The reality is, we don’t live forever. That’s why most of us need life insurance to protect our loved ones from financial hardship when we’re gone—not all of us, but most. If you’re young, single, and have no dependents or debts, you can probably forgo life insurance. If nobody needs your help to put food on the table or keep a roof over their head when you pass, you probably don’t need much (if any) life insurance at all. However, if you’re married or have dependent children, more than likely, you’re going to need coverage. In today’s edition, we’re going to help you cut through the noise when it comes to life insurance.
Contact us to schedule a no-cost insurance review with Good Life Financial Advisors of NOVA!
Term Life vs Permanent Coverage
Two different types of life insurance policies are available. The most common is term life insurance, which is the option that will suit the majority of people. Term life insurance is fairly self-explanatory: you get insured for a certain amount in the event you die during the term of the policy, which can range from 10-years to multiple decades. Should something happen to you, your designated beneficiary will receive the payout (called the death benefit).
Term life insurance is set at a fixed premium for a specified number of years, usually a number of years to meet a financial need. Term coverage will only remain in effect if the payments are made. Once the term is up, most term life insurance is guaranteed renewable, though at a much higher premium.
The other type of coverage that exists is permanent coverage. Permanent coverage refers to policies that don’t expire, such as whole life, universal life, variable universal life, and indexed universal life. As long as sufficient premium payments are made, these policies will continue to remain in effect. Not only do premiums maintain the policy’s death benefit, but the policy holder can borrow against or tap its cash value. In addition, the cash value grows on a tax-deferred basis, meaning that the policy owner isn’t required to pay taxes on earnings as long as the policy is in effect. Of course, you’ll pay handsomely for these perks—permanent coverage can often be 10x the annual price of a 30-year term life policy.
Factors to Consider When Buying Life Insurance
Buying too much life insurance can be a drag on your finances since there are plenty of more lucrative places to keep your capital. Even though whole life policies have a cash value component, you’ll likely find better returns through the markets. Buying life insurance is a bit of a Goldilocks proposition—you want the coverage to be just right. Here are a few factors to consider when buying life insurance:
- Age. Life insurance premiums are heavily influenced by your age, since the older you are when you purchase the policy, the more likely it is the insurer will need to pay the death benefit. Expect premiums to double between the ages of 30 and 50.
- Family. How many people depend on your income? Are you single with only a cat for a dependent, or do you have a spouse and multiple children? If you're the first person in this example, your need for coverage is small. But if you are married, have kids, or others who are financially dependent upon you, that number goes up significantly.
- Debts. If you have credit card debt or a mortgage, those responsibilities will typically fall to your heirs if you die before paying in full. Make sure you buy enough insurance to cover paying off your car, house, and credit cards.
- Death Expenses. Even dying is expensive these days. You’ll have to consider funeral costs, court fees, and attorney fees for dividing up your estate. Funerals and burials can cost upward of $10,000, which can be a huge burden on grieving loved ones. Always consider these costs when buying a policy.
- Assets. If you already have significant wealth built up in bank or investment accounts, buying extra life insurance may not be necessary. However, you do want to make sure that there are assets that are readily available. If you have a lot of assets but limited liquidity, you should consider a small policy to take care of your final expenses.
How Much Life Insurance Do I Need?
Being underinsured is a problem for sure. Ask yourself the question, “How much money would the people who count on me need if I died?" Now, ask yourself how you arrived at that number. The reality is, most people don’t know what this number is.
While you certainly don’t want to have too little insurance, having too much is also a problem. Why? Simply put, insurance isn’t free. Every dollar spent on insurance is a dollar that can’t be saved, invested, or spent on other things. Doing a needs-based analysis can show you what your insurance number truly is.
It is a good practice to sit down and conduct a comprehensive insurance review every few years or as your life situation changes. Consider factors like your age and health, outstanding debts, and the number of people who depend on your paycheck. If you have policies that no longer fit your needs, you may be able to drop some coverage. If you determine that there is insufficient coverage, you can address that, too.
One thing to keep in mind is that buying or dropping an insurance policy should be done in the context of a holistic analysis working with a financial advisor. This advisor should not be a captive employee of an insurance company— insurance agents work for commission, and if their employer is also the policy issuer, there is certainly an inherent conflict of interest. Before you buy a policy, ask why the policy fits your needs. If the agent is recommending a policy and focusing on the investment component of it, be sure and really dig deep as to why buying an insurance product is the best way to achieve an investment goal. Spoiler alert, for most investors, it isn’t.
It’s important to know how much life insurance you really need. It’s also crucial to find the right financial advisor to assist you in creating a plan that works for your specific situation. Contact us to schedule a no-cost insurance review with Good Life Financial Advisors of NOVA!
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.