Of all the financial products to have in our arsenal, I think most of us would agree that life insurance is definitely one of the most important. However, in a survey conducted in 2017, more than 4 in 10 people didn’t own a life insurance policy in any amount! Furthermore, of those who did own a policy, 40% claimed they were underinsured. (1) Why is there such incongruity? What are some of the obstacles people face that may be hindering their life insurance decisions?
Life insurance is not a one-size-fits-all product, and you can quickly become overwhelmed when trying to make a selection on your own. Everything from the type of insurance you get to the amount of coverage you receive will depend on your unique needs. And while there’s no exact formula, here are a few questions you can answer to help you evaluate your life insurance needs.
Do You Even Need Life Insurance?
The obvious first step is to address whether or not you even need life insurance in the first place. To answer that question, you need to determine whether or not you have enough money saved so that your death would not create a financial hardship for your loved ones, taking into account the other possible circumstances that could deplete your savings before you pass. For example, a single young adult with no dependents may not need life insurance if his loved ones can easily afford a funeral and all other final expenses. Or, even if you still have a family depending on you, if you have several million dollars safely stored away, your death may not cause a financial hardship either, assuming there are no unplanned medical expenses or other circumstances that require your savings first.
If you are like most and don’t have enough money saved, you should consider the purchase of life insurance to protect your loved ones when you are no longer here. Honestly, 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?
Once you’ve decided to purchase life insurance, you’ll then need to choose the type 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 does not expire like a term policy eventually will, so a death benefit will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). For this reason, this type of insurance is typically more expensive than term insurance.
Term insurance offers coverage for a specified length of time, typically 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 has expired, no death benefit is paid to your beneficiary. Depending on your situation, you may only need insurance for a certain time period—until your kids are grown, you have more paid off and fewer monthly expenses, or you have enough money saved to avoid a 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?
And now, the question at the forefront of everyone’s mind: How much life insurance will I need? To answer that, you’ll want to conduct a needs analysis, which can help you understand how much coverage you would require in order to adequately protect your family’s various areas of need. 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 that you have enough to cover debts, because not all debts (such as private student loans) are discharged in death.
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.
How Do I Make The Right Decision?
Given all the variables involved, there simply is no one-size-fits-all approach when it comes to choosing a life insurance policy. When making a significant financial decision such as this, the prudent choice is to get in touch with a financial professional who can review your options with you and offer their expert advice. At ClearVista Financial we help you navigate the products available and explain how they can integrate into your other financial strategies. If you have questions about life insurance, would like to discuss your options, or schedule a review of your existing policies, give us a call at 800-491-4508 or email me at firstname.lastname@example.org. Prefer a simple click of a button? Click here to book your free introductory meeting!
About ClearVista Financial
ClearVista Financial is a faith-based independent financial services firm providing financial planning and retirement planning to pre-retirees and 401(k) plan participants. Founded by Mark Trice, ClearVista strives to help people find financial balance in their lives and spend their lives well. As a Certified Kingdom Advisor (CKA®) advisor, Mark provides professional guidance while also incorporating biblically-based financial management truths into ClearVista Financial’s advisory practice. ClearVista Financial has offices in Austin, Brownwood, Temple, Houston, and Waco, Texas. Along with serving clients in Texas, the team also works with individuals in Arizona, California, Colorado, Maryland, Missouri, West Virginia, and Virginia. To learn more, visit www.clearvistafinancial.com or connect with us on LinkedIn.