3 Questions to Help you Decide!
When I was a student I got so stressed before tests! The week leading up to the test I would study loosely, be constantly stressed, and cram the day before.
Eventually, I learned to create a study plan two weeks before my test. I studied each day for a set time, had little stress, and usually performed well. With an appropriate plan I was able to enjoy my life without worrying about my test. I wasn’t planning for the worst but rather preparing myself so I would have freedom.
This is similar to the approach we use in life insurance planning.
When it comes to financial planning everyone focuses on building a portfolio. However, one of the largest missed pieces in a financial plan is life insurance. Today we'll discuss the questions we hear most often about life insurance.
1. Do I really need life insurance?
I understand the push against life insurance. Many people have a bad taste from salespeople trying to push a product on them. Additionally, no one likes considering the event of their passing. However, much like making a will if you consider this possibility you can give your family the freedom to grieve without financial burdens weighing them down.
In general, if you are married or have dependents you should get life insurance. If you have debts, your life insurance will cover these so your family's inheritance will not be reduced. Any cosigned debt will be covered by insurance and remove the risk of your cosigner being burdened with payments.1
Beyond paying off debt, an appropriate level of life insurance can fill in the missing income for your family. This will give your spouse the ability to continue at or above their current lifestyle. It will also give your children funds for future expenses such as purchasing a car or going to college. Additionally, insurance can provide a substantial amount of assets that your spouse and children can inherit to provide greater benefit to their needs in life.
2. Why do I need life insurance?
When considering why to get life insurance understanding the need for it is important. Your family and friends will be able to grieve without the burden of finances weighing them down. There is peace of mind knowing your family will be cared for in your passing. For example, if a husband were to pass away and his wife has the difficult task of being a stay-at-home parent typically his wife would have to go back to work and find child care.
With an appropriate level of life insurance, the mother could continue to stay with the children at home. Or in the opposite scenario, the husband would have the necessary funds to avoid the burden of needing to take on additional work to afford child and home care.
3. How much life insurance should I get?
This is a hard question because most people tend to be underinsured. The rule of thumb is 10 times your annual income. If you make $50,000/year then you would have $500,000 of coverage. 2 Remember, this is just a "rule of thumb." This calculation does not include factors like current expenses, future needs, funeral costs, additional discretionary costs, debts, savings, potential college costs, child care costs, and unexpected variable costs. Just looking at that list is stressful and overwhelming! Additionally, for a homemaker spouse, many families do not consider or vastly underestimate, what this spouse provides in terms of monetary value. The cost of child care and home care is far undervalued.
The best way to figure out the total need for coverage is to reach out to a financial professional to complete an insurance analysis.
Ultimately, getting an appropriate amount of life insurance is essential, not because you're planning for the worst, but rather, pursuing freedom from the weight of having no plan.
Connor Creekmur, MBA