How Much Life Insurance Do You Really Need?
Brett Gottlieb
Helping You Navigate the Transitions in Life | Income Plan | Investment Plan | Tax Plan | Healthcare Plan | Legacy Plan | Retirement Plan
When building a financial plan, one of the things that often slips through the cracks is life insurance. Because the benefit of life insurance is not traditionally seen until after you pass, you may think there is no true need for it. However, if you are human, your life insurance is guaranteed to be claimed sooner or later (hopefully later!). And if you have ever lost a loved one, you know the devastating financial burden that all the final expenses and a modern funeral of an uninsured death can impose. Even worse, if the deceased left dependents behind, the financial loss could leave them in ruins.
Sadly, in 2018 almost 50% of Americans do not have any form of life insurance at all. And of those that do, 1 in 3 admit that they are underinsured. Nearly half of couples say they wish their spouse or partner had more sufficient coverage. (1) Insufficient coverage has grave consequences for countless families. More than half of consumers say they would have immediate or near immediate trouble paying living expenses if their primary wage-earner died. (2) We insure our cars, our health, and our homes even though all of these things may never fail. But the one thing we know without a doubt will come to an end and bring financial requirements with it is our life, and yet so many of us leave that uninsured.
Clearly there is a real need for life insurance. But many people have no idea how much they actually need. The fact of the matter is, there is no one-size-fits-all plan. A single person with no dependents and healthy savings is going to have very different needs than a father with three children and a wife who stays home to raise them. Your mortgage, medical history, and the risk level of your occupation all play a factor in the unique needs you may have. Here are a few quick ways to determine if you are still in need of more protection.
Do You Even Need Life Insurance?
First things first: do you have a need for life insurance? There are two simple ways to answer this question. First, are you single with no dependents? If you answered yes, then secondly, ask yourself, “If I were to die today, do I have enough money in the bank to cover my debts, final expenses, and funeral costs?” Final expenses are things such as medical expenses that need to be taken care of due to illness or a hospital stay, outstanding debts that don't disappear when you die, and potential tax liabilities. Funeral expenses include the costs of ceremony and burial or cremation. If you answered yes to that as well, then you most likely have little to no need for life insurance.
However, if you are like most people and you answered no to either of the questions above, you have a need for life insurance. When you pass, you will leave behind debts. You may even leave behind additional expenses you don’t currently have, such as medical expenses from passing due to something like a car accident or illness. If you have dependents, they will suffer the ongoing impact of losing your financial provision as well. This is a torturous burden when added to the already deep grief of the emotional loss they will be suffering. You will want to make sure you have enough coverage to care for your family while they adjust to life with you no longer there.
Spouses who stay home to raise children can also greatly benefit from life insurance. Even though they do not bring in a paycheck, the services they provide would need to be purchased if they were to pass. With the median annual value of a stay-at-home mom being $162,581 in 2018, up $5,000 from 2017 and sure to continue rising, the need to outsource these responsibilities should not be taken lightly, much less overlooked. (3) Life insurance for a stay-at-home parent can ensure that their children are able to receive top-of-the-line childcare, and even help their now- widowed-spouse hire someone to help with household needs if they so desire.
You also may want to consider some additional benefits of a life insurance policy, such as critical illness insurance, which can cover the enormous expenses of cancer, heart disease, stroke, and other life-threatening illnesses. There is also long-term care insurance, which can cover things like home care, assisted living, adult day care, respite care, hospice care, nursing home, Alzheimer's facilities, and home modification to accommodate disabilities. We never know what life will bring, but we do know it can add up quickly, and therefore, it is far better to be prepared than to be caught off guard.
What About The Different Types Of Life Insurance?
After you determine how much coverage you need, you’ll need to find out which type of life insurance will be most appropriate for your current situation. There are two primary types of life insurance: permanent and term.
Permanent Insurance
Permanent insurance is coverage that is not limited to a specific duration of time, meaning it will cover you until you pass and it pays out. There are several types of permanent insurance, including Universal Life, Indexed Universal Life, and Whole Life. The benefit of permanent insurance is that it will not expire like a term policy will, so no matter when you die, your policy will pay out to your beneficiary. (This, of course, is assuming you remain in good standing with your contract and pay your premiums as agreed.) This type of insurance is more expensive than term insurance because it will eventually pay out. And though that guarantee sounds like a no-brainer, this is not necessarily the best option for everyone.
Term Insurance
Term insurance offers coverage for a specified length of time, usually ranging anywhere from 10 to 45 years. The downside to term insurance is that it only covers you for the specified period of time. So even if you remain in good standing and pay your premiums for the entire term, if you pass away after the term is over, no money is paid to your beneficiary.
The lack of guarantee for payout may sound like a waste of money, however, depending on your situation, you may only need insurance for a specific term. For example, you will not need insurance to cover college expenses for your children after they graduate, or insurance to cover your mortgage so that your family does not become homeless once your house is paid off. One of the major benefits of term insurance, as opposed to permanent, is that it is usually the most inexpensive out-of-pocket option, therefore, making it the most frugal choice for covering those needs that will only exist for a specific amount of time.
Also, many times for accumulators who are just getting started, the purpose of insurance is to cover the income gap during that most vulnerable time period. As someone’s liabilities decrease over time, there is often a decrease in what needs to be insured. For instance, as your net worth increases, you pay off your mortgage, and your children grow up and move out, your need for coverage decreases. In this scenario, you may consider layering term policies, or in some cases “decreasing base” policies.
So How Much Life Insurance Do You Need?
When all is said and done, you want to know how much coverage you will actually require in order to meet your unique circumstances. To answer this, you’ll want to conduct a needs analysis, which takes all things into consideration and helps you determine how much coverage you will need to protect your family adequately and cover all your final expenses.
How Should You Make Your Decision?
It can be confusing and scary to try and determine how to adequately protect your family and cover your final needs. And as time passes, many also find it difficult to be sure their policy is still up to date with their needs and will still serve as it was intended when they pass. This is why it is so important to find a professional you trust who can guide you through your needs analysis and provide services to periodically review and update your policy as needed. Here at Comprehensive Advisor, we are ready to serve you in every area of need and make sure you and your family are well taken care of. Email us at info@ComprehensiveAdvisor.com or call (760) 813-2125 today.
About Brett and John
Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life, Accident and Health Insurance licensed in several states.
John Mc Kean, financial advisor, joined Comprehensive Advisor in 2016. He has been in the financial services and retirement planning industry for over six years. John is Life, Accident and Health Insurance licensed in California.
Brett and John previously worked as a Registered Representatives with Securities America, one of the largest independent broker/dealers in the country, and currently offer advisory services through Legacy Road, LLC, a Registered Investment Advisor. Both are passionate about educating clients on retirement planning. They take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County. Learn more by connecting with Brett on LinkedIn or email us at info@ComprehensiveAdvisor.com.
Advisory services offered through Legacy Road, LLC, a Registered Investment Advisor.
Brett Gottlieb, Investment Advisor Representative. California Insurance License #0C68886.
Comprehensive Advisor and Legacy Road, LLC are not affiliated.
___________