By Ann C. Alsina, CFP®, CPWA®
I’ve had a few friends and neighbors pass away recently, and given my job, I wonder if the family was prepared financially for the loss they now face. Life insurance is an important part of your financial plan. If you or your spouse passed away, how would you make ends meet?
There are essentially two types of life insurance: term and permanent. Term insurance covers you for a preset amount of time, usually 10, 20, or 30 years. At the end of the term, the premium increases significantly. Term insurance is generally affordable and helps fill the need for most families.
Permanent insurance comes in many forms and with multiple variations: whole, universal, guaranteed universal, variable universal, indexed universal. Permanent policies, when well designed and funded, can build cash value and have tax advantages. They are a great option if you have a child with special needs and you want to fund a trust when you pass away. Permanent insurance can also be an option for pension survivor benefits, buying insurance instead of taking a reduced pension. They aren’t typically our first choice for a savings vehicle, but for families who are already saving the maximum in other areas, they can be a powerful tool.
How much insurance do you need? While there is financial planning software that can model out life insurance needs to the dollar, you can also use some rough guidelines as a starting point. One planning benchmark is to have ten to twenty times your income in insurance. We generally start at one million dollars in insurance for every fifty thousand dollars of income you need to replace. When you think of that income, remember that you don’t need to replace a full salary, just the take-home portion. Depending on the surviving spouse’s income, you may want more or less insurance. The amount of savings you have, the number and age of children, and how close you are to retirement are also considerations.
Stay-at-home parents need insurance, too. If you’re home with the kids, your spouse may need to hire a nanny or au pair. Perhaps a housekeeping service or lawn service. Meal prep or take-out costs may increase. All of the normally unpaid labor in a household still has to be done.
If you’re thinking about purchasing insurance, find a reputable independent agent. The agent should be able to show you multiple quotes, not just one company. Using an agent doesn’t cost any more than doing it yourself online, and a good agent can help navigate any bumps in the process, especially if you have any health concerns.
You may be able to purchase insurance through your employer, but remember, if you leave the company, you also lose your insurance. If your health has changed, you may not qualify for a new policy. And group insurance rates normally increase with age.
You can find great resources, calculators (including one for life insurance), and register for our educational events on our website at www.covingtonalsina.com. If you have questions, email us at info@covingtonalsina.com. We’ll continue in the next column with a discussion on saving for college and other goals.
CovingtonAlsina is a Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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