“Determining Life Insurance Needs”

Life insurance is not a one size fits all game. Factors around someone’s stage in life, their financial commitments, and their current available resources all contribute to the answer.  If you are wondering what type of life insurance makes the most sense for you, then check out our recent post on term vs. whole-life insurance.  For this post, we assume that term life insurance is the preferable option but how do we know what amount makes sense?  Should I be insured for $100,000, $500,000, maybe even $1,000,000? Do I even need life insurance at all?  We break down these questions below and encourage you to get serious about coverage for you and your family if it’s the right stage of life. What Stage of Life Are you in? Life insurance can be an important part of someone’s financial plan, but for some people it may not be necessary.  For example, a single young professional in good health who isn’t providing for family members probably doesn’t need to worry about life insurance.  As morbid as it may sound, if they were to pass away, there are no other individuals relying on them for their well-being.  Similarly, a financially independent elderly couple also may not need to consider life insurance because they have built up enough assets to be considered “self-insured.”  In contrast, the breadwinner of a household with a spouse and children, should ensure they are adequately covered with life insurance because their premature death would be financially devastating for the family.  So, before assuming you need life insurance, consider your stage of life and who would be dependent on your income or support if you were to pass. What are your Financial Obligations? If you’ve determined that your stage of life would warrant life insurance, then how much should you be covered for?  To answer this, we normally take our clients through the following questions:

1. What are their current total of debts waiting to be paid off? (mortgage, auto, student loans, credit cards, etc.)
2. For the proposed insured, take their annual income and divide it by 5% (0.05). (This assumes a portion of life insurance proceeds are invested and produce a 5% rate of return)
3. Add other expenses you want to provide for upon death? (funeral, education for children, etc.)
4. What available resources do you already have? (checking, savings, non-retirement investments, etc.)
5. We then have clients add steps 1-3 together and subtract step 4. If there is a shortage, then the remaining amount should be considered for life insurance coverage.

What Length of Term Insurance Should I purchase? Once you have determined you need insurance and you’ve also decided on a sufficient $ amount of coverage, then you’ll want to decide how long you want coverage.  Most term policies give options of 5, 10, 15, 20, or 30 years (30 years is rarer to find).  To decide, we suggest clients consider the length of time remaining for their debts (i.e. 20 years left on the mortgage or 15 years until the kids are through college) and obligations and use this as a guide to select the term length. Life insurance is a way to show your family and dependents that you are looking out for them should anything happen to you.  However, life insurance doesn’t make sense for everyone in their current stage of life.  If you feel you may have a current need for coverage, then reach out to one of our advisors to start a discussion.

March 6th, 2020