With all that is demanded of parents these days, it’s easy to let some of the basics fall by the wayside. One of the most important items on every parent’s to-do list is to purchase life insurance to protect their family in the event of their premature death.
While many aspects of financial planning, like investing, can be interesting or, dare I say, even fun, life insurance is not generally considered to be one of them. That being said, buying life insurance is just another perk of being an adult.
Let’s talk about some of the basics.
When considering how much insurance you need, you should consider what you’re trying to replace—$100,000 may sound like a lot of money, but if you consider how many years of your income it would actually replace, it probably won’t go very far. So how much do you need?
At the low end of the scale is the amount your survivor would need to simply pay off debts and maybe provide some immediate funds in order to adjust to a life without you. At the high end is the amount you would need to replace every dollar you would have earned during your lifetime. The real question to answer here isn’t “how much insurance do I want on myself,” it’s “how much does my family need me to have.”
Once you’ve settled on an amount, you’ll need to figure out what type of insurance to get. There are two basic types of insurance and they serve two very different needs. The key here is to use the right tool for the job.
Permanent insurance (Whole Life, Universal Life, etc.) provides coverage for a lifetime. Permanent insurance is important if your need for coverage never goes away. For example, if you chose a single-life-only pension, or if you need the insurance for estate planning purposes, then having a policy that will last your lifetime is crucial since, whether you die tomorrow or in 40 years, you’re going to need the policy to pay out.
Term insurance, however, provides coverage for a set period of time. For example, if you had a child today, and you want to be sure that child is provided for until they graduate college, then a 25-year term policy might be exactly what you need. Since the need is temporary, the insurance can be too.
Generally speaking, permanent insurance will have higher premiums than term insurance. Why? In part, because a portion of your premium is going to build some form of cash value in the policy. Life insurance is typically not the most efficient way to invest so, for most clients, we recommend other vehicles. However, if you are a very high income earner, and are ineligible to contribute to certain tax-deferred accounts, then permanent insurance may be an attractive option.
Term insurance is going to give you the most bang for your buck, as far as coverage per dollar of premium. You may also find that you have access to term insurance through your employer, which can be very cost effective, and which does not typically require any medical underwriting. If you don’t have coverage through work, don’t worry, you can still get very affordable term insurance by working with your financial advisor.
A healthy 40-year old male could expect to secure a $500,000 25-year term policy for as little as $51/month, whereas a properly funded permanent policy for the same amount would cost at least $240 per month. This is simply because, while you are eventually going to die (sorry), the insurance company knows it’s not likely to happen during that 25-year term.
Where do you go from here?
Decide how much coverage your family would require if you were to pass away tomorrow.
Assess whether that need is temporary, or if it will continue indefinitely. If a temporary need becomes permanent, most carriers will allow you to convert your policy from term to permanent in the future.
Consult with an independent advisor for a premium quote. Insurance premiums can vary greatly between carriers depending on age, health, and other factors. If your agent works for XYZ Insurance Co, Inc. then you’re very likely to see quotes from that carrier, which may not be the best for you. An independent agent should have dozens of carriers to compare and get you a lower premium.
Remember that your needs may change in the future, and that financial planning is not simply a transaction. Work with your financial advisor to determine what is the best type of insurance for you today, and they will be able to help you make changes as life dictates. The most important thing is that you are proactive in assessing your needs and protecting your family.
Stephen Kyne is a partner at Sterling Manor Financial in Saratoga Springs.
