“Life insurance. Do I actually need it? Why?” “How much should I have?” These are the questions financial planners hear all the time.
The answer to number one is there’s a good chance you do need life insurance. Why? Because you want to make sure that after you pass away, those around you aren’t left struggling to pay bills (and yes, this goes for young, single people as well). Things get a little trickier as we try to figure out how much life insurance coverage is needed because so many factors go into that decision. So, let’s get into the process of understanding all these factors and how they work together.
What life insurance terms mean
Insurance isn’t the simplest topic, which often adds to confusion and uncertainty around exactly what may be needed. One common phrase people hear includes “term life insurance,” which is a type of life insurance that pays out a death benefit to beneficiaries if you pass during a set period of time. This differs from “permanent life insurance,” which is designed to be a guaranteed death benefit payment.
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“Cash value” refers to the accrued monetary value that can be accessed outside of the death benefit while the insured is still alive — or the amount of money that’s accumulated in your life insurance policy over time.
Finally, there are “premiums,” which refer to what you pay for life insurance coverage. Premiums can be paid monthly, quarterly, semiannually or annually. Gender, age and health all factor into how much you pay for life insurance.
What should you consider before you purchase a policy?
Each person and family’s circumstances are different, but there are several themes for consideration, including debts, employment, marital status, overall health and, of course, budget. And it’s important to remember these factors all influence one another as well.
Let’s take marital status as an example. Those who are married, have a partner or have a family who depend on your paychecks, must have a plan in the event you pass unexpectedly. Take a look at exactly how your debt plays a role here as well — if there is substantial debt, ensuring you’re leaving your family debt-free is meaningful. For individuals with one income, you should ensure a large enough life insurance death benefit for your surviving family to live on so they don’t have to change their living situation or standard of living.
One often overlooked area is what happens if a stay-at-home parent passes. These individuals may need life insurance just as much as the one earning a paycheck. Why? For that household to continue, there will likely be increased costs such as daycare, nannies, babysitters, cleaning services, transportation costs or food preparation services — all of which the stay-at-home parent was likely providing.
For households with two incomes, it may be possible to support the household with one income, but you need to consider whether that income is enough to avoid a change of lifestyle. For most families, going from two incomes to one is a significant adjustment.
Often, we hear from unmarried people who assume they don’t need life insurance as they don’t have any dependents. Sure, for some this is the case, but let’s not forget any debt an individual may have or costly funeral expenses that other family members need to cover.
Single or not, we always encourage those applying for life insurance policies to better understand their debt situation. Are there enough assets that can be converted to cash to cover this debt, and also is there enough extra to pay for your end-of-life costs? You’d be surprised how often we uncover debt without any assets or a life insurance policy to cover the bills.
Further, those who are self-employed or part of a business partnership have extra considerations, as their passing may impact the business. Life insurance may be a way to help minimize or eliminate the financial impact of your passing. The main concern would be the future of that business and how employees are affected.
In terms of budget, it’s important to remember what’s affordable and what’s realistic for premiums. Those with health conditions and/or who are older will face higher premium amounts. Insurance companies view these individuals as higher risk and therefore charge more for the services.
What should you do next?
If you’re trying to figure out how much life insurance coverage you may need, solid next steps include:
- Determine the financial impact of your passing and the goal of your life insurance plan. If you need help with this, there are a few methods that can be used by a financial adviser or life insurance agent to determine your coverage amount.
- Review if you have existing life insurance. If you are working, do you have employer- or employee-paid health insurance through the company? Can you increase this, and if so, by how much? What is the cost of the coverage?
- Create a monthly budget to better understand what kind of premium you can afford. If you find after all bills are paid and your monthly savings goal is met, you have unspent cash in your budget, this would be good information to have in your life insurance analysis.
- Discuss the information in the previous three steps with your financial adviser or life insurance agent. That person will be able to recommend a life insurance policy that works for you and clarify your ideal coverage amount. Make sure to ask about the process of applying so you know what to expect. Quickly take care of any requirements requested of you, and the insurance company will be able to tell you your actual premium amount.
As time passes, make sure to review your beneficiary designation. Death, divorce, marriage, family additions and even relationship changes are a handful of reasons to make updates. You also may find as you get older that you may need more or less coverage as your needs change. Your life insurance plan should be an ongoing discussion with your financial professional. Even being underinsured is better than being uninsured.
The views expressed here are those of the author(s) and do not necessarily represent the views of TruStageTM. TruStageTM is the marketing name for TruStage Financial Group, Inc. its subsidiaries and affiliates. Corporate headquarters are located in Madison, Wis. CPI Qualified Plan Consultants, Inc. and CMFG Life Insurance Company are subsidiaries of TruStage Financial Group. Annuity insurance products are issued by CMFG Life Insurance Company, located in Waverly, Iowa. Each Insurer is solely responsible for the financial obligations under the policies and contracts it issues. All contracts and forms may vary by state and may not be available in all states or through all broker/dealers.
Securities distributed by CUNA Brokerage Services, Inc. (CBSI), Member FINRA/SIPC, a registered broker/dealer, 2000 Heritage Way, Waverly, Iowa 50677, toll-free 866.512.6109. CBSI is a limited business broker/dealer (Member FINRA/SIPC), a fully owned subsidiary of TruStage Financial Group, Inc. Non-deposit investment and insurance products are not federally insured, involve investment risk, may lose value, and are not obligations of or guaranteed by the financial institution. Representatives offer retirement and investment education but do not provide investment, legal or tax advice. Participants are encouraged to consult their financial professional. TruStage™ Insurance products and programs are issued by CMFG Life Insurance Company, MEMBERS Life Insurance Company and other leading insurance companies. The insurance offered is not a deposit and is not federally insured, sold, or guaranteed by any financial institution. Product and features may vary and not be available in all states. All guarantees are based on the claims-paying ability of the insurer. All guarantees are subject to the financial strength and claims paying ability of the issuing insurance company. CBSI, GEN-7434151.1-1224-0127
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