Have you ever thought about what would happen to your family if you were to die tomorrow? Would they be able to cover their basic living expenses? Would your kids be able to go to college? It’s an uncomfortable thought which many try to avoid, but the truth is, the answer to this question is vital to your family’s well-being. According to a 2017 study conducted by LIMRA, more than half of consumers say they would have immediate or near immediate trouble covering living expenses if their primary wage-earner died. Despite this bleak statistic, only 54% of Americans having any form of life insurance at all. And of those who do have coverage, more than 30% say they are underinsured. (1)
While there are many important aspects to financial planning, such as setting goals, aligning your portfolio with your risk level, and planning for future life milestones, insurance can play a role if necessary. The tricky part is knowing if you need insurance and how much and what type is appropriate for your situation. This is where a life insurance review comes in. Here are three questions we will discuss during your life insurance review:
Do You Even Need Life Insurance?
The first question you should address is whether or not you even need life insurance in the first place. You’ll want to determine if you have enough money saved so that your death would not create a financial hardship for your loved ones. A single young adult with no dependents may not need life insurance if his loved ones can easily afford a funeral and burial. If you have several million dollars safely stored away, your death may not cause a financial hardship either, even if you still have a family depending on you.
If you don’t have enough money saved, you should consider the purchase of life insurance to protect your family in case you pass away. Even if you do have enough money saved, you may still want to consider purchasing life insurance for other benefits that it can provide, such as living benefits and diversification.
What Type Of Life Insurance Do You Need?
Along with knowing how much coverage you need, you’ll also need to choose the kind of life insurance that is most appropriate for your situation. The two primary types of life insurance are permanent and term.
Permanent insurance is coverage that is not limited to a specific duration of time, meaning it can potentially last your entire life. There are several types of permanent insurance, including Universal Life, Indexed Universal Life, and Whole Life. The benefit of permanent insurance is that it can last longer than a term policy so that a death benefit will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). This type of insurance is typically more expensive than term insurance. There are some situations where permanent insurance makes sense, but in general, term insurance can cover your insurance needs.
Term insurance offers coverage for a specified length of time, which can be anywhere from 10 to 35 years. The downside to term insurance is that it only covers you for the specified length of time, so if you pass away after the term is over, no death benefit is paid to your beneficiary. But depending on your situation, you may only need insurance for a certain time period — until your kids are grown or you have enough money saved to avoid financial hardship. One of the major benefits of term insurance, as opposed to permanent, is that it is usually the most inexpensive out-of-pocket option.
How Much Life Insurance Do You Need?
Unfortunately, there is no one-size-fits-all for life insurance. In our life insurance review, we will conduct a needs analysis, looking at different factors that will determine how much coverage you would need to protect your family and assets adequately. Two of the biggest factors that affect how much insurance you need are your marital status and your financial dependents.
If you’re single without anyone — child or parent — depending on you financially, you’ll want enough to cover your funeral and burial costs. It’s also important to have enough to cover debts, because not all debts are discharged in death, such as private student loans.
If you’re married, use the DIME method to consider your needs:
- Debt and final expenses
- Education costs
After calculating and totaling each of those dollar amounts, apply an income replacement multiplier to determine your needed coverage amount. The multiplier varies based on your age and the status of your home mortgage. For example, if you’re under 50 years old, you can likely use a multiplier of 20. Older couples may be able to use a multiplier of 10 or 15, depending on the number of years left on their mortgage.
Keep in mind that these are just guidelines designed to give you a general idea of the amount of insurance coverage you need. There may be adjustments for your particular situation and what makes the most sense for your family.
Is It Time To Review Your Life Insurance?
Life insurance can be confusing, and it is often difficult to know if your policy is right for you. Through an insurance update, we can help you examine your policies in depth so that you can have increased confidence that your plans are on track. If you are concerned about your life insurance policy or would like to schedule a review, contact us at (330) 896-6250 or [email protected].
Kevin Spray is a lead advisor and senior financial planning analyst at Cornerstone Capital Advisors, where he assists clients with the development of a financial plan to meet their short-term and long-term goals through investment, retirement, income tax, estate, and college planning. Kevin graduated from The University of Akron in 2012 with a bachelor’s degree in business administration, specializing in financial services. He focused on study areas pertaining to the field of financial planning and was a co-founder of the university’s Student Financial Planning Association (FPA). Kevin earned his CERTIFIED FINANCIAL PLANNER™ designation in September 2014 and ACCREDITED INVESTMENT FIDUCIARY™ credential in 2017. He has held board positions with the FPA of Central Ohio and continues to be an active member of the community. To learn more, connect with Kevin on LinkedIn.
All information contained herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation or recommendation to purchase any security. Past performance does not guarantee future results. These views are as of the date of this publication and are subject to change.