Top 5 Considerations when Evaluating the Need for Life Insurance for September’s Life Insurance Awareness Month.

I’ve worked in financial services for several decades, and I can still say, that discussing life insurance is still a difficult conversation – for all parties! September is National Life Insurance Awareness Month - so let’s dive right in.

Here are the TOP 5 (sometimes difficult) CONSIDERATIONS WHEN EVALUATING THE NEED FOR LIFE INSURANCE.

1.    First, even mentioning it means we must address our own ☠️ mortality. And who likes to think about that? I’m sure you’ve heard the expression made famous by Benjamin Franklin, on November 13, 1789, when he said, “. . . in this world nothing can be said to be certain, except death and taxes.” (PS – I also help clients manage their financial lives strategically so as to minimize taxable income when appropriate.) So while it can be an uncomfortable conversation, you have to be an adult and address it.

2.    Next we must address the ‘value’ of an insured’s life. Of course, NO amount of money can compensate those we’ve left behind, for the hole in their 💔 heart. But because most of us do not have unlimited budgets, we do, however, have some methods of approximating the appropriate amount of coverage, which we’ll discuss later.

3.    Third, we must address our 💵 budget, and our priorities that must be paid from our income. Where do we feel life insurance fits in? (Hint – if you have loved ones who would be impacted greatly from the loss of your income, it must become a priority in your budget).

4.    Fourth, our health!! 💪🏽 I tell my clients that YOU are your own best asset, and we must treat our bodies and minds with respect. In general, this entails avoiding smoking (of any type or flavor), and excess drinking. We also want to see healthy body weights relative to our height. Family health history and genetics, much to our chagrin, also plays an important role in our situation. If you’ve had family members die prior to age 60, or have developed cancers, this can impact us negatively. (But don’t let this dissuade you from applying – we will take into account your health history when we research possible insurance carriers for you).

5.    Fifth, gads – what TYPE of life insurance do I buy? 🧐 There are many types of policies to choose from. The type is impacted by your goals for the insurance – is it to replace your income? Leave money to heirs? Both? We will discuss the various types in detail below.

Now, let’s jump back up to the TOP of the list of (sometimes difficult) considerations and address each one.

1.    Am I going to die? (Just kidding, of course).
The question is rather, “when ⏱  I die, will I impact someone’s life in a financial way, such as a partner and/or children?” I typically tell my clients that as soon as they are adults in the workforce, they should be considering PRIVATE (not the insurance offered and often paid by our employer) LIFE INSURANCE and DISABILITY (INCOME) INSURANCE. (We’ll eventually discuss LONG-TERM CARE INSURANCE as well, but that conversation can start in our 40’s). Most people do not understand that while insurance coverage offered via our employer is great, in many cases it will not transfer to a private policy when/if we change employer – and we all know that many of us will accumulate 10+ employers over our lifetimes. Further, I often find that when I quote the same coverage you’re offered through work, privately, it can be less expensive to decline work coverage, and ONLY go with private coverage. But in many cases, I view the work policy as a bonus – and I’ll propose a private policy that will not be impacted by a change in employer.

2.    How much am I worth?? ➡️ 🏋🏾‍♀️  👻  There are several ways to arrive at an appropriate amount of coverage.

a.     The easiest, is to think about how much you earn (and will earn) and multiply that by the amount of years you’ll be in the workforce. For example, if I earn $100k/year (now), and will work for 30 years, I’ll need (at least) $3mm worth of coverage (maybe more when we include raises) to protect my loved ones from an unexpected loss of my income. This is a high number, so most people don’t go for that much coverage. This method is often called the “Income Replacement” method.

b.    Now let’s talk about the DIME method for calculating how much insurance you may need. DIME stands for DEBT, INCOME, MORTGAGE and EDUCATION. This method looks at how much you’d need to pay off the mortgage and other debts, how much income and how many years of that income you need to replace, as well as how many children’s education you’ll need to pay for. For education costs, I’m conservative and estimate $250k/child. You can estimate lower if you assume your children will attend a state school or other option such as community college.

c.     Another method tends to calculate on the low end of coverage – by multiplying your income by 6 – 10 years. Personally, I think this is way too low, especially if you’re applying for coverage in your 20’s or 30’s – you’ll have 30 more years of income to replace, not 10.

d.    MOTHERS and caregivers not working outside the home! 🤰🏿🍼  Please do NOT forget to insure the mothers and other primary caregivers in your life, even if they are not working outside the home. I have seen figures as high as $100k/year to replace the household and childcare duties of caregivers who work full-time IN the home. That should be considered the same way as covering the income of the working-outside-the-home-spouse.

3.    Budget. 💵
Once we’ve determined how much coverage we would like, it is not a given that we can afford those premiums. As I discussed above, our premiums are tied to our own and our familial health history. So while I may want $2mm of term coverage to protect my family, if I smoke or have an unhealthy BMI (body mass index) – this will increase my premiums. I work with my clients to make sure our premiums fit our budget, even if this means decreasing the amount of coverage we do accept.

