Let's face the facts: life insurance does not get a lot of attention in our daily lives. It requires us to address a subject that many prefer to avoid -- our own mortality. Yet, for most people life insurance is important for building a sound financial plan, and it's something that shouldn't be ignored. September is Life Insurance Awareness Month, so my musings this month are devoted to this topic.
I've seen certain themes emerge based on countless discussions with my clients about life insurance. Some of them get tripped-up on which type of policy, term or cash value, is most appropriate for their situation. Others may have misconceptions about how much life insurance coverage is needed.
Invariably, over the course of any discussion, a light bulb goes on when clients are asked a very basic question: "How long would your family be secure financially if you were suddenly gone?"
Life insurance is often a taboo topic, even within families. A recent ING U.S. study found that close to half (45 percent) of married respondents have never or rarely talked about what would happen to the family finances if a spouse were to pass on. While this can be a sensitive issue, even between couples, there needs to be open communication. I am fortunate to be in a position to help facilitate these critical dialogues.
For those interested in securing life insurance coverage but having trouble getting started, here are some of the common questions I get from my clients, along with a few thoughts that may help guide you during the process.
1. How do I calculate how much I need? While seven to ten times your annual salary is a generally accepted rule-of-thumb for coverage, it's best to conduct your own personal needs analysis. Countless online calculators may give you a rough sense of your needs. Yet, I encourage you to dig deeper and consider the following variables, which, when added together, will get you closer to your real number. Consider final expenses, which are one-time costs such as for the funeral and burial. In addition, factor in outstanding debts that need to be paid off and readjustment expenses that arise during transition, such as shifts in child care, housing or medical insurance. Parents need to take into account dependency expenses to cover a family until all children are self-supporting, as well as education costs to help with college tuition for each child. Don't forget to properly insure a stay-at-home parent or someone working part-time; their unpaid contributions to the household could result in significant additional expenses if they were to die. A final variable to take into account is providing lifetime income to the surviving spouse.
2. Who else do I need to involve in this decision? Life insurance is not a stand-alone decision. It is a selfless act that protects the future of your family, yet can bring up difficult emotions. Anyone affected by the policy should be involved in conversations and understand the rationale behind the amount of coverage. It is often helpful to have the conversation after doing some homework about coverage options first -- whether that work is done through the workplace, a financial professional or independently. Your spouse or partner should be involved and additional family members may also need to be involved, particularly adult children or parents.
3. When do I purchase life insurance? Major life events are good reminders for us, and they often trigger a life insurance purchase. These include marriage, buying a home and having children. Keep in mind that the younger you are and the better your health status, the cheaper the premiums can be.
4. When do I re-visit my existing life insurance? Life Insurance is not a "one-and-done" decision. Like many other long-term investment decisions, life insurance should be viewed on a continuum that reflects your current situation and stage in life. As a baseline, it's helpful to review your existing coverage every few years or when a "life event" occurs.
5. How and where do I obtain life insurance? There are a variety of ways you can obtain life insurance. You can work with a financial professional; if you do not already work with someone, you can get started by obtaining referrals from the people you trust. The workplace is a common way to obtain coverage, although the level and type of coverage available may not suit your needs by itself. Lastly, life insurance can be purchased online; just be sure to do your homework before purchase to ensure you are getting the right coverage for the right price.
ING U.S.'s study also found that 61 percent of respondents had never calculated their life insurance needs. By going through these steps to calculate your needs and figure out the facts of life insurance, you and your family will put yourselves in a position for greater peace of mind.
ING Retirement Coach Jacob Gold is a third generation financial advisor. He is a published author of "Financial Intelligence; Getting Back to Basics after an Economic Meltdown", which was published in August 2009. Gold is a CERTIFIED FINANCIAL PLANNER™ practitioner and FINRA Series 7, 24 and 66 securities registered.
Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.