Most people overpay for life insurance. Here’s how to make sure you aren’t one of them.
Selecting a life insurance policy can be overwhelming and complicated, especially when you’re sitting across the table from a salesman who won’t take no for an answer.
Before you panic and sign up for the Big Kahuna coverage, ask yourself a few simple questions that will clarify your needs, and match you with the appropriate amount of coverage:
1) If I died today, what debts and responsibilities would I leave behind?
The more financial debts and responsibilities you have, the more life insurance coverage you need.
- Are you a parent of young children who are living at home and still going to school?
- Do you have a lot of debt on your house that still needs to be paid off?
- Has your spouse been out of the workforce long enough to require additional education, or a few years of financial support while he/she attempts to re-enter the workforce?
These scenarios would require a significantly higher amount of life insurance than the retiree with an empty nest and most of the mortgage paid off.
2) What is our long-term financial need?
Now that you have identified your current financial debts and responsibilities, it’s time to visualize your family’s long-term financial need. Life insurance money is often used to replace lost income, pay off mortgages and other debts, fund college, and even offset death taxes.
You must clearly define your long-term financial goals and average household living expenses – a Certified Financial Planner® pro can help you with this – to accurately determine how much life insurance you need.
3) Can I prove a permanent financial need for life insurance?
There are two major categories of life insurance: term insurance, and permanent insurance. Whole life and universal life fall in the “permanent” category.
Term insurance expires after a window of time (usually between 5 and 30 years), while permanent insurance never expires. As you can expect, this makes permanent significantly more expensive.
Most people only need term insurance. However, there are some exceptions to the rule. If you are the parent of a special needs child who will require a lifetime of financial support, you may want to consider permanent insurance. There are also some benefits to permanent insurance if you have a net worth over $5.43 million, live in a state with an estate tax, or have business partners.
For most folks, I recommend to keep it simple and stick with term insurance.
4) Have I revisited my existing insurance policy in recent years?
If you already have a life insurance policy, it is good practice to re-evaluate your coverage as your financial circumstances evolve.
Maybe you have since retired, or paid off your mortgage, or sent 2 kids through college. Perhaps your premiums are based on outdated actuarial tables, and you’re a lower risk than originally thought.
Life insurance is a useful component of a balanced financial plan, but you shouldn’t be paying a fortune to protect your fortune.
If you want to evaluate your life insurance needs -or get a second opinion on your existing policy- we can help.