Last week, I discussed the use of life insurance as a true gift of love to your family. But, due to the variety of policy types and the number of life insurance companies, there can be so much clutter that some will fail to make a purchase. I’d like to cut through some of the clutter and discuss policy types and how they may best be used to provide protection for your family.
There are hundreds of life insurance companies, and generally each one promotes more than one type of life insurance product. One way to determine which is best for you is to answer some basic questions. How much life insurance do you need to protect your family? Secondly, how long do you need the life insurance, or do you need part of the coverage longer than the total? The answer to these questions can provide significant guidance as to the product type you need and perhaps the company.
To determine how much benefit you need, you need to understand the damage caused by a premature death. How much income will be lost and for how long? Would the income have increased over time? Are there other future obligations such as college costs for your children? Are you currently saving for retirement or will you have to fund this from future income? A professional can assist you in answering these questions and then determine the size of benefit required to be able to fund these obligations and replace the lost income.
Now that you know how much life insurance is needed, the second question can be asked. While some professionals may say all of the benefit is needed your entire life, I am not one of those professionals. Once the children are out of the house and have completed college or are on their own, that part of the death benefit is no longer needed. Each time the need for a benefit is over, a complete review should be done to insure the remaining benefit will still replace any lost income and that there are no new future obligations. Once again, most professionals can assist you in determining how long each level of benefit should be held.
Let’s look at an example using a typical couple with the husband earning the majority of the family’s income and with two elementary age children. For the husband, the benefit amount is $625,000 and for the wife the amount is $375,000. Due to their ages and that of their children, all of the benefit will be needed until the children reach college age or they can confirm their college savings will meet the costs. Depending upon the amount saved for retirement and the growth in their income, when the husband reaches his early 50’s, a review needs to take place and a reduction of benefit may be appropriate. Lastly, will any benefit be needed after they retire? In my opinion, a portion of the benefit is needed. I have never had a client upset they still had life insurance in place when they lost their spouse at age 70, 77 or 85. The benefit is generally appreciated by the surviving spouse.
Based upon these needs, term insurance is part of this solution. Rarely is it beneficial to purchase whole life, universal life, or variable life for short-term needs. For life insurance, ten, twenty and sometimes thirty years can still be classified as short-term. For my couple, permanent life insurance such as universal life or variable life is best to cover the portion of benefit needed to replace income and that portion lasting into retirement. You can blend policy types and use term coverage added to the permanent policies, thus the combined benefits meet short and long-term needs.
Can the term and permanent coverage be provided by the same company? I generally recommend using a different company. The reason is not diversification or spreading the risk. Life insurance companies that specialize in term policies will have lower premiums. Since the benefit is being provided for only a portion of your life, you may eventually cancel this coverage since you have outlived the need. While the cost savings is important, the term policy you purchase should be convertible. This is a critical feature and not all term policies offer conversion. Since term policies are offered with several durations of level premiums, my recommendation most often is the ten year plan.
For the portion of the benefit that extends into retirement, I generally recommend a special type of policy. Because needs are so diverse between individuals and families, individual recommendations are more appropriate than a one- size- fits- all. If you have questions on this or other articles please contact my office. If you need assistance with life insurance, call my office or one of the other professionals in the area.