Time to Snap Out of It (and Evaluate Life Insurance)
I don’t know about you, but I’m still slowly emerging from the haze of summer. As Cher said in the 1987 movie Moonstruck, it’s time to “Snap out of it!” I was thinking about that line as I fielded a bunch of questions from listeners about how to address the as of yet, still not completed, New Year’s financial to-dos.
What financial task did you put on hold for the summer? If you are like many, the broad category of dealing with unpleasant issues got pushed to the back burner. That said, because September is Life Insurance Awareness month, I am pulling that simmering pot from the back to the front of the stove, and turning up the heat.
Pre-pandemic, most of us broadly understood that bad stuff can occur at any time, but then came COVID-19 to prove that point and then some. According to research conducted for the insurance industry by LIMRA, 31 percent of Americans say they are more likely to buy life insurance because of the pandemic and a whopping 44 percent of families would face financial hardship within six months if the household’s primary wage earner were to die suddenly.
You might think that these two statistics would prompt urgent action, but the hurdle with life insurance is that it requires you to contemplate the worst possible of all bad things, death. Even if you scale that first hurdle, others await: complex and sometimes heavy-handed insurance sales pitches; dense and lengthy policy agreements; and fee structures that often require a special decoder ring to unravel. To help, there is a bit of good news: the process of buying life insurance is easier than ever and it all starts with a simple question: “If I were to die now, would anyone endure financial hardship?”
If the answer is yes, you will need to purchase enough coverage to help pay for living expenses and ongoing care, as well as provide a lump sum to fund future needs like college or retirement. There are online calculators that can help you figure that out, but I really like the free one that was developed by The American Institute of Certified Public Accountants’ (AICPA) 360 Degrees of Financial Literacy website.
Once you determine the amount of coverage, it’s time to figure out the type that works for you and your family. For the vast majority of Americans, who have a specific insurance need for a defined period of time, term life insurance will likely be the most appropriate and affordable coverage. Here’s how it works: during the stated term of a policy (defined as 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 insurance gets progressively more expensive, but hopefully, at that time, your insurance need will be reduced (i.e., kids will be grown and hopefully, on their way off of the parental payroll) and/or your savings and investments will be sufficient to cover your needs.
To shop for term life, start with your employer’s benefits. Many companies offer standard life insurance coverage, which is often expressed as a multiple of your 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, hop online to find competing quotes.
On the other end of the spectrum from term life is permanent life insurance (whole, adjustable, and universal life policies fall under the permanent umbrella). Permanent coverage is a more expensive option than term because the death benefit remains in place for your entire life, which is why it’s most often used for estate planning purposes (maybe to fund an irrevocable life insurance trust or a special needs trust) or sometimes to facilitate a small business buy-sell agreement. Permanent life policies also have a savings or investment component. If a salesperson is making a hard pitch for permanent coverage, consult a fee-only financial adviser, who does not sell insurance, but can evaluate your needs, determine the right type of policy and refer you to a reputable life insurance agent, if the more expensive coverage is warranted.
Finally, as your insurance needs change over time, due to major life events (marriage, divorce, children, or a death), revisit your coverage.