The continuum on life insurance products and even philosophies can fill a gap as wide as the Grand Canyon. Risk management and mitigation are critical components to any sound financial plan. Yet, the topic of insurance regularly brings feelings of doom and gloom, uncertainty and misunderstanding. Particularly, when the conversation comes to life insurance. Life insurance is argued, marketed, and oftentimes not even recommended for the right planning reasons, or worst-case scenario, sold to a client when the various life insurance vehicles aren’t even understood.
Life insurance is complex, needs context, a proper needs analysis, and then a sound recommendation. With that said, what are five great questions for you to ask your financial advisor when evaluating your best next step for life insurance?
At what point should I apply for life insurance?
In theory, you are as young and healthy as you may ever be. It’s always interesting when you hear the advertisement on the radio, “$18/month for $500,000 of life insurance,” and you are thinking to yourself, my life insurance premium is more than $18/month! Well, I anticipate the life insurance company just quoted a healthy, non-smoking 16-year old. As life insurance has evolved and there are additional benefits to life insurance built into each policy, not just a pure death benefit, the first answer to the first question would be sooner rather than later. You have the potential to lock in a level cost for a long period of time, with either a level term policy or a permanent policy. The next trigger to apply for life insurance, a life transition. The obvious life transitions are marriage, children, purchase of a home, an increase in income, an additional debt obligation. Typically, life insurance becomes even more critical when you are no longer just responsible for yourself. Can you afford to write a check if something happens is a great question to ask involving any type of risk management. Sooner rather than later, we want to address your future insurable need, anticipating it will rise. If something happens between now and then, it’s emotionally and financially imperative to already have a plan in place addressing the protection of your income, your obligations, your family, and yourself.
How often should my risk be evaluated?
This is a similar answer to the first question. You just hired your financial advisor to be a fiduciary on your investment accounts, shouldn’t your risk management plan also be managed the same way? Every time there is an adjustment to your income, your expenses, or your life, your insurance needs should be evaluated. Now, it may not require a change, but the conversation should be discussed.
Term or permanent…and what’s the big deal?
I’ve not committed to a book deal, so I’ll keep this answer brief. It shouldn’t be a question of term versus permanent. Oftentimes, the solution should be a combination of both! At a lower cost, you can meet your insurance need through a term policy. However, a smaller permanent policy addresses the future question, “What do I do when my term runs out and I can’t afford to renew my term policy?” Statistically, your term will run out before you pass away. A term-permanent combination doesn’t break the bank on a monthly basis, yet provides both a short and long-term solution, with the added benefit of Accelerated Benefit Riders and cash value growth within the permanent policy.
How should we determine the amount of life insurance my spouse and myself may need?
Is it the DIME method? Is it the human life value analysis? How about the capital retention needs analysis? Some advisors simply take a multiple of your income. We are not going to make a decision quite yet. As you evaluate your insurable need, it is important to think through what you, as the insured, would want your family to receive as a death benefit, to alleviate any financial burden in the short-term, along with replacing ongoing costs. The emotional burden will be enough. Simply, think through a multiple of your income, based on the number of years you would want your income to be replaced. Also, include your mortgage, current debt obligations, and add in future expenses…the cost of college is expensive! Doing some mental math, you quickly find a married couple, both working, need at least $500,000 to $1M in coverage. Now, based on the cost, we can work backwards to find a level of needed protection that is affordable for the family on a monthly or annual basis.
Should I have life insurance outside of what is provided at work?
Yes! I do encourage clients to take advantage of work life insurance. The cost is minimal. Yet, work life insurance is oftentimes, exactly what you think it is…pure life insurance. Other than that, benefits are limited. Work life insurance is often not portable upon changing jobs. Having a solution in place outside of work is important to address times in life when you are in transition, taking a year off, or thinking ahead towards retirement. If your insurance need comes to $2M, then devise a solution that includes a combination of work life insurance, and then a term-permanent combination. This will provide an ongoing solution, for a fair cost, with immense value.
Can I afford to write a check if something were to happen? Most often, the answer is no. It is a lot to sort through as you evaluate your life insurance options. Please consult with a Certified Financial Planner to address what’s best for your specific planning situation.