The reality is many families do not have enough life insurance protection. Research shows that 1 in 4 people have more insurance on their cell phones than their own lives. While shopping for life insurance can be overwhelming, understanding the different types and how much you need can provide clarity and peace of mind in your decision-making.
Types of Life Insurance
There are two primary forms of life insurance, term coverage and permanent. Term insurance is temporary and lasts for a "term" of 10-30 years. It is like renting insurance. If you pass away during the specified term, your beneficiaries will receive a check from the insurance company. Meanwhile, permanent insurance lasts your entire life. It comes in a few different forms, e.g., whole life, variable, universal, etc. Most of these types also include a cash value bucket that can act as a supplemental investment vehicle, increasing the cost. Since term insurance is just pure life insurance, it is generally significantly cheaper than permanent coverage.
Do I Need Life Insurance & What Kind
I view life insurance as purely needs-based. Always start by evaluating insurance from a risk management standpoint, not as an investment vehicle. Ask yourself, "Would someone else be hurt financially if you were to pass away"? If yes, then you have a potential need for life insurance. A simple rule of thumb, such as 5 to 10 times your income, can help you get started. If you're looking for a more accurate estimate, try a life needs calculator.
An essential point about insurance is that you should plan. After all, financial planning is a proactive process, not reactive. If you anticipate changes to your situation, then shopping for life insurance is a great idea. Typical examples may include a baby on the way, marriage, home purchases, or starting a business.
Most individuals should look at term insurance before permanent forms like whole life. Because term life insurance is more affordable, it is a better starting point, especially for a growing family. However, it all comes down to your situation and protection needs. For example, an older couple with complex estate and gifting issues may find that permanent insurance is a better fit for their needs.
What Is The Cost & Where Do I Start?
Age, health, gender, occupation, and lifestyle all factor into the price. The younger and healthier you are, the cheaper it will be. And typically, for females, the price is lower since, on average, females live longer than men. If you secure term insurance when you are younger and healthier, the premium can be level, meaning it won't change. In financial planning, locking in a lower cost premium when you are young and healthy can be a huge cost saver.
As a starting point, I recommend working with a fee-only Certified Financial Planner. Because a fee-only financial planner does not sell insurance, it removes any form of bias from the process.
Many life insurance agents and some commission-based financial planners receive large commissions and kickbacks from specific carriers. This may incentivize them to pick one company over the other even if it is not in your best interest.
With my clients, whenever we shop for life insurance, we go through an independent insurance agency. This way, we can shop across hundreds of companies to find the best coverage and rate for my clients.
What About Group Insurance?
Many employers also provide complementary or supplemental group life insurance. While this is an excellent employee benefit, it typically is not as strong as an individual policy. Generally, a group policy is not portable if you leave and often is only issued in small amounts. The rates can also be subject to changes. For a family with dependents, securing an individual policy usually makes sense.
Insurance Planning Is Ongoing
Simply buying life insurance is not the end of your insurance plan. As life changes, so will your needs. With my clients, we evaluate insurance needs at least once per year and make adjustments if necessary. For example, I have some clients whose kids are starting to grow up and enter college. For them, their need for life insurance is decreasing, and thus we can make changes. With other clients, who are just getting started on college planning for their young kids, it can make sense to have more when the need is the highest.
The big takeaway is to begin by evaluating life insurance from a needs-based perspective. Attempting to combine life insurance with an investment vehicle is often expensive, confusing, and unnecessary. So for most young professionals and growing families, term insurance will be more appropriate than permanent. When shopping for insurance, don't forget to consult with a fee-only CFP® Pro for extra guidance.
If you are looking for guidance on incorporating life insurance into your financial plan, reach out for a complimentary planning consultation.
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