LOVE INSURANCE

Nothing quite says love like ensuring that your family is protected financially through life insurance—it is a critical piece of any financial plan. Although I’d advise that in addition to showing your spouse the life insurance policy, you also have a nice dinner with a dozen red roses waiting. 

Below is important information that you, as the consumers, need to understand about it. 

Who Needs It?

Anyone who has someone, such as a spouse, child(ren), or other family and co-dependents that are financially dependent on you. Both my wife, who incidentally is an amazing school teacher, and I work and we each have a policy. It is a broad misconception that if one spouse stays at home, lets say to take care of the child(ren), they don’t need a policy. This is a mistake. For the spouse, who works outside the home, can only do so because of the spouse who stays at home to tend to the childcare/homecare responsibilities.

What Type of Life Insurance Do You Need?

Term insurance is most likely all you will ever need; it is the least expensive form of life insurance and allows people to affordably obtain the coverage they need.  It’s less expensive because the life insurance coverage is only for a specific period of time, or term. Policy terms can range from 1-30 years. The length of term should be based on a few factors, such as your age, the age of your child(ren), future sources of income, etc.  The money is only paid if death occurs during the period covered by the policy.

How Much You Can Expect to Pay for Term Insurance?

The amount of your premiums is based on the following five factors:

(1)           Length of coverage – for example, a 20 year policy will be more expensive than a 10 year policy because the insurance company is covering you for twice as long;

(2)           Amount of the Benefit – for example, a one million dollar benefit will cost more, per month, than a $500,000 dollar benefit;

(3)           Your Health – for example, if your health is good and you don’t smoke, your premiums will be lower than if your health is poor and you smoke. It’s all based on probability of mortality;  

(4)           Your Age – a 20 year policy for a 25 year-old will be less expensive than a 20 year policy for a 50 year old. Again it’s all based on probability—there is a greater chance a 50 year-old will die over the next 20 years than a 25 year-old; and

(5)           Your Gender – males pay more than females. Again, it all comes down to probability—men have a lower life expectancy. Not surprisingly men also win more Darwin awards than women.

Premium Example:

A 20 year policy with a $1,000,000 benefit for a 40 year-old male with a standard non-tobacco health rating would be around $105/monthly, whereas for a female it would be around $83/monthly. A pretty good deal. A male pays a $105/monthly premium for 20 years and if you die, the insurance company pays out to your family $1,000,000.  If you have the highest health rating, difficult but not impossible, the premium would be around $50/monthly for a male, or $42/monthly for a female. If the person smoked, it would be over $320/monthly for a male, or $230/monthly for a female. This is a marked difference.

Permanent Insurance (which includes whole life, universal life and variable): 

When should you consider permanent insurance? You’d require a) enough term insurance, b) an adequate emergency fund, c) a fully funded retirement (or on track), and d) no plans to invest or spend the money on anything else.  Even with these in mind, it’s highly debatable. 

For those with estates greater than $22,000,000 and/or the estate isn’t very liquid, there may be a case for permanent insurance. This clearly eliminates most people.

So why do we hear so much buzz about permanent insurance?" As always, “follow the money”! There are life insurance agents who sell the merits of whole life, universal life, variable, etc. because their commissions are directly proportional to the amount you pay. The higher your payment, the higher their commission. For instance, a $1,000,000 policy for a 40 year-old male with a standard health rating would have a monthly premium close to $1000/monthly for the rest of his/her life.

Life insurance should first and foremost be a cost-effective safety net, so he/she can invest more in accruing investment vehicles accruing (i.e. retirement, home, investment property, etc.). 

How Much Life Insurance Does a Person Need? 

There are many factors to consider: income needs, your age, the age of your child(ren), etc. A general rule of thumb is 8-10 times your income, but even that’s far too broad. Your widow and child(ren) could be eligible for survivorship benefits through Social Security.  It’s nowhere near enough money for your family, but it can reduce the amount of life insurance you may need. Life insurance agents rarely, if ever, mention this fact, as it would lower your payment and consequently their commission. 

Why Getting Your Life Insurance Through Work Isn’t a Great Idea?

Some companies offer life insurance as a group benefit; however, there are two reasons why this is not recommended.  First, if you are healthy, it’s more expensive as it’s not based on your individual health, but rather an average health for your age group. (If you have health conditions your employer will likely be your best option.) Second, it is not portable—when you leave your employer, you lose your insurance.

New Policy Meets the 21st Century

I recently replaced my term life policy. My last one was approximately four years-old; it was good for an additional 16 years, but I found a policy with the same benefit that had lower premiums that also provided incentives for staying healthy. They provided a fitness tracker, either an Apple watch, or fit bit. I paid $25 plus taxes and received an Apple Series 5 watch to track my fitness. If I meet monthly exercise goals, my premium stays the same (or even lowers slightly); if not, it may rise slightly higher each month.

Part of Your Financial Plan

I had a relative who died nearly 10 years ago, without life insurance who had a non-working spouse with young children. The emotional toll was difficult enough. The financial toll made things even more difficult. 

As a financial planner, I help clients obtain life insurance policies and even review their current policies. Should you, your family, or friends have questions regarding life insurance, please feel free to contact me.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.