Confessions of a Financial Advisor
So I have to confess, that until recently I did not understand or value life insurance. It always seemed like a waste of money especially when I was under 30. I knew that I was provided a nominal amount through my company, and I always assumed that this coverage would be adequate should something happen to me. The truth is, I never really fully contemplated what would happen should I suffer an unexpected end to my life. Then two years ago I became a financial advisor, and I received training on life insurance, and it was truly eye opening to me. I really only thought of potential funeral costs to my family should something happen to me. What I neglected to contemplate was the following:
What happens if I am gone to…
- Our home Mortgage – If I passed away, how would my husband afford the home our family lives in? Would paying for the home put him in financial distress? It would be hard enough for my son to lose his mom, but to ask him to lose his home and his school would be traumatic.
- Household Income – Other than paying the mortgage, my income supplements other family expenses. How would my husband pay for these on his own? We have plans and goals that require two incomes to get there. If you take away one too early, how would that impact the household?
- Childcare costs – My husband and I both adjust our schedules as much as possible to make sure my son gets on the bus and has someone to watch him at night. If I passed, would my husband have to hire extra help to make sure our son is cared for?
- Future college costs – My son is only seven and we have his college savings started and off to a good start, but with the cost of an education in the United States, we are not near enough close to achieving this goal. If I have passed, would my husband be able to give this gift that we have planned on providing for our son?
- Well-being of my family – Other than the above mention changes in finances, it is difficult to know how anyone will handle grief. What if my loss has an emotional impact on my husband to the point that it impacts his work life?
Have you asked yourself these questions? Do you have the answer or solution to all of them should something happen to you or your significant other unexpectedly? Again, I confess that I did not have the answer to these questions. I can assure you that I do now.
How do you determine how much life insurance you need?
Okay, so you have decided that insurance will help you answer all of the questions above. The next question is how much? There are a number of rules of thumb to determine your level of life insurance and the type you need. A blogger that I follow, Matt at Mom and Dad Money, recently wrote a well-thought out blog on how to determine your life insurance needs. I have also suggested and used the app Life calculator. At the end of the day, the answer is completely unique to you and your family. Your formula could be this simple:
I have also had clients determine the amount life insurance they purchased based on the monthly expenses they could afford in their current budget. As a financial planner, I give clients a ballpark of the type of coverage I would like to see them have based on their life plans and current financial situation, but at the end of the day, something is better than nothing to me.
How do you determine what type of life insurance you need?
There are two basic types of life insurance most people will review, permanent or whole life and temporary or term life. Unless I had clients with complex estate planning or tax planning needs, I rarely saw the benefit of a whole life policy. They are expensive and do not provide as much coverage as a term life policy. As long as you make your premium payments, though, a whole life policy will always remain in place and you can borrow against it. Term life is like car insurance. It’s a use it or lose it type coverage. In my opinion, it is much more cost effective than whole life with greater death benefits, but it will always have an end date. For most clients, though, you will not need coverage past certain life events. Once the house is paid for or your kids are done with school, the financial burdens on your significant other dramatically decrease. On average, a term life policy for $500,000 will cost around $30 a month or $360 a year. Over 15 years, this will cost you $5,400. To me, a $5,400 investment for the potential of $500,000 in return is worth it.
Where do you go for life insurance?
There are many places to go for term life insurance coverage. The first thing I say to clients is to check with their homeowner or car insurance provider. If the provider also offers life insurance as well, they may be able to give you a better “deal” because you are already a client. I actually found this to be the case myself. I priced out a number of providers, but actually received the best deal from USAA, my homeowner insurance provider. There are also individual websites like MetLife or State Farm. Or there are sites where you can compare a few providers like Bankrate.com.
Important things to note
- Typically when you enter into a life insurance policy, you lock in a rate/premium for the length of the policy. This rate/premium is based on a number of factors, but the primary are age and health. Therefore, it is best to get this sooner than later. My husband recently added additional coverage with another provider and since he was over 40, his rates were dramatically higher.
- Many people have automatic coverage with an employer, if so, make sure it is enough based on your calculator (it typically is not), if not, you can always get another policy on your own. The benefit of this policy is that you can leave your employer, but still maintain your coverage.
- There are a number of different options when it comes to structuring life insurance policies. Make sure you ask LOTS of questions and that you are aware of all of the features of yours.
- Once you have coverage, make sure your loved ones know you have it and how to claim it should something unforeseen happen.
Do you have life insurance? If so, what worked best for you and do you feel you have enough? If not, why not?