No one likes to think about their own mortality, so many investors avoid the conversation about their need for life insurance. However, life is full of “what ifs,” and those “what ifs” also change throughout the course of your life. The life insurance conversation should begin by answering, “What do you need to protect?” to help you determine your need.
Often investors will assume life insurance provided by your employer of two or three times your salary is enough. Group life insurance is nice to have as a no-cost benefit, and the coverage may be adequate for a single, young adult whose death would not create a financial hardship for others. As you grow in your career and take on the personal responsibilities of a family and a home, the life insurance conversation should not end with group coverage. It may not be enough to truly replace a breadwinner’s lost income.
If both spouses are wage earners and one were to die unexpectedly, it is unlikely that the surviving spouse would be able to keep up with household expenses and pay for child care with the remaining income. You need to consider the income gap a premature death would create; what expenses need to be covered, and for how long. The amount of life insurance you need depends on a number of factors, including family size; current assets; immediate expenses, such as, burial costs and hospital bills; how much of your salary is devoted to current expenses and future needs; how much you want to leave for special situations, such as, funding your children’s education, and of course, how much insurance you can afford.
Term life insurance coverage allows investors an opportunity to receive great coverage with a guaranteed premium and death benefit at a low cost. This type of coverage can get most families through the meaningful years when a death would fundamentally change a family’s financial future. With term policies, I highly recommend looking for a conversion privilege that will lock in a guaranteed low rate, but will also allow you to convert your policy to a permanent policy should something happen to you that would affect your future insurability. If you were to develop cancer within the 20 years your term policy is in place, a conversion privilege would allow you to convert to a permanent policy without having to go through the underwriting process again. The conversion privilege should not carry an added cost to the term policy; however, some companies severely restrict the future permanent policy options. Look for a company that does not limit their permanent policy choices if ever needed in the future.
As you approach retirement, life insurance is less needed because mortgages may be lower or paid off, and dependents have since left home to begin their own lives. At this point, again consider what you need to protect. Most often this is your retirement assets that could be drained by a long-term care event. You may consider reallocating what you’re paying in term life policies for long-term care coverage, or if you have a permanent policy that has a cash balance, look for ways to optimize your coverage that would allow you to access that cash balance should you need it.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.