Throughout the different stages of life your financial needs will change with you. This is especially true for life insurance. As you begin ramping up your life through marriage, having kids, and new debt, the need for life insurance increases incrementally. Then, as the debt is being paid off, kids begin to gain independence, and as you and your spouse get closer to retirement, the need for life insurance decreases. What are the things to keep in mind as you assess if you have enough insurance?
Reasons for Life Insurance
There are 3 main areas to consider when you are looking at life insurance and they are all of equal importance. First, we want to make sure any current debts can be paid off by the policy. The last thing we want is to have your unfortunate early passing result in a family member being burdened with the debt you had.
Second, we want to take care of our spouse through income replacement. When one spouse passes away, it puts a strenuous financial burden on the surviving spouse. The living spouse now must take care of maintaining the household, maintaining their lifestyle, and continuing to try and save towards retirement. If we account for several years of income replacement in the life insurance calculation then the surviving spouse can have less stress by knowing they don’t need to penny pinch at every corner after losing an income.
Finally, we look at the children. Typically, we would like to provide money for the children's college in the event a parent passes away. This will provide the children with their education without burying them, or the surviving parent, in student loans.
After accounting for all of these costs, it can be fairly easy to see a need for a very large insurance policy. How can we make this protection affordable?
Life Insurance Options
Every situation is different, but term life insurance is typically the preferred method to get this protection without breaking the bank through premiums. Term life insurance will protect you for a certain time period, typically 10-20 years. Once the term is over, the insurance will stop covering you if you were to pass away. However, if done right, this lapse in coverage can be okay.
The benefit of term insurance is it will allow you to have a large enough death benefit to meet your needs, and may not be too expensive for a standard family. For example, let’s say you get a 20 year term policy after the birth of your child and you are 30 years old. The policy will cover you until the child is 20 at which point they should be fairly independent and no longer have a college expense need. Additionally, major debts such as a mortgage should either be paid off or almost paid off after these 20 years.
Finally, in this example you are 50 years old so there is still a need for income replacement. For your final 10-20 years of work there is income, but there is also income replacement needs post-retirement because of social security. Social security may not seem like a big deal, but when you add the monthly income over a 30 year retirement, you will realize this is a million dollar income stream that your spouse has an insurable interest in. Because of this lifelong income replacement need, we could evaluate the options and purchase a smaller whole life policy to protect the income streams. However, purchasing a whole life policy at this age can be expensive. This is why it is advantageous to have the foresight to make a plan and purchase the whole life policy at a younger age knowing that it could be useful later.
If you are nervous about the coverage running out at 50, then you could always purchase another, smaller, term policy when you are 40 and this new one will bridge the gap from age 50 to age 60.
How Your Needs Have Changed
As outlined above, the quantifiable life insurance needs change as you age. It consistently ramps up until it peaks during the time where you have a family, personal debt, and are in your peak earning years. Then, as you age your family will become more independent and you have spent time paying down your debt so the insurance need is not as significant. These changing needs are why insurance is an art where one single policy likely is not the end-all be-all for your lifetime. You need to have a constantly evolving plan to make sure you are properly covered at all stages of life.
Conclusion
Life insurance is an area of financial planning which is often overlooked, but can have disastrous consequences if the need arises and you are not prepared. You must make sure everything is in order for your loved ones in the unfortunate event of your passing, and term life insurance can be a cost effective way to do this. If you would like a second opinion on your financial plan and your insurance needs, please reach out to us at (734) 681-7575 or email me at preston@peakwm.com