The Importance of Life Insurance: It’s Not About You, It’s About Them.
Jim and Mary, husband and wife, walked into a financial advisor’s office to ask about life insurance. They just found out Mary has late-stage cancer. Jim wanted to know if he could place a policy on his wife to cover costs associated with burial, household expenses, and mortgage payments. The couple had very little savings, and Mary stayed at home with their two children. Given the recent late-stage cancer diagnosis, the financial advisor informed Mary that a life insurance policy would not be possible.
The advisor then looked at Jim and asked if he would like to evaluate his life insurance needs. Jim, a construction worker who was in excellent shape, stated that he didn’t think life insurance was necessary given his personal health and family members who lived to 100. They walked out of the office with no policy in place for either Jim or Mary. The next day, Jim headed to work on his motorcycle and hit a slick spot on the road causing him to lose control and crash. Jim lost his life that day. In the years following Jim’s death, Mary aggressively fought cancer and was now in remission. However, given the loss of her primary source of income, she faced insurmountable medical bills, a home in foreclosure, and struggles of taking care of her children after a long fight with cancer.
This story happens more often than you may think. Since September is Life Insurance Awareness Month, now is the perfect time to discuss your family's life insurance needs.
Do I need life insurance?
Life insurance is a simple answer to a tough question: How will the people I care about manage financially when I die? There are many reasons to consider life insurance, including replacing income and estate preservation. For further detail, take a moment to study our recent blog about mitigating risk. Those who might find themselves needing answers to that difficult question are a single parent, married, married with children, a stay-at-home parent, those who have a dependent with special needs, one who owns a business with other partners, or someone who is charitably inclined and wants to provide a specific amount to charitable organizations. There are many answers to the question of why life insurance is important. But by and large, the most important answer is ensuring the financial security and peace of mind of those you care about.
What are the different types of life insurance?
Life insurance generally falls into two categories: term life insurance and permanent life insurance. Term life insurance protects policyholders for a specific period (the term), often 10, 15, 20, 25, or 30 years. In contrast, permanent life insurance provides lifelong protection for as long as you pay the premiums.
Term Life Insurance
Term life insurance typically offers the most coverage for the lowest initial premium. This type of life insurance makes sense when you need protection for a specific amount of time, for instance, until your kids graduate from college or your mortgage is paid off. Because it offers coverage at the lowest premium, a term life insurance policy is a good choice for those on a tighter budget.
Permanent Life Insurance
Permanent life insurance, like a whole life insurance policy, can accumulate cash value on a tax-deferred basis. You may even earn dividends that you can use to pay for additional insurance, offset your premiums, or accumulate the savings to cover an emergency expense. You can also use it to supplement your retirement income in the case of a life insurance retirement plan. Since these are additional benefits, initial premiums are higher than what you would pay for a term life insurance policy with the same amount of coverage. However, benefits of whole life insurance include never expiring, consistent premiums, and some tax advantages.
How much life insurance do I need?
The most important question to answer after establishing if you need life insurance is how much insurance you need. There is no single method for determining the amount of insurance one may need, but two of the most common are the “Multiples of Salary Method” and the “Personalized Needs approach.”
The Multiples of Salary Method is the simplest method to arrive at a coverage amount. Multiply the wage earner’s salary times a number that makes the most sense. By replacing the salary for X number of years, the beneficiaries will be able to continue as they were. Younger clients may be able to attain higher multiples than older clients, given the fact that there are more years of income replacement needed. While there is an attraction to the Multiples of Salary Method for its simplicity, sometimes a more robust approach is needed for an individual.
The Personalized Needs Approach includes all an individual needs and wants in determining how much life insurance is needed. Those needs and wants will generally fall into the categories of paying off liabilities, replacing income, covering final expenses, and funding education.
Review Your Life Insurance Needs Annually
Do you already have an insurance policy? You may want to review your policy depending on what has changed during the year. Did you get married or divorced? You may need to change your beneficiary on your policy. Did you recently have a baby? You may need to add more insurance coverage for your family.
Whether to invest in life insurance is a complex question. The best way to determine the answers to many of your life insurance questions is to meet with a CERTIFIED FINANCIAL PLANNERTM. Everyone’s situation is different, and a CERTIFIED FINANCIAL PLANNERTM can put the various pieces of the life insurance puzzle together and present you with a clear picture of your life insurance and other financial needs.
Author: Michael Dykes, CFP® | Allegheny Financial Group | September 2022
The information included herein was obtained from sources which we believe reliable. Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.
