My focus on young families has seen needs vary from $100,000 to over $1,000,000! There are primarily two different ways that I see estimates for life insurance based off of: needs-based vs life-value based.
Life-Value: Takes a look at all of your projected income that you’d earn over the course of your life and includes a portion of Social Security income too. This does not account for current assets and may cause the insurance need to be substantially larger than needs based analysis.
Needs-Based: Instead of looking at how much income is lost, a needs-based analysis looks at what costs need to be covered in order for your family to not be negatively impacted in a financial way should you pass away.
The main factors that play into my clients’ life insurance needs analysis are the following:
- Current outstanding debt (mortgage, auto, credit card, etc.)
- Important goals (buying a home, paying for college, vacations, retirement)
- Normal lifestyle expenses now and throughout retirement
- Inflation & investment growth
- Current assets
When you factor in the various expenses of life you may be shocked at how much coverage you need, especially early on in life when you don’t have significant assets at your disposal. If you are building wealth, the need for a significant amount of life insurance may decrease as your asset size rises, but that may not be the case if your lifestyle costs continue to increase at a pace faster than your wealth.
What Type Do You Need?
This is not covered nearly enough at the time you are purchasing a policy. Wouldn’t you like to know how the policy you are being sold compares to other choices? I’m really big on providing education in addition to my recommendations because I always hated being told to do something “because” it has bugged me since I was at least 4 years-old.
The three most common types you’ll run into are Group Life, Term Life, and Whole Life. There are a few more variations of whole life with different spins to them that I won’t dive into today.
Length of Policy: While enrolled through an employer
Access to this coverage is typically provided through employers, though you may gain access through other groups (ex: credit union, church). Usually, an employer provides a basic life insurance policy as a benefit and may provide the option to purchase additional insurance. The basic coverage will not require an insurance exam, but one may be required for additional amounts of insurance to be covered. Since this is often an automatic employee benefit, this is the most common coverage for young families. It’s important to know that coverage terminates once you leave your employer. Group life insurance is rarely enough coverage for a growing family.
Length of Policy: Flexible Terms- 5,10, 15, 20, 25, and 30 years
It provides a really cost-effective way to have a significant amount of coverage, but only for a specified period of time, this works best for families that plan to pay off debts and build assets.
Length of Policy: Never expires (as long as premiums are paid)
Unique Features: Accumulates Cash Value, Guaranteed Return on Cash, May Allow Loans
Although insurance sales representatives talk up the features, they very rarely point out the cost or consider providing term insurance as a potential option. Due to the cost of this insurance, there are few situations where it is the preferred choice. Here are a few I can think of though I’m sure there are more uses:
- Liquidity concerns (assets are not easily liquidated)
- Estate planning tax concerns (mega millionaires)
- Dependent with disability concerns (care for loved ones is extremely expensive and dependents may outlive the insured)
- Guaranteed inheritance (leaving a legacy is paramount)
If you feel you have a unique situation that may be relevant to pursue whole life insurance, I do recommend you seek out additional guidance.
Where Can You Get a Policy
Captive Agent– This type of insurance agent works directly with one company.
Independent Agent– An independent agent will have access to multiple insurance companies.
Online Quote– Surprisingly this costs the same as going through the traditional route, but without the comfort of having a trusted agent.
Reading this is just the beginning. In addition to the information you need to process and maybe calculate out yourself, you still have to go through the underwriting process. Unfortunately, it takes a little bit of time, but I encourage you to suck it up and knock this out as timely as possible. After you have proper insurance coverage in place, it definitely will let you sleep better at night.
Although I don’t sell insurance, I do help my clients determine their optimal life insurance need to protect their family and have resources that are available to help them through the whole process if they don’t have their own dedicated insurance agent.
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