Life Insurance Considerations
Written By: Shawn Perkins, CFP®, AWMA
As financial advisors, we have many responsibilities when it comes to providing quality service to clients. Cash flow management, tax planning, distribution strategy, investment management and allocation to name just a few. But there is one area that I believe advisors have an underappreciated responsibility and that is having the difficult conversations around what happens in the event a loved one passes away. These are not easy or enjoyable conversations to have at any time. But it is the advisor’s responsibility to uncover opportunities and risks within a comprehensive financial evaluation. In light of September being Life Insurance Awareness Month I’d like to focus on life insurance for today’s topic.
A report stood out to me recently that stated over 100 million Americans say they are uninsured or underinsured when it comes to life insurance. More critically, 40% of families stated that they would face financial hardship within 6 months if the primary wage earner passed away. Twenty percent stated it would happen within a month. Clearly, there is a risk that many Americans do not feel financially secure in this area of their financial plan. In fact, 70% of life insurance owners reported feeling financially secure, compared to less than half of non-life insurance owners. While the reasoning behind uninsured or underinsured varies from person to person, perhaps one of the main obstacles standing in the way is the understanding life insurance options and how much is needed in the first place.
First, let’s explore the two types of life insurance, term and permanent. Term life insurance is an obligation by the insurance company to pay a death benefit upon the passing of the insured during a specific time frame, typically between 10-30 years from the policy issue. In return, the insured pays the insurance company a level premium during that same 10–30-year period. After the period ends, you stop paying that premium and the policy is no longer in force. With permanent life insurance, however, you have the option to keep the policy for the remainder of your life assuming it is adequately funded. There are a few different types of permanent insurance (whole, universal, and variable). Essentially these policies create a type of forced savings account within the policy every time you make a premium payment. As long as you’re making your payment, the policy will remain in force and the savings account will grow over time, perhaps even reaching a point that it will pay for the policy for you. It’s important to note that term insurance will likely be cheaper compared to permanent insurance all things being equal. Group term insurance, which is offered through employer benefits, will likely be even cheaper. Make sure you evaluate your budget and needs when deciding between these options.
When it comes to evaluating how much life insurance you need, there are a few main factors to consider. First, how much income do you make and how long of a time horizon do we need to replace that income if you were to pass away? Next, let’s consider paying off sizeable debt obligations. Having a mortgage payment, student loans, and/or a car loan could cause a financial strain on a now one income household. And finally, think of financial goals that you would want to be achieved. If you have kids, do you want to earmark a portion of your death benefit to pay for college? Perhaps you want to make sure that your surviving spouse has enough to retire comfortably? Whatever it may be, consider all of these factors together and engage an online calculator or our advisors to calculate the total death benefit for you.
Your life insurance need will be unique to you and your goals. If you feel like you fall into the many Americans who are without this critical component to financial security, our advisors are here to help find the right solution for you and your budget.
The article highlights:
- The Hollywood actors and writers strikes are prompting some to speak out about their financial concerns.
- Dax Shepard, best known for his roles in “Punk’d” and “Parenthood” recently spoke about it, saying he’s in a “spiral of just completely out of hand financial insecurity.”
- He admitted that it’s absurd to think he will be out of work forever and that he’ll end up destitute, but he says, “It’s from growing up poor. I just can’t shake it.”
This week in history
1954 – President Eisenhower signed into law an amendment to Social Security that provided wider coverage, extending benefits to 10 million additional Americans, including those who are self-employed.
1969 – The first ATM to be installed in America starts dispensing cash at Chemical Bank in New York City.
1997 – Princess Diana, Dodi Fayed, and driver Henri Paul were killed in a car crash in Paris.
1997 – Mother Teresa, a Catholic nun who devoted her life to helping the poor, died at the age of 87.
1999 (September 1) – Ty Warner toys announced that on December 31, 1999, Beanie Babies would be retired. (Not sure you could retire off of your kids’ old Beanie Baby collection, but some of them might be worth a few bucks.)
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