4.    Health. 🏋🏾‍♀️💪🏽🚵🏽‍♀️
As mentioned above, life insurance premiums are predicted on your health (and your driving record! 🏎 ) I cannot stress enough how important it is to exercise regularly, avoid smoking (any substance) and excessive drinking, maintain a healthy body weight, and also take care of your mental health. Unfortunately, some of us are cursed with bad genetics, that can’t be helped, but to the extent that you can maintain a healthy lifestyle, please try. I always say that YOU are your own best asset. This is reflected in your capacity for a long, healthy, prosperous career, but it is ALSO reflected in lower insurance premiums.

5.    And last, but not least, what type of insurance is right for me? 🧐 Let’s discuss.

a.     Term insurance.
Term insurance is perhaps the most common and least expensive form of life insurance — if you’re under age 50. These policies are written for a specific period of time — 1 year, 10 years, 30 years, etc. — and often have the option for renewal, during which time the premiums are likely to increase. If you wish to lock in the premium for periods of up to 30 years, select a level term policy.

b.    Declining balance term insurance.
This type of insurance can be used to match the amortization of your mortgage principal or other debt schedules, with benefits paid only if you die during the policy’s term. While the premium remains constant over the term, its face value decreases. Once you pay off your mortgage, this policy expires without value, unless you choose to renew it. You can choose a variation of this policy which is renewable up to age 70 and convertible to permanent insurance without undergoing a medical exam.

c.     Whole life insurance.
Whole life insurance incorporates features of permanent protection with a savings account. You can lock in a premium rate, and part of the premium accrues a cash value as long as you continue to pay the premiums. As the savings amount increases, you can even borrow up to 90% of the policy’s cash value tax-free (though borrowing money reduces the policy’s death benefit and cash value).

d.    Universal life insurance.
Universal life is similar to whole life while including potentially higher earnings on the savings feature. You can also change the premium amount and withdraw cash, as well as possibly even change the face value of the policy. These can also offer a guaranteed return on cash value.

e.     Variable life insurance.
Variable life policies generally feature fixed premiums and a flexible cash value policy. In fact, you can invest the cash value in your choice of stock, bond, or money market funding.1 However, keep in mind that the cash value and death benefit can fluctuate, too, based on the performance of your investment choice(s). There is typically a floor for death benefits but no guarantee on cash values. Additionally, fees for these policies tend to be higher than for universal life. Finally, should you accrue investment earnings, they are tax-deferred as long as the funds remain in the insurance contract.

f.      Universal variable life insurance.
Universal variable life is considered an “aggressive” policy. While similar to variable life in that you can choose from a variety of investment options, there is no guarantee beyond the original face value death benefit. As such, they are more common with wealthy buyers who can withstand the risks.

g.     Survivorship life insurance.
Survivorship life insurance is a unique type of life insurance that insures two people, paying a death benefit only upon the death of the second insured, thus avoiding two separate policies. It is typically used for estate planning, with a death benefit that can fund estate taxes while passing along wealth to future generations or a charity. This policy may be favored if one of the insured is finding it difficult to have a more traditional life insurance policy underwritten, possibly for medical reasons.

h.    First to die life insurance.
First-to-die life insurance insures the life of two people and pays a benefit upon the death of the first insured. This is useful for covering a mortgage or other large debt where there are multiple debtors. It is often used when funding buy-sell agreements within a closely held business.

Let’s recap the top 5 (difficult 🧐 ) considerations when evaluating the need for life insurance.

As you’ve learned, life insurance is an important part of your financial plan and there is a lot to think about when determining the type and amount of coverage that is right for your family. However, it does not have to be as daunting as it seems, especially when you work with a professional. We know how to discuss your options, how to choose carriers and policies that will work for you, and how to usher you through the underwriting and issuance process. In fact, when I work with some couples, if they are young and healthy, we can often get them coverage in less than 48 hours with some carriers.

And lastly, insurance coverage is something that we can and do review, regularly, the way we do with your personal financial plan. Your plan is a road map 🗺, helping to navigate us through our various life stages and end goals – and our GPS 🧭 needs calibrating from time to time, or suggests alterations to our plan. Changes in your health or financial situation, as well as changes in the insurance industry, often lead to us reviewing, changing, increasing, or decreasing coverages according to your unique needs at the time.

In conclusion, your CALL TO ACTION is to schedule 📲 your consult today. I’ll help you review your coverage needs and implement an insurance plan that works for you and your family - it would be my honor 🙏🏼.

1 Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Guarantees are based on the claims paying ability of the issuing company. 

The cost and availability of Life Insurance depend on many factors such as age, health and amount of insurance purchased. In addition to premiums, there are contract limitations, fees, exclusions, reductions of benefits, and charges associated with policy. And if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

Variable Universal Life Insurance/Variable Life Insurance policies are subject to substantial fees and charges. Policy values will fluctuate and are subject to market risk and to possible loss of principal.

Any life insurance guarantees are contingent upon the claims-paying ability of the issuing company. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.