I've been spooning out a healthy portion of financial planning vegetables in the aftermath of Hurricane Harvey. Now that we have covered the ins and outs of navigating the property insurance claims process, it's time for another helping of what’s good for you…because it’s Life Insurance Awareness Month! I know people really don’t like to think about this topic. But not addressing this cornerstone of planning can leave your heirs with big financial problems. According to the 2017 Insurance Barometer Study, conducted by Life Happens and LIMRA, while 84 percent of respondents agree most people require life insurance, only 70 percent said they themselves needed coverage.
As it turns out, even if they think they need it, many are not buying coverage: 41 percent of Americans do not carry any life insurance at all. If you aren’t sure about your own circumstances, ask yourself this question: If I were to die right now, would anyone endure a financial hardship? If the answer is yes, it’s time to figure out how much coverage you need and what type of insurance is best for you. Forget about the old-time rules of thumb for insurance—it’s easy to calculate your needs with online calculators, like the one from the American Institute of CPAs.
To start, you will need some information. First, determine your current living expenses (yes, that darned cash flow again), because without that number, you won’t be able to input your survivors’ needs. If you are the primary caretaker for your kids or adult parents, factor in the additional cost of care for them. If you are a single parent or the primary wage earner, you may want to leave your heirs cash to pay off debts, like student loans or the mortgage; and if you have young kids and you want to pre-fund college, you will need to increase your insurance amount to cover those costs. Finally, you may want to provide for the future retirement needs of your surviving spouse.
The calculator will ask about what other assets will be available, like a workplace insurance policy, a retirement account or other savings and investment accounts. Depending on how organized you are this process can take just a few minutes or a few hours. That said, whatever the time needed, it is too important to delay.
When you have the necessary amount in hand, you need to decide what type of insurance makes most sense for you. Insurance comes in two basic flavors: term and permanent. Term is best for those who have a specific insurance need for a defined period of time, like a young couple with kids who have not yet saved a sufficient nest egg to support their survivors in the event of premature death. During the stated term, if the insured dies, the insurance company pays the face amount of the policy to the named beneficiary. Premiums for term policies are often reasonable for those in good health, up to about age 50. After 50, premiums start to get progressively more expensive.
Permanent life insurance is a more expensive option, because it combines the death benefit with a savings or investment component and it remains in force until you die. While these policies are often sold as a tax-efficient way to save for retirement, they come with high fees and commissions, which can soak up as much as three percentage points from the annual return. Up-front commissions are typically 100 percent of the first year’s premium. If you are buying insurance for estate planning purposes, you will likely use permanent insurance, but be sure to consult an estate attorney to help structure the plan.