When planning for the future, many people neglect to consider life insurance’s role in their financial strategies. In 2017, more than 4 in 10 people didn’t own a life insurance policy in any amount and 40% of those who do said they were under-insured. (1)
When it comes to life insurance, most people have a vague idea that they should have it, but very few have a clear picture of what they really need. People frequently ask me, “How much life insurance do I really need?” Unfortunately, there isn’t a one-size-fits-all answer. But, there are a few things you can review and answer to help you evaluate your life insurance needs.
Do You Need Life Insurance?
The first question you need to answer is whether or not you even need life insurance in the first place. You’ll want to determine if you have enough money saved so that your death would not create a financial hardship for your loved ones.
A single young adult with no dependents may not need life insurance if his loved ones can easily afford a funeral and burial. If you have several million dollars safely stored away, your death may not cause a financial hardship either, even if you still have a family depending on you.
If you don’t have enough money saved, you should purchase life insurance to protect your family in case you pass away. 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?
Along with knowing how much coverage you need, you’ll also need to choose the kind 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 can last longer than a term policy so that something will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). This type of insurance is more expensive than term insurance. Permanent Insurance is almost NEVER the answer or a good fit for Accumulators. Frankly, investments and insurance go together like oil and water, they really shouldn’t mix. In my business there is an old phrase that still has relevance today (to the ire of your insurance salesman buddy) “Buy Term and Invest the Difference.”
Term insurance offers coverage for a specified length of time, which can be anywhere from 10 to 35 years in some cases. The downside to term insurance is that it only covers you for the specified period of time, so if you pass away after the term is over, no money is paid to your beneficiary.
But depending on your situation, you may only need insurance for a specific term — until your kids are grown or you have enough money saved to avoid 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. Also, often for younger accumulators the purpose of insurance is to cover the income gap during a certain time period. As someone’s liabilities decrease over time (either through an increase in net worth, mortgage being paid down or kids growing up and going out on their own), there is often a need for less insurance. In this scenario, we often introduce layering of term policies (more coverage in the beginning) or even look at newer “Decreasing Base” policies.
How Much Life Insurance Do You Need?
Finally, the question at the forefront of your mind. You’ll want to conduct a Needs Analysis, which can help you understand how much coverage you would need to protect your family adequately. 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 funeral and burial costs. It’s also important to have enough to cover debts, because not all debts are discharged in death, such as private student loans. (2)
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.
Stay-at-home parents can also benefit from life insurance. While they don‘t generate income, the services they provide would have to be purchased if they were to pass away. Many stay-at-home parents care for their children, cook, maintain the house, and more, so their spouse needs enough insurance coverage to pay someone else to do the same if they are gone.
How Should You Make a Decision?
Life insurance can be confusing and it’s difficult to know if your policy is doing what it’s intended and customized to your needs and circumstances. Through an insurance review, we identify risks, such as death, health and disability (a major issue most accumulators and small business owners tend to neglect), and long term care. We help you calculate the financial impact on you and your family, should one of these risks happen, to ensure everyone is adequately and appropriately protected. If you are concerned about your life insurance policy or would like to schedule a review or discuss your options, call my office at (858) 255-4475 or email firstname.lastname@example.org to book your appointment.
Scott Melbrod is the founder and CEO of Accumulation Wealth Partners, an independent wealth management firm in San Diego, CA. Working with a wide array of clients, from families to young Millennials just starting their careers, his mission is to provide impactful and targeted financial advice at a transparent cost to people in their accumulation phase of their lives. With more than 15 years of industry experience, he uses his knowledge to develop for his clients a structured and tailored plan designed to guide them toward financial freedom. Learn more about Scott by connecting with him on LinkedIn or emailing him at email@example.com.