By Tom Breiter, Integra Capital Advisors
We hear messages all the time about the importance of life insurance and the devastating effects a death, expected or unexpected, can have on our finances. But in 2018, more than 4 in 10 people didn’t own a life insurance policy in any amount and 20% of those who did said they were underinsured. (1) Whether it’s because life insurance is confusing, too much of a hassle, or too costly, many people who need life insurance aren’t sufficiently covered. While there’s no one-size-fits-all solution to everyone’s life insurance needs, here are four questions that will clarify life insurance and help you make the right decisions.
1. Do I Need Life Insurance?
The first question you need to address is whether or not you even need life insurance in the first place. You’ll want to determine if you have enough money saved so that your death would not create a financial hardship for your loved ones. Currently, a third of American families admit that, within one month of the family’s primary income-earner dying, their finances would be in crisis. (2) Your first step is to evaluate your unique life situation to determine how big your financial need is.
For example, a single young adult with no dependents may not need life insurance if his loved ones can easily afford a funeral and burial. And if you have several million dollars safely stored away, your death may not cause a financial hardship either, even if you still have a family depending on you.
If you don’t have enough money saved, you should purchase life insurance to protect your family in case you pass away. Even if you do have enough money saved, you may still want to consider purchasing life insurance for other benefits that it can provide, such as living benefits and diversification.
2. What Type Of Life Insurance Do I Need?
Along with knowing how much coverage you need, you’ll also need to choose the kind of life insurance that is most appropriate for your situation. The two primary types of life insurance are permanent and term.
Permanent insurance is coverage that is not limited to a specific duration of time, meaning it can potentially last your entire life. There are several types of permanent insurance, including Universal Life, Indexed Universal Life, and Whole Life. The benefit of permanent insurance is that it can last longer than a term policy so that something will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). This type of insurance is more expensive than term insurance.
Term insurance offers coverage for a specified length of time, which can be anywhere from 10 to 35 years in some cases. The downside to term insurance is that it only covers you for the specified length of time, so if you pass away after the term is over, no money is paid to your beneficiary. But depending on your situation, you may only need insurance for a certain time period—until your kids are grown or you have enough money saved to avoid financial hardship. One of the major benefits of term insurance, as opposed to permanent, is that it is usually the most inexpensive out-of-pocket option.
3. How Much Life Insurance Do I Need?
Finally, the question you’ve been waiting for. In order to figure out how much coverage is needed to protect your family, you’ll want to conduct a Needs Analysis, specifically focusing on your marital status and your financial dependents.If you’re single without anyone—child or parent—depending on you financially, you’ll want enough to cover funeral and burial costs. It’s also important to have enough to cover debts, because not all debts are discharged in death, such as private student loans.
If you’re married, use the DIME method to consider your needs:
Debt and final expenses
After calculating and totaling each of those dollar amounts, apply an income replacement multiplier to determine your needed coverage amount. The multiplier varies based on your age and the status of your home mortgage. For example, if you’re under 50 years old, you can likely use a multiplier of 20. Older couples may be able to use a multiplier of 10 or 15, depending on the number of years left on their mortgage.
Keep in mind that these are just guidelines designed to give you a general idea of the amount of insurance coverage you need. There may be adjustments for your particular situation and what makes the most sense for your family.
Life Insurance Coverage In Retirement
Where retirees are concerned, there is a common misconception that life insurance needs simply go away. This is not true. The need for, or uses of, life insurance simply shift. Consider, for example, the loss of a spouse, and the related income lost to the survivor from Social Security, pensions, or both. The surviving spouse will find themselves with a lower systematic income, as well as a higher tax bracket, now being single. Furthermore, the use of life insurance remains a viable consideration for estate expansion, in that it purchases large lump sums to beneficiaries, on a tax-free basis, for pennies on the dollar.
4. How Do I Decide?
There’s no one best way to choose a life insurance policy. When making such a significant financial decision, it can be helpful to talk to a financial professional and review your options. Someone experienced with insurance policies can offer you guidance on the products available to you and how they can integrate into your other financial strategies.
How We Can Help
At Integra Capital Advisors, we work primarily with clients who desire our personal yet structured process for planning and investing that relieves them of the day-to-day worry of the financial markets with freedom to pursue what they value most and allows them to feel confident and reassured. We call this process the “Waypoint Formula.”Call us today at 941-778-1900 or email firstname.lastname@example.org to review or discuss your life insurance options and plan your path to financial freedom.