Life insurance may be one of the most important purchases an individual will ever make. An August 2010 study by LIMRA, an insurance research organization, revealed that ownership of individual life insurance has fallen to a 50-year low in the United States: 30 percent of households (35 million) have no life insurance coverage at all. In addition, there are a variety of mistakes made during the process of obtaining life insurance coverage.
When you wait too long to buy life insurance, you leave your family vulnerable if something unexpected happens to you. Term life insurance premiums generally increase as you get older, so buying sooner rather than later can save you money. The older we get, the more at risk we are for health issues. That will increase the cost of your life insurance or even make you ineligible to purchase it. Many people think they should wait until they are debt free to buy life insurance, but that’s when your family is the most vulnerable. As you reduce debt and increase savings, you slowly begin to reduce your need for life insurance as well. Waiting to buy coverage leaves your loved ones and assets vulnerable in the event of your sudden or unexpected death. If your health declines, you may pay more as well – assuming you can still get coverage at any cost. Delaying for any reason is risky financially and could mean coverage becomes limited or not available at all.
When you’re young and single, it’s not possible to know what your future life insurance needs will be. But if you have the opportunity to buy a large amount of inexpensive life insurance now, by all means do so. Though it may not be adequate 10 or 15 years down the road, you will at least have built a solid foundation of coverage at very affordable rates. Life insurance is a major part of a healthy financial plan.
Getting Enough Coverage
It is recommended that you buy ten to twelve times your income in life insurance coverage. If you’re the primary source of income in your household, then your spouse and kids need to be taken care of for a long time if something happens to you. Making sure you have plenty of coverage will allow them to live comfortably and maintain their lifestyle until they figure out the next step in their lives.
Employer sponsored life insurance is a great benefit, but in many cases it does not offer enough protection to sufficiently cover your financial future. When you leave the company, the coverage ceases, but your need for coverage does not. When people shop for term life insurance coverage, they may focus primarily on the most obvious expenses, which could result in being drastically underinsured. Here are some commonly overlooked expenses you should take into account:
• Is there enough money to cover additional childcare costs?
• Will your family require help to maintain the household?
• Do you plan to pay for your children’s college education?
• Do you want your family to be able to pay off your mortgage or buy a home?
• Will your family have health coverage – and money to pay for it – if you are suddenly taken from them?
Just as important, don’t forget to get coverage for both spouses. Even stay-at-home parents need to have term life insurance. Many people think only in terms of insuring the family’s main breadwinner. It’s important to recognize that a person maintaining a home and caring for a family has a financial value, even if they are not currently earning money. If an individual takes care of children or another person in the home, such as an elderly parent, the caregiver’s death could create unexpected – and significant – expenses. These costs can run for years and really add up.
Finding an appropriate plan
You might be trying to save a few dollars by choosing shorter term coverage. But what happens if you buy a ten-year policy and you have medical issues ten years from now that raise the cost of your next plan or make it so you can’t get coverage at all? That will cost you even more in the long run. So how long should you buy for? Dave Ramsey’s general rule of thumb is to buy based on when your kids will be heading off to college and living on their own. In other words, if you plan on having children in the future, then a 30-year plan might make sense. If you have a newborn in the house and don’t expect any more children, then a 20-year plan would be a better option.
People sometimes choose a whole life insurance policy (permanent insurance), perhaps because it was sold to them by a charismatic insurance salesman or because their parents took their own whole life policy 60 years ago and always encouraged you to do the same. The basic problem is that whole life costs a lot more than term life insurance. Sure, you can lock in the premium for life, but the cost is high and will limit the amount of coverage that you can afford. If you have a family, particularly a young family, you need as much coverage as you can afford. You’ll be able to afford a whole lot more with a term life insurance policy
Review policies periodically
It’s always a good idea to go over your term life insurance policy in the same way you might review other aspects of your financial or retirement plan. The life insurance coverage that fit just fine when you first got your policy years ago might not be the best for your needs anymore. Getting married or divorced, having or adopting children, taking on a mortgage and other life events can greatly affect your term life insurance needs. You might decide you need more coverage — or less. Make sure you have enough insurance to take care of your changing needs. Maybe you had a child, bought a new home, got a raise at work, quit smoking or had other health improvements. These life-changing events can either help you save money or require additional coverage. Not doing so could leave you with an inadequate level of coverage, and that can leave your family fighting for financial survival in the event of your death.
Choose an appropriate beneficiary
An astounding number of policies are payable to ex-spouses or others whom the insured would not want receiving proceeds. Underage children are designated beneficiaries while other children born after a policy was purchased are inadvertently omitted. Even deceased persons are still named as beneficiary. Naming an estate as beneficiary of life insurance proceeds can expose moneys paid needlessly to state inheritance taxes or state death tax rates (in some states) that would not apply to an individually named beneficiary. In addition the life insurance proceeds left to the estate are subject to creditors. By naming the estate as beneficiary, precious dollars intended to go to loved ones can be subject to the fees and delays of probate. Be sure the beneficiary is an adult individual, and make sure to have at least two contingent (backup) beneficiaries named as well.
Use an advisor
The internet is full of online forms and calculators that spit out a fast term life insurance rate quote. These tools may be handy for getting a rough idea of what you might pay, but it takes more detailed analysis to nail down an accurate rate. Your age, health, budget, medical history and other individual factors need to be included in the evaluation to determine an appropriate amount of life insurance and term length as well as an accurate rate. Only a licensed life insurance agent can provide you with an accurate rate (based on your health profile) and sell you life insurance. It is better to have a personal representative for the same price as online policies for your loved ones to call and get counsel, rather than an 800 number. Your family’s financial picture likely has many moving parts – income, retirement savings and investments that need to be balanced against mortgage payments, college tuition needs and other financial obligations. When in doubt about a life insurance purchase, consult a professional agent.
Jeffery Masters, president of Jeffery W. Masters & Associates, can be reached at 954-977-5150. Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor. Independent Financial Partners and Jeffery W. Masters & Associates are separate entities’ from LPL Financial – [email protected]. Jeff is a locally endorsed Investment Advisor by Dave Ramsey, who is not affiliated with LPL Financial.