There’s that point in everyone’s life when you realize, “I need life insurance.” You’re getting married, you’ve just had a baby, or you’re friend mentioned that they finally bought some and you’re like, “Oh, yeah. I forgot about that.” You feel the need and you’re worried about what will happen to your family if you have an accident or get a devastating illness.
You’re at the point where you’re filling out the online request for a quote, or maybe you’ve got the insurance application from your local insurance agent in your hand. But there are three questions you have to answer before you fill out the application: 1. What kind of insurance do I need? 2. How long should I be covered? 3. How much should my coverage be?
The answer is….
“Wait a minute,” you say. “You’re a financial advisor from a registered investment advisory firm. What do you know about life insurance?”
I’m glad you asked.
Why Should You Take our Advice
At Pacesetter, our number one goal is to encourage our clients to look at the big picture, so that they can make wise and informed financial decisions. We believe that you can become financially confident and you can have a better investment experience if you are informed. To serve you well, we continually seek education, because you need to get the right answers the very first time.
On our staff, we have two CPA’s and one CFP®, all of whom have significant experience concerning financial planning and how life insurance fits into your estate plans, your taxes, and your financial future. Insurance is an important piece of your financial picture. If you happen to pass away and you have the right amount of coverage, your life insurance will provide all the income your family will need in your absence. It will pay the mortgage, it will put food on the table, it will pay for your kids' college expenses, and it will provide your spouse and children with the financial space they need to grieve your loss. We take life insurance very seriously.
What makes us additionally qualified is that we don’t sell life insurance. We’ve all heard stories of good people being suckered into insurance products that they didn’t need. They don’t like or want what they bought, but they’re stuck with a bad product. It shouldn’t be that way. Because we offer financial advice for a set fee, there is no conflict of interest when you get advice about your life insurance. In fact, we choose not to receive commissions, kickbacks, or referral fees of any kind if you happen to buy insurance based on a referral from us. No matter what insurance product or amount of insurance coverage that you purchase, we never have a reason to upsell you. You deserve the right insurance that meets your needs at your current stage of life.
What Kind of Insurance?
So what kind of life insurance is right for you? In the vast majority of cases, term life insurance is the appropriate type of life insurance for working and non-working spouses. Not every situation is right for term life insurance, but those situations are the exception, not the rule. Talking to a trusted advisor about your situation can provide you some peace of mind that you are not the exception.
If you are like most people, term life insurance will give you the right amount of coverage for the right timeframe at the lowest out-of-pocket cost to you. Policies range from below $10,000 up to $10 million or higher, if you qualify. Term life insurance covers you for a period of time that you specify such as 10, 20, or 30 years. And, term life insurance is inexpensive. The typical 20-year monthly premium for a healthy 30-year-old male seeking $1 million of coverage is only about $35 per month. Because it’s so inexpensive, you can keep more of your money for other things like living expenses, retirement savings, college savings, or even buying a disability policy, which you, statistically speaking, are more likely to collect on than a life insurance policy.
How long should I be covered?
As mentioned above, you can purchase term life insurance for increments such as 10, 20, or 30-years. Once the term is up, your coverage ends and you stop paying the insurance premiums. But what amount of time is right for you? If you have children, you typically only need coverage up until your kids are finished with college. After that point, you’re not paying for your kid’s cars, phones, clothing, food, or college expenses anymore. Your kids can find a job that can at least pay their basic expenses. You can downsize your home, which means lower mortgage, lower utilities, lower homeowner’s insurance, and lower real estate taxes. If your spouse had been staying home with the young children, she or he may have already gone back to work once the kids hit late grade school or high school. If you had been saving through your company 401(k), an IRA, or a taxable investment account for the majority of your career, once your children are finished with college, you will be reaching the point where your spouse's expenses will be covered by what you’ve saved.
If you don’t have children, and don’t plan to have children, talk to your spouse about what they might need if you happen to pass away. Maybe you only need a policy to cover you until you’ve paid off student loans or the mortgage. Maybe your spouse is going back to school and won’t be making any income for another 4 to 7 years, but will comfortably be able to support themselves once they secure a job after they finish. Or, maybe they would prefer to not work even if you pass away and you’ll need insurance coverage until you’ve saved enough to be self-insured.
How much coverage should I have?
So, how much coverage should you have? There are many opinions out there. It can get complicated with calculators and trying to narrow what you need down to the dollar. But like most things, the simple answer is better. There are fewer costs and resources devoted to keeping the right amount of coverage if you stick with a simple rule of thumb. The rule of thumb that we’ve found to be the most reasonable is to purchase coverage at 10 times the earner's salary plus $100,000.00 for each child. 10 times your salary will cover final expenses and then you can invest the remainder to produce annual income for your spouse and/or children. The $100,000 per child can provide an additional buffer for your spouse, as well as provide for college or trade school costs for those children.
Often times, the next question to ask is what about coverage for a non-working spouse. A common rule of thumb is $250,000 to $400,000. But this may not be the right amount. The thought behind purchasing life insurance coverage for a non-working spouse is to replace the economic output of the non-working spouse. This varies from family to family. A non-working spouse can be many things – childcare provider, cook, housekeeper, taxi driver, etc. Also, depending on the emotional needs of the surviving spouse and any surviving children, the working spouse’s income may need to be completely replaced. Honestly, I don’t want my children to be raised by a nanny or a daycare, so insurance coverage for my spouse should be enough to replace my income so that I can stay home with my children until they are old enough and mature enough to take care of themselves. Talking to an advisor in-person is the best option for finding out how much life insurance coverage a non-working spouse should have.
Life insurance is important and you need to answer three questions before you purchase a policy: 1. What kind of insurance do I need? 2. How long should I be covered? 3. How much should my coverage be? Once those questions are answered, you can sleep well knowing your family will be taken care of if you happen to pass away. Remember - you can become financially confident and you can have a better investment experience.
- Tim Bacus, EA