Life Insurance Is Unsexy, but Essential

September is Life Insurance Awareness Month, an opportunity to pitch the very un-sexy, but essential topic to producers and editors across the country. This year, for some reason, I was able to sneak on-air, in between the launch of the NFL season and lots of crazy weather, to give the topic its proper due.

The core concept of life insurance is easy: you agree to pay a certain amount of money to a company, in exchange for the company's obligation to pay out a lump sum of money to your designated beneficiaries in the event of your death. But many get tripped up by the details, which is why it’s time to peel back the layers and help you get on track with one of the core aspects of a financial plan.

Life insurance starts with an obvious hurdle: it is an emotional topic because it forces us to contemplate the impact of death on our loved ones. But NOT dealing with it or pushing it to the back burner is not going to make it any easier. In fact, the longer you wait, the more expensive it might get. So, let’s dive in!

To understand if you need coverage, ask yourself a basic question: If I were to die now, would anyone suffer financially? If the answer is yes, you must determine the amount of coverage that you need. Rules of thumb do not work well for this topic because the size of your family, and what you want to cover varies dramatically. For example, some people want life insurance proceeds to cover ongoing living expenses and the payoff of debt, while others may also want to include future college costs for kids or a surviving spouse's retirement needs.

To pinpoint the coverage amount, go online to lifehappens.org and use their free calculator, which will help you estimate the death benefit you need to purchase. You will be prompted to plug in the variables that apply to you, like how much money you spend monthly, how much you have already saved, how much coverage is already in place, and the amount of debt you want to pay off.

Once you determine the amount, it’s time to figure out the type that works for you. Most people have a specific insurance need for a defined period, which is why term life insurance is the go-to coverage. Here’s how it works: during the stated term of a policy (a certain number of years), if the insured dies, the insurance company pays the face amount to the named beneficiary. The cost is reasonable for those in good health up to about age 50. After 50, term gets more expensive, but hopefully, at that time, your insurance need will be reduced (i.e., kids will be grown and launched) and/or your savings and investments will be sufficient to cover your needs.

To shop for term, start with your employer’s benefits. Many companies offer term that is equal to a multiple of salary, with an opportunity to purchase additional coverage beyond the base amount. If that extra coverage is portable (meaning you can take it with you if you were to get another job), it is worth considering buying for you and/or your spouse. Otherwise, go online to find competing quotes, from aggregation sites like PolicyGenius.com (a sponsor of my podcast) or at HavenLife, a division of Mass Mutual.

On the other end of the spectrum from term is permanent life insurance (whole, adjustable, and universal life policies fall under the permanent umbrella). Permanent coverage is more expensive because the death benefit remains in place for your entire life, which is why it’s most often used for estate planning purposes, to fund a special needs trust, or to facilitate small business buy-sell agreements. Permanent policies also have savings or investment components. If you are getting a hard sale for permanent coverage, consult a fee-only financial adviser, who can evaluate your needs, determine the right type of policy, and refer you to a reputable agent, if the more expensive coverage is warranted.

Finally, when you apply for the policy, you will need to name a beneficiary, which can be a person, several people, an estate, a trust, or a charity. You can also name a back-up (contingent) beneficiary, in the event that the primary beneficiary is no longer alive at the time the payout is made. If the beneficiaries are adults, provide them with details and a copy of the policy or the policy statement.