Life insurance is one of the most oversold and exaggerated pieces of your financial life. It is important to know when you actually need it, how much you need, and what type to use. Otherwise, you could end up like many, over-insured and spending more in premiums.
What is the purpose of life insurance?
The primary purpose is to provide financial assistance to someone else in the event you pass away. Ultimately, you only NEED it when you have people in your life that depend on your income.
What type of life insurance should you use?
There are different types of life insurance available to you. Without getting into the specifics of each, term life insurance will likely be the best option for most individuals. Most other options promote their usefulness as tax-deferment tools and investment vehicles. That is not the true purpose of life insurance. The purpose is to help those who are financially dependent on income you only earn while you are alive.
Term policies let you set a fixed benefit your beneficiaries will receive if you pass away during a certain term. For example, a 30-year $500,000 bought today will give your beneficiaries $500,000 tax-free if you pass away in the next 30 years. It’s that simple. Another benefit of this type of policy is cost. Among the different types of insurance, term is usually the cheapest, especially for younger individuals.
How much life insurance do you need?
At this point, you should be able to determine if you actually need insurance. Some of you do, but how much? The amount can vary dramatically on a case-by-case basis. Different variables include:
- Income Replacement Ratio – How much of the lost income do your dependents actually require if you were to pass?
- Remaining Income Time Horizon – How much longer will they actually be dependent on that income?
- Investment Risk Profile – Depending on your beneficiary’s capacity for risk, the insurance proceeds could be invested to help grow the asset base while still withdrawing a certain amount to sustain their lifestyle. This is our general approach, which typically helps reduce the actual projected life insurance need.
- Long-Term Lifestyle Projections For Dependents – Our approach to life insurance needs analysis involves taking the above variables into account, while projecting dependents’ lifestyles over their entire lives. This helps us understand exactly how much insurance coverage is required.
We frame any financial need in the context of an individual’s actual goals. This is a much better way of doing things than using general rules of thumb. Analyzing ongoing life insurance need in this manner is an area where a fee-only financial advisor can provide tremendous long-term value to your financial situation.
How should you get life insurance?
As fee-only financial advisors, we do not sell insurance. Our only compensation comes directly from our clients for the services we provide them. However, we can and do help individuals acquire the insurance they need, if they like us to do so. We typically work together with a number of different third-party insurance brokers who can go out and shop for the best policies available on behalf of our clients. Then they provide a couple different options to choose from.
So…what do you need?
Now you know whether or not you need insurance. If you do, you know some of the things to consider when determining how much you’ll need. You also know what type you need and how to get it. However, calculating the ideal amount of coverage for different time frames can be more complex. This is especially true when it comes to framing that need in the context of your overall goals. If you want or need help protecting the ideal lifestyle for you and your dependents, please contact us.