By Kyle Ferrare
I think most of us would agree that life insurance is an important financial product to have in our arsenal. But in 2017, more than 4 in 10 people didn’t own a life insurance policy in any amount and 40% of those who did said they were under-insured. (1) Why is there such a disparity? What are some of the obstacles people face when making their life insurance decisions?
Life insurance can be complicated and is not a one-size-fits-all product. Everything from the type of insurance you get to the amount of coverage you receive will depend on your unique situation. Even though there’s no exact formula, here are a few questions you can answer to help you evaluate your life insurance needs.
Do You Even Need Life Insurance?
The first question you should address is whether or not you even need life insurance in the first place. You’ll want to determine if you have enough money saved so that your death would not create a financial hardship for your loved ones. Alternatively, if you have a large estate, your life insurance could help you cover the cost of your estate taxes, increasing the inheritance amount to your beneficiaries.
A single young adult with no dependents may not need life insurance if his loved ones can easily afford a funeral and burial. If you have several million dollars safely stored away, your death may not cause a financial hardship either, even if you still have a family depending on you. If you don’t have enough money saved, you should consider the purchase of life insurance to protect your family in case you pass away. Even if you do have enough money saved, you may still want to consider purchasing life insurance for other benefits that it can provide, such as living benefits and diversification.
What Type Of Life Insurance Do You Need?
Along with knowing how much coverage 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 so that a death benefit will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). This type of insurance is typically more expensive than term insurance.
Term insurance offers coverage for a specified length of time, which can be anywhere from 10 to 35 years. The downside to term insurance is that it only covers you for the specified length of time, so if you pass away after the term is over, no death benefit is paid to your beneficiary. But depending on your situation, you may only need insurance for a certain time period — until your kids are grown or you have enough money saved to avoid financial hardship. One of the major benefits of term insurance, as opposed to permanent, is that it is usually the most inexpensive out-of-pocket option.
How Much Life Insurance Do You Need?
Finally, the question at the forefront of your mind. 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 your 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.
How Do I Make The Right Decision?
There’s no one size fits all approach to choosing a life insurance policy. When making such a significant financial decision, it can be helpful to talk to a financial professional and review your options. Someone 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 life insurance policy or would like to schedule a review or discuss your options, call us at 973-525-1000 or email Info@mqsadvisors.com.
Kyle Ferrare is a director and client advisor at Massey Quick Simon with more than 10 years of industry experience. Kyle works directly with high-net-worth clients to develop and implement their investment and financial planning goals. He also works with single family offices, endowments and foundations and regularly attends investment committee and board meetings. Kyle graduated from Bryant University with a BS in Finance. He completed the Financial Planning Certificate Program at Fairleigh Dickinson University and holds both the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Alternative Investment Analyst (CAIA) designations. Learn more about Kyle by connecting with him on LinkedIn.