Raise your hand if you love your family. Even though some days the spouse or kids can be quite difficult and drive you nuts, I’m sure we’d all quickly throw our hands into the air to show support to this request. One way of showing your love to your family from a financial perspective, is by securing the proper type and amount of life insurance. This, unfortunately, is one area of financial planning that we see is oftentimes overlooked.
While we’d all love to live into our 80’s and 90’s, reality shows us not everyone will make it to retirement. It’s a sad fact that we’ve seen many times in our career as financial advisors. If we all had a crystal ball that told us when our lives would end and how things would play out, it would be so much easier to plan. Unfortunately, that is not the case, so we must do our best to be prudent in our planning to safeguard from these types of catastrophic occurrences.
Do you ever see those car wash signs as you drive around, where a group of family and friends are doing a charity car wash to help pay for the funeral of a lost loved one? Many of those that died were of a young age, which caught many people off guard. Hence why they may have had no life insurance or were vastly underinsured. Or you see people sharing Go Fund Me pages across social media, to help pay for the same thing. It’s sad, but can definitely be avoidable.
One in five households with children under age 18 are uninsured, according to a 2016 study. Of those families who have no life insurance coverage at all, 73 percent recognize they need it and 62 percent say they would be in immediate financial trouble if a primary wage earner died. Using the Life Insurance and Market Research Association's Life Insurance Needs Model, LIMRA estimates that 48 percent of households (60 million) have an average life insurance coverage gap of $200,000, which amounts to more than $12 trillion in total market need. The good news is two thirds of these households say they are likely to purchase life insurance within the next 12 months.
According to the article, 6 Troubling Life Insurance Statistics That You Need to Overcome, 38 percent haven’t bought life insurance, or more of it, because they’re unsure of how much or what type to buy. This is definitely true in what we see daily with our clients, as many people freeze up and do nothing, because they have no idea how to proceed. They hear so many differing opinions of what type and how much to get, which gets confusing.
Let me simplify this process for you. Most industry experts suggest obtaining anywhere from 8-12 times your annual income to be adequately insured. Let’s make that easier and take the middle ground and use 10 times. if you earn $100,000 a year, a million-dollar life insurance policy may be adequate. The idea here is to replace lost income. If the surviving spouse is a stay-at-home parent and they just lost a $100,000 salary they were used to living on, how will they replace that?
Let’s use another way to determine how much you need. It’s called the DIME Method:
D - Debt (Non-mortgage debt such as credit cards, student loans, car loans)
I - Income Replacement (Here it could be anywhere from 7-10 times)
M - Mortgage (how much do you owe on your house?)
E - Education (How much would you like to have saved for your kid’s college. A minimum of $100K is usually the norm, but can differ depending on if it’s a state school or private university)
Having clients fill in the blanks here, they basically tell you how much coverage they need. The main point of life insurance is to not have the surviving widow skip a beat financially after the loss of a loved one. That surviving spouse still needs to retire and the kids still need to go to college. Losing that income would stop the contributions that may have been going into those various goals, so having enough of a lump sum from the life insurance proceeds would help continue that along. It will definitely be a huge emotional loss, and there will be long periods of grieving, but having the appropriate amount of life insurance in place, it will help that widow during the grieving process, so they don’t have to be even more stressed out, wondering how to pay the bills or keep the household budget going.
Speaking of budget, that generally determines what type of life insurance coverage one would purchase. The two most common categories are Term or Permanent. Or sometimes a combination of each. Let’s dive a little deeper into each of these below:
- Term is definitely the cheaper version, where you pick the amount of time you need the coverage for and the premium remains the same during that timeframe. Let’s say you are a 35-year-old male who just purchased a home with a 30-year mortgage. A 30-year level term policy should be adequate, as the objective is to have the coverage mainly during your working years, while you have a mortgage. This is also usually the point where you have the most debt and may have young children in the house. Having coverage last at least into your 60’s is another great idea, as that will allow you to get to an age where you can access your retirement accounts without penalty (59 1/2), as well as start taking Social Security (earliest you can start drawing is at 62).
- Permanent policies are more expensive for the amount of coverage that you are purchasing, but that is simply because they have a 100% likelihood of paying out to the beneficiary. While there are several types of permanent policies, they all have the same theme: to last for life. They would last into your 70’s, 80’s, and 90’s, or beyond, if they’re structured correctly. They could serve a purpose for someone who wants to leave a legacy to their children, grandchildren, or charity. There are also unique strategies that can be used to help subsidize your retirement income.
- Review your current life insurance policies.
- Using the two methods of calculating the amount of proper coverage needed above, assess what your shortfall may be.
- You may have set up the coverage 10-15 years ago, before purchasing or upgrading the house, before a kid or two, and before that large pay raise.
- Just like going to the doctor for a health checkup, it’s a great idea to have a life insurance checkup from time to time, to make sure coverage keeps up with your needs.
- You may also have purchased a 20-year term at age 30, because that was all you could afford at the time, and you are now close to age 50, where that term policy will run out. You’ll want to address that now before it does.
- If you have no life insurance in place, take action ASAP at looking into coverage
- Each year you turn older, the cost of insurance goes up.
- It’s also based on your health, and generally our health is better the younger we are, so don’t delay! The last thing you would want to happen would be to apply and get denied based on a health condition.
- While there are many sites online to help you obtain coverage… it’s generally best to seek the advice and guidance of a prudent financial planner that can help assess your needs in a more detailed and unbiased manner.
- Good luck and let us know your progress!