Wow! Do I have enough life insurance?
If you have a partner/spouse, child or elderly relative who depends on your income, you need life insurance. The question: “Am I meeting the need?” If you don’t regularly check your needs against your coverage, you may be putting your loved ones in a precarious situation.
Welcoming a new child to the family or buying a new home are prime examples of life events that should automatically trigger a review of your existing life insurance. If it’s been a few years since you last reviewed your coverage, asking the following questions will provide a good starting point for assessing your life insurance needs.
How much do I need?
Quantifying the amount of life insurance coverage needed can be a bit complicated. When determining the need for coverage, the following factors are important to consider: existing life insurance, the family’s annual living expenses, total outstanding debts, and Social Security survivor benefits. Other critical assumptions include a funding schedule and the rate of inflation used for current living expenses. Let’s take a simple example.
Katie, 31, is married and has a 3-year-old child. Katie has a 20-year term life insurance policy with a death benefit of $250,000. Katie wants to support annual family expenses of $36,000, more than the Social Security survivor benefits her husband would receive, until her child turns 18. She would also like to pay off their mortgage (current balance of $250,000) and car loan (current balance of $15,000).
Given the information above and a 3% inflation rate on annual living expenses, Katie has a total life insurance need of $935,000. After subtracting her current coverage of $250,000, Katie needs additional life insurance in the amount of $685,000. The calculation breaks down below:
- Current mortgage value: $250,000 more,
- Current value of car loan: $15,000 more,
- Annual living expenses: $36,000 (for 15 years; inflation rate of 3%)
Total life insurance need: $935,000
Other factors to consider when evaluating life insurance should include the value of available assets (cash, investment accounts, and retirement accounts) and any future funding goals (such as projecting future college expenses). children). Additionally, it is recommended that you work with a CERTIFIED FINANCIAL PLANNER™ (CFP®) or Chartered Life Underwriter® (CLU®) to determine the appropriate amount of coverage for your specific needs.
do i have the right type cover ?
Level term life insurance. The simplest and most appropriate type of life insurance for most individuals is level term life insurance. Term life insurance ensures that beneficiaries receive a predetermined death benefit if the insured dies during a specified period. Once the term of the policy expires, the death benefit also expires. Typically, this type of life insurance offers terms ranging from 10 to 30 years. Term life insurance is usually the cheapest option compared to permanent life insurance.
Permanent life insurance. While term life insurance provides coverage for a set period of time, permanent life insurance covers long-term insurance needs. Permanent life insurance, such as whole or universal life insurance, remains in force as long as the necessary premiums are paid. Permanent insurance often combines a cash value component, which some liken to a forced savings vehicle. However, the underlying expenses associated with these types of policies can ultimately hinder the growth of cash value investments. Permanent life insurance premiums are generally more expensive than term insurance, and premiums can be difficult to maintain over a long period.
Employer’s group insurance. In addition to term and permanent insurance, many people have life insurance through employer-sponsored group policies. Employers often provide some coverage to employees for free with the option for employees to purchase additional coverage. Employer-sponsored life insurance can often be a cost-effective way to obtain insurance since the group component can reduce overall premiums. Additionally, employees may have the option of obtaining coverage without medical underwriting, which may be an attractive option for older workers or workers with known medical conditions. However, group coverage terminates upon termination of employment, so it is recommended that you purchase coverage outside of employer-sponsored insurance.
Determining life insurance needs with the help of a professional is a good option. Remember that level term life insurance is generally the right type of coverage for most people. If you think you need additional insurance coverage, act fast! Policy premiums increase as we age due to underwriting. Lock in cheaper premiums by getting coverage as soon as possible.
Abby VanDerHeyden, CFP, is a wealth advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Abby at [email protected].