Do I Need Life Insurance? How to Choose Life Insurance Coverage and When to Reassess Your Needs

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By Matt Lewis, Vice President, Insurance 

Just because we express a desire to do something, doesn’t mean we’ll do it.  

Take insurance as an example. The 2021 Insurance Barometer Study from LIMRA noted that concern for life insurance rose faster than concern for any other categories where consumers expressed financial concern. Also, more people expressed that they intend to buy life insurance because of the pandemic.  

However, LIMRA also reports that only 52% of the population is insured, down 2 points year over year. That means roughly half of the U.S. population is uninsured. And if we dig deeper into that 52%, we might find that much of that insurance is group-owned versus individually owned. Digging even further, many of those people who are insured are actually underinsured.  

Some reasons for this could be that people have misconceptions about life insurance, like how expensive it is. People overestimate the cost of life insurance. LIMRA reports that people oftentimes estimate life insurance is triple its actual cost and as such they might avoid it. But that shouldn’t be the case as life insurance is a valuable tool to protect you and your loved ones. It can also be used as a retirement and college planning vehicle.  

In this article, we’ll go over the value of life insurance and when you should purchase or update existing policies.  

Looking at Your Life Insurance Program

A professional can help you determine whether you need term or permanent life insurance. People who overestimate the cost of insurance might be more comfortable with a less-expensive term policy. Coverage is likely needed, and it’s better to have coverage at a lesser rate with term than no coverage at all.  When you look at your life insurance program, the things that should guide it are life events. There are a handful of major life events where you should consider getting a policy or updating one if you already have it.  

Major life events include getting married, having or adopting a child, becoming a stay-at-home parent, getting a divorce, getting a new job, starting a business or becoming self-employed, buying a house, caring for aging parents, sending kids to college and entering retirement. Depending on when those events happen, you could also walk through the age discussion.  

A Deeper Dive into Common Life Events 

Let’s take a deeper dive into the three common life events. 

Buying a Home 

Your home is one of the biggest assets you’ll ever purchase, and it takes a long time to pay for it. A 30-year mortgage is still a very common way to purchase a home, and insurance provides the leverage to ensure your family stays in the home.  

You bought your home for a reason – it’s likely in the neighborhood you wanted, the school system you wanted your kids to attend – and you don’t want to run the risk of having that family harmony disrupted.  

You want to make sure that if something happens to you, your family can stay in the home, stay in the same neighborhood, stay in the same school and that your spouse stays close to any support system they’ve built near their house. That’s why you protect that asset and ensure there’s an infusion of dollars when you need it the most. 

Any time you take on a new mortgage, you want to ensure your surviving spouse can pay for the house when you’re not there.  

Having Kids

When you have kids, you need to evaluate your insurance coverage. 

When you’re young and just getting started, you might think your spouse or partner can handle things on their own, so you don’t give life insurance much consideration. But when you have kids, you’ve added an extra element.  

Whether it’s one child or multiple, your financial obligation goes up. You have to think about things like paying for childcare, ongoing expenses associated with raising kids and saving for college.  

New Job or Promotion 

When you get a new job or a promotion, you’ll likely have a higher income. When your income increases, oftentimes your social economic landscape might change. You might have more debt obligation from buying a bigger house, and you have more income to protect.  

Families get accustomed to lifestyles based, on income and as incomes increase, those lifestyles will potentially change along with them. You want to make sure your coverage is compensatory to your higher income.
 

Insurance as Part of College and Retirement Planning

Life insurance policies can also be used as additional retirement savings vehicles. Unlike a qualified retirement plan – where the government tells you how much to put in, how much to take out and when to take it out – with a properly funded life insurance policy, you can put in as much as you want based on the policy, and there is no limit as to when you can take it out. For example, nobody will stipulate that you have to take it out at age 72½.  

In comparing saving this way to a Roth IRA, the income stream could be income-tax free if it’s structured properly. The plan would pay a death benefit to beneficiaries if it wasn’t used as a retirement savings vehicle, as initially intended. 

If you have kids, you can use certain policies as part of an approach to saving for college. If your child is already 15, it might be too late to incorporate this strategy as you won’t have enough time to plan for the cash value to “cook.” But if you do have the time, a professional can help you structure a policy as part of your college planning strategy.  

If you’re a parent funding college, you could use a life insurance policy’s cash value dollars tax-free to pay for a portion of college – maybe room, board or books. It’s best to have this be part of a broader strategy that includes other elements, like 529 plans. 

For example, for our two kids in college, we used 529 plans for the bulk of our planning, but as a reserve, we have a permanent life insurance policy that has cash value set aside. So if we don’t have enough, we could use this as a secondary source of college funding.
 

Are You Underinsured?

Oftentimes people don’t take into account all their needs and compare those with the coverage you have. You might be going off what your colleagues or friends are doing, or you might be going off what you see or hear on TV ads. 

Professional help and a formal needs analysis would be ideal, but to get a quick gauge on whether you have enough coverage, look at four elements:  

  • Debt obligations. First look at your debt obligations, including your mortgage and short-term loans (like car loans).  
  • Your age. For example, if you are in your early 40s and want to retire in your 60s, you might need to plan to replace 20 years of your income to protect your family should something happen to you.  
  • Kids. Do you have kids that you need to pay for childcare or college costs should something happen to you? 
  • Whether you have reserves. Do you have some cash to fall back on? If not, you might need more coverage.  

Rely on a Professional for a Custom Solution 

Identifying your basics needs is a solid place to start. And while many resources are out there, particularly online, nothing replaces working with a professional. A professional can analyze your needs, consider taxes and other complexities, tell you whether you are under- or over-insured and give you an unbiased opinion. 

Your financial and insurance professionals exist to tailor your insurance solutions to your needs. Reach out today for guidance. 

 

*Matt Lewis is a non-producing registered representative of Cetera.

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