Do I Have Enough Life Insurance to Protect My Family?
Legacy Planning is for everyone [i], not simply when you’re reaching your later years. There are many ways that Legacy Planning takes shape and a little forethought can make a world of difference in the lives of your family and loved ones. While you’re in the process of accumulating assets to be able to self-insure, life insurance is a great tool to close the gap and give you peace of mind.
A means of loving your family is by planning ahead and ensuring that they will still be okay in your absence. It’s easy in the day-to-day to take for granted that you’ll always be able to provide for them by working hard. However, in the unfortunate event of your early passing, you want to make sure they’ll be taken care of. This is where life insurance comes into view.
There are several types of life insurance policies out there. It’s easy to get lost in the sea of information and sales. My focus today is on Term Life Insurance. Term Life Insurance is considered pure insurance: it doesn’t mix investments with insurance. It is the most straightforward of all the life insurance options. If you pay your premiums, it guarantees payment of the stated death benefit if the person covered by the policy dies during the specified term. Do note that if you lapse on your premium payments and/or the policy lapses prior to death, your beneficiaries are no longer entitled to the cash death benefit. [ii]
Once you’ve determined that life insurance is the right tool for your circumstances, you’ll need to decide how much coverage you need and how long it should last.
How much coverage do you need? [iii]
Debt: How much debt would you leave to other people? This could include credit card debt and student loans that aren’t forgiven at death.
Income: Multiply your income by the number of years you want to provide income replacement for your family. If you still have minor children, you may want your death benefit payout to be able to provide for them until they become of age or graduate college. This will help to support either your remaining spouse or named guardians.
Mortgage: Add your outstanding mortgage balance to your running total.
Education: Add an amount that covers tuition, room and board for each of your children who will go to college. The College Board regularly publishes trends in college pricing.
Sometimes it may be helpful to use this equation: Financial Obligations you want to cover (such as your annual income for a certain number of years) minus Existing Assets that can be used toward obligations (such as savings) equals Your Life Insurance Need.
How long of a term should you have? [iv]
Term Life Insurance is typically issued in fixed increments of time, such as 10, 15, 20, 25 or 30 years.
You want your life insurance policy to last as long as you have others depending on your income to meet financial obligations. You can consider the following factors:
Mortgage: a big part of your monthly expenses is your mortgage. Consider taking out coverage for as long as the remaining length of your loan term.
Children: consider how long it will be until your children are self-sufficient. They currently rely on you for housing, food, clothing, education and extracurricular expenses, etc. There also may be expenses beyond age 18, especially, if you intend to pay for college.
Retirement Age: once you’ve retired, life insurance may not be something that is necessary for you because your kids are grown and self-sufficient, your home may be paid off, and you are living off of your retirement savings.
These are rules of thumb, but the best way to understand how much insurance coverage you need and for how long is to schedule an introductory call with us so we can build your comprehensive financial plan and tailor your insurance needs to your specific life circumstances.
Life changes quickly, so in the future, if you find that you’re closer to self-insured and you do not need as much coverage as you initially took out a policy for, you can usually decrease your coverage amount at the same premium rates you were quoted at the initial application (depending on the specifics of your policy).
For example, if you take out a $2M policy at 30 years old for 20 years, then in 15 years decide that you only need $1M at this new stage in life, you may be able to decrease your coverage amount and premium to the same rate they would have given you when you initially bought the policy at 30 years old. If you decided to let your original $2M policy expire and reapply for the lower $1M coverage of term life insurance at 45 years old, your premium rates would be higher.
As always, discussing your individual needs with a financial advisor is a great first step. We do hope you’ll reach out to make sure you have enough life insurance to protect your family.