When planning for the future, many people neglect to consider life insurance’s role in their financial strategies. One study shows that life insurance falls seventh in financial priority, and less than 40% of Americans are worried about a lack of coverage. And another study showed that while 60% of Americans say they own a life insurance policy, nearly half of them don’t have sufficient coverage to address their specific needs.
So why is that more than 80% of Americans agree that most people need life insurance, but only 60% of people have it? When it comes to life insurance, most people have a vague idea that they should have it, but very few have a clear picture of what they really need. Many people assume other financial priorities take precedence or that they can’t afford life insurance.
People frequently ask me, “how much life insurance do I need?” Unfortunately, there isn’t a one-size-fits-all answer. But, there are a few things you can review and answer to help you evaluate your life insurance needs.
How Would Life Insurance Play Into Your Financial Plan?
Many people choose to buy life insurance because they don’t want their death to create a financial hardship on their loved ones. A young single adult with no dependents may not need life insurance if his loved ones can easily afford a funeral and burial. Or, if you have several million dollars safely stored away, your death may not financially impact your family.
If you don’t have enough money saved, you may want to purchase life insurance to protect your family should you unexpectedly pass away. Even if you do have enough money saved, you may still choose to buy life insurance for some of the other benefits that a policy can provide.
What Are Your Life Insurance Needs?
Next, you’ll want to conduct a Needs Analysis, which can help you understand how much coverage you would need to protect your family adequately. Two of the biggest factors that affect how much insurance you need are your marital status and your financial dependents.
If you’re single without anyone — child or parent — depending on you financially, you’ll want enough to cover funeral and burial costs. It’s also important to have enough to cover debts, because not all debts are discharged in death, such as private student loans.
If you’re married, use the DIME method to consider your needs:
- Debt and final expenses
- Education costs
After calculating and totaling each of those dollar amounts, apply an income replacement multiplier to determine your needed coverage amount. The multiplier varies based on your age and the status of your home mortgage. For example, if you’re under 50 years old, you can likely use a multiplier of 20. Older couples may be able to use a multiplier of 10 or 15, depending on the number of years left on their mortgage.
Keep in mind that these are just guidelines designed to give you a general idea of the amount of insurance coverage you need. There may be adjustments for your particular situation and what makes the most sense for your family.
Stay-at-home parents can also benefit from life insurance. While they don‘t generate income, the services they provide would have to be purchased if they were to pass away. Many stay-at-home parents care for their children, cook, maintain the house, and more, so their spouse needs enough insurance coverage to pay someone else to do the same if they are gone.
What Type Of Life Insurance Do You Need?
Along with understanding the coverage amount you need, you’ll also need to choose the kind of life insurance that is most appropriate for your situation. The two primary types of life insurance are permanent and term.
Permanent insurance is coverage that is not limited to a specific duration of time, meaning it can potentially last your entire life. There are several types of permanent insurance, including Universal Life, Indexed Universal Life, and Whole Life. The benefit of permanent insurance is that it can last longer than a term policy and you’ll know something will be paid to your beneficiary regardless of when you die (so long as your policy has been funded properly). This type of insurance is more expensive than term insurance.
Term insurance provides coverage for a specified length of time, which could be anywhere from 10 to 35 years in some cases. On the downside, it only covers you for the specified period of time. If you pass away after the term is over, your beneficiary doesn’t receive anything. But depending on your situation, you may only need insurance for a specific term — until your kids are grown or you have enough money saved to avoid financial hardship. Because of its specified timespan, term insurance is usually the most inexpensive out-of-pocket option.
How Should You Make a Decision?
There’s no one best way to choose a life insurance policy. When making such a significant financial decision, it can be helpful to talk to a financial advisor and review your options. An advisor experienced with insurance policies can offer you guidance on the products available to you and how they can integrate into your other financial strategies.
If you have questions about your current life insurance policy or are looking to purchase your first one, call my office at (626) 529-8347 or email me at [email protected]. I’d be happy to provide you a quote for life insurance and review the policies available to you.
Ricky Biel, CRPC® is a wealth manager with Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with cutting edge financial technologies that make it easier than ever to accomplish your goals. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].