Life Insurance 101
Nobody wants to think of the inevitable – I get it. Not exactly a dinner table conversation. But if you have loved ones that depend on you it is time to put your big boy or girl pants on and get this conversation over with.
Either spouse or significant other’s untimely demise will put most families in a financially difficult position, whether they work or not. I am talking to you stay-at-home parents – without you, the cost of childcare just went up. Or maybe you were banking on entering the workforce when the kids get older. There is still a financial consideration.
In light of the recent pandemic, I hope that those of you reading this realize that life can be fragile, so don’t make this harder on everyone else you leave behind. Enough with the lecture.
So where do you start?
For starters, let’s not rely on the insurance you have from work. I hear that every day. “I have that through work so I don’t need anymore.” I’ll tell you why that is the wrong way to look at this.
- So you plan on working there for the next 30-40 years? People lose their jobs all the time and most of the time you can’t take that policy with you. Or if you can, the terms are terrible with reduce death benefits. Or, maybe you decide one day to start your own business. That means those sweet benefits are now on you.
- It isn’t enough. If you have kids and you have no idea what the future cost of college will be, you will quickly realize that 2x your salary will never be enough to keep your family financially safe if you were gone. Or, if you have just started a family and hope to grow the family tree, you’ll need more life insurance.
- What do you do when you no longer work? Congrats, you worked hard, saved and now you are retiring. Did you buy more life insurance when you were younger? If not, you probably don’t have anything in place. You might want to cover things like a funeral or leave money to your kids or grandkids. The price tag for life insurance when you are in your 60s is not cheap.
- You are healthy now, but we all know someone that has had melanoma, a heart attack or breast cancer. If you are putting this decision off now, it might be too late down the road since you will not be insurable for a period of time, or the price will be too much for your budget.
If I have you concerned, great. At least you are now open-minded to the idea that you might need some more. But now what? Navigating things such as how much or what type of insurance you need can be daunting.
I have always described life insurance benefits through work as something extra – an added benefit if you will. That means that you need a foundation that you own and can’t be taken away from you by the whims of an employer.
There are many schools of thought regarding what you need. Some say 7-10 times your salary. For many, that is a budget buster. I am a firm believer in covering your need – just get something in place since life can be so unpredictable. I feel that there are many great calculators online that can be a great starting place. The questions the calculators ask focus on the following:
- Mortgage balances
- Other debts you owe
- How much do you want to set aside for final expenses
- College Education
- Additional expenses (basically, replacing your monthly income and for how long)
- Any legacy or inheritance you might want to consider
That total is then offset by:
- Existing life insurance (yes, even your life benefits through work)
- Savings and investments
These calculators will then give you an idea of how much more you will need. Here is an excellent calculator: https://www.erieinsurance.com/life-insurance
These calculators are a great starting point. What I tell my clients that may balk at the amount they need is to consider your budget. What could you afford monthly? Then back into that number. You may not need a 30-year term policy if you have teenagers, or you are closer to retirement than entering the workforce. A good agent can help you navigate this. The bottom line is something is better than nothing – to strike the right balance between how much you need, your budget, and your personal situation.
And start early. Don’t wait because your cost only goes up as you get older, regardless of the plan you choose.
Speaking of plans, which one is right for you?
Is it term insurance? Whole or universal life? Again, that depends on your situation. So let’s examine the various types and where they may be applicable.
Term life is typically what many people get. It is simple and to the point. You agree to pay a premium for a term of time (10 years, 20 years, or 30). In exchange, the carrier agrees to pay a death benefit during that time. If you last longer than the term, you have two choices. One, do not renew the policy in year 21 or 31 or chose to continue the policy past year 20 or 30. The issue becomes what happens to the premium once you reach the age when your policy renews. It does so on an annual basis so the premium will skyrocket after your reach the end of your term. Term insurance is typically your most affordable option.
This is a great policy for younger couples who are starting a family and early on in their careers with their best earning years ahead of them. And as your income grows, term life policies often have a conversion privilege. This means you can take a portion (or all) of your death benefit and convert it to a whole life or universal life policy. But why would you do that?
The simple reason is that cash value policies such as whole or universal life policies provide a longer time horizon to provide a death benefit. For instance, you can rate these policies to age 100 if need be so as some people realize that the useful life of the term policy is coming to an end, it might make sense to convert a small portion of their term policy to a whole life policy for things such as final expenses. Sometimes referred to as “permanent” insurance, whole/universal life policies offer the benefit of locking in a death benefit for a period that can far exceed a term life policy without the rate increase. Remember that term rates increase substantially after you outlive the initial term.
Also, there are some great new whole-life products that provide riders with long-term care.
This means that you might find yourself paying more for a whole life policy initially, but over time, it might make the most sense. But again, everybody’s situation is different.
So what should you do?
We believe the most important thing to do first and foremost is cover the need. Determine how much you need and what your budget is willing to afford. At the end of the day, something is better than nothing. Just consider what happens to your family if you are no longer there. Will they lose the house? Will college be out of reach?
From there look at the benefits of term vs a permanent form of insurance. Find an insurance agent that listens to your concerns and can help you plot a plan for your family since your need will change over time. We are here and ready to help you so please give us a call any time at 513-444-2100 or email at firstname.lastname@example.org