Life insurance can play an important part in your long-term financial planning. It’s one of the simplest ways to protect your assets and transfer your wealth. More importantly, it supports the future financial well-being of those you care about, providing you with peace of mind.
However, calculating how much life insurance you need and knowing what type of life insurance policy is right for you can prove confusing. SageVest Wealth Management offers insights about how to determine the best life insurance elections in support of both your lifetime goals and the future security of your loved ones.
How Much Life Insurance Do I Need?
A fundamental question to buying life insurance is determining the amount of coverage you need. Unfortunately, there’s no generic answer, but there are some important considerations that can guide your analysis:
Define Your Life Insurance Goal
The most common goal of life insurance coverage is to protect dependents like your children, a spouse, aging parents, a sibling, etc. Other common objectives include repaying the mortgage, replacing a lost pension, providing liquidity for a business, or offsetting the impact of estate taxes.
Know The Duration
Many life insurance needs diminish over time as you gradually achieve your family’s financial objectives. For example, if your goal is to secure your children’s upbringing, this timeframe typically covers a finite period of, at most, 20-25 years. Conversely, some objectives are much longer term, like caring for a disabled child, or replenishing estate taxes.
Account For Other Resources
Your current and future resources should be considered as part of your analysis. These might include existing savings, Social Security survivor benefits, pension benefits, and more.
Know What Would Be Lost
Your planning also needs to consider what would be lost in the event of death, such as forfeited earnings, the loss of dual Social Security payments or pension benefits (if survivor benefits aren’t available or weren’t elected).
Calculate The Remaining Need
The final step is to calculate the funding gap or deficit. This will equal the amount of life insurance coverage you need.
What Type Of Life Insurance Do You Need?
Once you’ve determined how much life insurance you need, the next step is to determine what type to buy. Following is an overview of the four primary types of life insurance that we recommend and their suitability:
Group Life Insurance
A group life insurance policy is a great low-cost option for business owners and employees. It offers workers basic life insurance coverage, typically up to one year’s worth of salary (although additional coverage can often be purchased relatively inexpensively).
Group life insurance is helpful, but coverage limits generally aren’t sufficient if you’re concerned about the wellbeing of dependents. Furthermore, it’s important to remember that group coverage is typically only available to you while you remain with your employer.
Term Life Insurance
Term life provides a simple death benefit for a specified period of time. Premiums may be fixed or annually renewable (meaning that the premium increases as you get older). If you die during the insured period, your nominated beneficiaries receive the death benefit. If you live beyond the term period, coverage ends and you get nothing back.
This type of is best suited for defined periods of need e.g., during the years when you’re concerned about providing for your children and their education. If your insurance needs diminish over time, a great strategy is to ladder different policies of varying terms.
Whole Life Insurance
As the name suggests, this type of insurance offers coverage for your whole lifetime. With most policies, part of your premium is added to a cash value account, which grows tax-deferred and earns interest. It can be used as collateral to borrow from the insurance company, or can be accessed directly through a partial or complete surrender of the policy. Some whole life policies also pay a dividend, based on the company’s profits during the previous year.
Note: A policy loan or partial surrender can have tax implications, and it will reduce your policy’s death benefit. A complete surrender will terminate your life insurance coverage altogether.
Whole life insurance is significantly more expensive than term, but may prove a good option if you need to have insurance coverage in place throughout your lifetime e.g., if you have responsibility for a disabled family member.
Joint And Survivor Whole Life Insurance
If you’re married, you can each purchase a single policy that covers your respective lives. When the first spouse dies, his or her respective policy pays out. However, you might also consider a joint and survivor life insurance policy, which only pays upon the second spouse’s death. The primary benefit to this insurance structure is that premiums are often lower, as the policy covers two lives instead of one.
This option is recommended as a way to reduce premiums when the only point of liquidity concern is upon the second spouse’s death, typically to cover estate taxes.
As CERTIFIED FINANCIAL PLANNERS®, SageVest Wealth Management advisors are qualified to help you evaluate your life coverage options within the context of your broader wealth strategies. Furthermore, as fee-only planners, we receive no commissions or incentives, so you can be assured that the recommendations we make are unbiased and focused upon helping you select the coverage that best meets your personal and financial objectives. Please contact us to discuss your life insurance goals and options.
