Life Happens, Are You Protected?

By Jason Silverberg, CFP^®, CLU^®, ChFC^®

You insure your health. You insure your car. You even insure your diamond wedding ring. So what about your life? September is life insurance awareness month and it’s the time of year where families are encouraged to review their life insurance coverage and make sure it is the right fit for their current circumstances. To help with the process, below are some frequently asked questions about life insurance that should prove helpful.

What is Life Insurance?

Life insurance is not just a piece of paper that you pay a premium for. It is truly a gift that you give your loved ones to make sure that they will be okay. No one wants to be a burden on their family. With the purchase of life insurance, you are ensuring that the people you care about will be provided for after you have gone.

Who benefits from it?

The answer to this one is pretty simple. If you have anyone who depends on you for financial support, you can benefit from life insurance. This can be a spouse, partner, child, grandchild, parent, sibling, or even a business partner. Don’t forget, even stay-at-home moms and dads can benefit from life insurance.

How much might I need?

When purchasing life insurance, figuring out how much you may need is a very individualized process. Some say you should have a multiple of salary, while others focus more on a flat amount, like $500,000 or $1 million. I often ask these people why they chose these amounts and they usually say that it sounded like a nice round number. I believe the true answer lies in what you want to have happen. Let’s use a fictitious couple, Brenda and Nate, to illustrate how to come up with the right amount.

1. Outstanding Debts. Many times people want to pay off all of their loans, so that their family won’t have to worry about the financial burden. The big one here is the mortgage. Brenda and Nate own a home with a $350,000 mortgage that they would like paid off if something were to happen to either of them.
2. College and Retirement Savings Goals. Many families strive to put money away for the future. If either parent died, college funds and retirement accounts would probably be pushed aside for more pressing expenses. What if we could create an instant pot of money for the kids to use for school and to stimulate our retirement accounts? Brenda and Nate are saving diligently for their children’s college expenses. If either dies, they would like $100,000 put aside for each of their two kids for college. They also figure that a lump sum of $300,000 should be enough to stimulate their retirement savings.
3. Child Care. Depending on your situation, you may need to think about child care costs. Brenda is a stay-at-home mom. She takes care of the kids and if something were to happen to her, Nate would need to hire a nanny. Also, if Nate were to die, Brenda would probably need to go back to work and hire a nanny as well. They both decide to incorporate $250,000 ($50,000 for 5 years) in their life insurance amount.
4. Maintaining Your Lifestyle. This is where many get tripped up. Think about it. If you were to be given a tax free check each year to maintain the lifestyle that you are accustomed to, how much would you need, and for how long would you need it? Keep in mind, all of your debts are paid down and your savings goals are funded. Brenda and Nate figure that they would both need about $50,000 per year for 5 years in tax free income, totaling $250,000.
5. Final Expenses and Emergency Fund. When a loved one passes away, it’s hard enough dealing with the emotional loss. Many don’t want to have to worry about paying miscellaneous bills and funeral costs during this time of mourning. Brenda and Nate agree that an extra $50,000 should be added for final expenses and money to pay the bills

In our hypothetical example, both Brenda and Nate will need $1.4 million of life insurance coverage to maintain their goals and objectives. At this point, many people see this number and their eyes widen with shock. Here is where there is a tendency to say to ourselves, “well, do we really need to pay for college for our kids?” Or “We can do without paying off the mortgage.” When purchasing life insurance, the conversation should be around what you both want to have happen.

What type should I buy?

There are many different types of life insurance. In a general sense, there are group and individual plans. Group coverage is usually found at work, where your company provides a certain amount that they either give to you or that can be purchased. With group plans, everyone in the group usually pays the same rate. If you are healthy and a non-smoker and desire more coverage than what is offered in your group insurance plan, it may be beneficial to get individually underwritten since you may be able to lower your costs.

Individual policies usually come in two flavors, Term and Permanent coverage. Term insurance is like renting your coverage from the insurance company for a specific period of time. If you miss a premium payment, you are usually dropped. Because of the “no frills” nature of term, the costs are very low. These types of plans are good for people who want to insure themselves for only a specific period of time.

With a permanent product, you own your policy. These products can last for a long period of time or your whole life and often have the option to accumulate cash value you can access via policy loans and or withdrawals.  That being said, policy loans and withdrawals may create an adverse tax result in the event of a lapse or policy surrender, and will reduce both the cash value and death benefit.

Depending on the type of permanent policy, premiums can be flexible and can be missed in certain circumstances without losing your coverage. Costs are usually a bit higher than term insurance, but if there is a long term need, permanent insurance could hold a greater value to the policy owner.  It is important to keep in mind that life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges.  Depending on actual policy experience, the owner may need to increase premium payments in order to keep the policy inforce.

Additionally, depending on your individual situation, purchasing a combination of both term and permanent insurance may get you to the desired death benefit amount without breaking your budget.

Who should I buy from?

It is critical that you choose a quality company from whom to purchase your coverage. Life insurance is simply a promise and you want to make sure that if you pay your premiums, the company will make good on their end of the deal. Take a look at a company’s ratings and see how they align with their peers.  The guarantees tied to insurance products are based on the claims-paying ability of the issuing insurance company.

You also want to choose a knowledgeable advisor to help you navigate through the underwriting process. It can get quite confusing and having someone to guide you along the way helps make everything a lot easier, especially when you’re dealing with a topic that many don’t like to talk about.  

In my book, The Financial Planning Puzzle, I discuss a few other items to consider when reviewing a financial advisor. You’ll find this and a lot more valuable information as your fitting your financial pieces together. Buy the book now on Amazon.com here.

If you’d like to discuss your own personal finances, you can email me directly at jason@finadvinc.com or call me at 301-610-0071.

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Jason Silverberg CFP^®, CLU^®, ChFC^®, specializes in comprehensive financial planning. His practice aims at helping families and small business owners to fit their financial pieces together to create financial freedom. He uses a values-based process to connect with his clients on a deeper level than most other advisors, diving into the "why" behind the numbers. He focuses on helping clients achieve and protect their goals through methodical investment strategies and calculated risk management and insurance solutions. Separate from the financial plan and our role as financial planner, we may recommend the purchase of specific investment or insurance products or accounts.  These product recommendations are not part of the financial plan and you are under no obligation to follow them. 

For more information, please contact Jason Silverberg directly at Jason@finadvinc.com or 301-610-0071. Jason is a Registered Representative and Investment Advisor Representative of Securian Financial Services, Inc., Securities Dealer, Member FINRA/SIPC.

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