In this article:
- The one question you need to answer
- Why we prefer simple term life insurance policies
- Our personal examples
- A note about complex life insurance and annuities
You’ve probably heard the expression, “too little too late.” But with life insurance, the risk is the opposite: too little too early or too much too late.
Let’s dig in deeper to explain what we mean.
The One Question You Need to Answer
The answer to one question can define your life insurance needs: Who is dependent on me, and what will they need to thrive if I die?
The second part of this question involves taking stock of the cost of living for your surviving family. Planning your death is not a fun line of thought, but it’s critical to having peace about thelevel of coverage you need to provide for your family when you are gone. Here are some important questions:
- How much income would my family need if I was gone?
- Should this life insurance policy pay off our house?
- Are there outstanding debt obligations that would be a burden to my family if I was gone?
- What investment and retirement assets would be available to my spouse/family after my passing and to my spouse at their retirement?
Answering these questions should lead to a basic number and we can help you calculate this number. It might include the lump sum to pay off your mortgage, other debts, provide for your children’s college education or marriage and maybe a lump sum that could be invested to provide ongoing income for your family members.
Married couples should discuss this together, and since you each bring in your biases, this might be a good discussion to have with an informed third party such as us as your financial advisors or your insurance representative. We do sell life insurance as well as annuities and long term care insurance and we can help you find a policy with appropriate coverages to meet your needs.
Term Life Insurance
Our point of view is that term life insurance policies offer the most simple and straightforward solution. A term life insurance policy is for a specific amount of death benefit for a specific time frame (the term) such as 20 or 30 years. The purchaser can pay the premium annually, quarterly, or monthly. When the term is over, the policy ends. You pay for the coverage during the coverage and when the coverage time frame ends, you don’t pay. Simple. Or, if the need for the insurance coverage no longer exists, just stop paying the premium.
But how do you decide the term? Our point of view is to orient term life insurance around life and financial milestones, such as kids leaving the home (when they are presumably financially independent), wealth accumulation goals, and retirement. Our philosophy is that by the time you reach retirement, your need for life insurance should be over.
Think about it, by the time you retire, what would you do or accomplish with life insurance? You have no dependents to care for, and if you’re married, retired, and pass away, then your spouse will receive most, if not all of your retirement funds and, depending on your age and situation, social security. The cost of life insurance can increase dramatically as you get older. Paying a lot of money every month for your spouse to receive a lump of money at 85 years old when they really don’t need it doesn’t seem like a good investment to us.
How We’re Making the Choice
For example, my (Josh) term life insurance would pay off our house with a lump sum leftover to provide for some living expenses, and the term will be up after both our kids have left the home. It is unlikely that we’ll renew my wife’s life insurance, but as my working income will likely still be more than hers, we’ll have to choose if we need an additional term life insurance policy on me or if we have enough assets for her to thrive financially if I died before retirement.
For me (Doug), I don’t have life insurance because I am nearing retirement and have accumulated enough assets for either my wife or I to thrive in the event of one of our passing. I do, however, hold a long-term care policy so that if I need long-term care my wife is free from the burden of having to care for me in our home or to liquidate assets to pay for my care and jeopardize her retirement income.
You can see in both our examples, our goals are simplicity and financial provision for our surviving families so we have what is simple and adequate.
A Note about Complex Insurance and Annuities
Complex insurance can create complex fees that can be hidden and underlying, and complex risks. We sell simplicity and so believe that if you want insurance, buy insurance. If you want to invest in the market and have access to your funds, invest. If you want retirement, use a retirement instrument. That said, an annuity can be an appropriate investment when it is the right fit for the needs of the client. Click here for a basic overview of annuities.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.