Protecting What Matters Most: A Real-World Guide to Life Insurance
By: Stephan Hess, CFP®
Life insurance is one of those financial topics that seems to be universally misunderstood. This is concerning because it is also one of the most important financial tools you can use to protect assets and ensure financial continuity.
Why is this? Let’s state the obvious. No one enjoys writing checks to insurance companies. In fact, we would rather send them less money, so when people look to get insurance, they often look at it more from the cost perspective than the benefit side. Paying lower premiums sounds financially prudent, but it often means less coverage and less protection.
This is why many people are underinsured and don’t know just how financially vulnerable they really are.
Why We’d Rather Avoid Life Insurance — and Why That’s a Problem
Lots of people have well-thought-out financial plans designed to build wealth and economic security, but none of that means anything if all your progress is wiped out in an instant. Fires, floods, accidents, premature deaths, disabilities and lawsuits are all rare occurrences, but they do happen.
Protecting your wealth and the vision for your life is vital. Life insurance is the one tool that can fill the financial hole that is left after a premature death. It ensures that your family can continue with your life plan, even if that life plan no longer looks the same.
Imagine a family with young children. How would the household be financially affected if one spouse unexpectedly died? How would such a loss impact the household budget, the ability to pay a mortgage and other debt, and the ability to save for college or retirement? How hard would it be to raise children and support them with the opportunities and experiences that you always wanted for them?
Without additional resources, there is a good chance the family would have to make some hard or unpleasant choices.
How Much Is Enough? Let’s Do the Math.
Your life insurance should help fund future college expenses, weddings and home repairs. It should help to pay off the mortgage and replace the cars. It should help fund retirement accounts and create a fund to help raise the children. This is why it is necessary to have enough coverage.
The goal is not to enrich your family, but to ensure that they can carry on as planned. When you start adding all this up, you will be in the ballpark of $1 million or more.
What’s the Difference Between Term & Permanent Life Insurance?
For most people, term insurance is the best option. It only provides coverage for a fixed period of time, but it is generally the least expensive and offers the most benefit.
Your greatest risk is the period of life when you have the most debt, the least amount of assets and young children in the home. A premature death at this stage could be catastrophic. At a minimum, people should have coverage until the children are out of the house or until they have built up enough wealth to cover the risk on their own.
Permanent coverage is much more expensive, which is why we see policies with much lower death benefits. Instead of ending after a fixed term, the policy accumulates extra money so that it stays in place for the rest of your life.
This sounds great, but how is a $50,000-$100,000 death benefit going to offer any meaningful financial protection?
What Insurance Companies Look For: Health, History & Risk
All life insurance is dependent on your current health and medical history. The cost of insurance increases based on your determined health class, and sometimes you can even get denied if the insurance company deems your application too risky.
They will review your history of drinking, smoking, drug use and driving. Remember that once you are diagnosed or being treated for something, this could impact your underwriting, so it is always smart to get coverage before something happens.
Looking Ahead: Let’s Talk About the Right Coverage for You
This is just the tip of the iceberg when it comes to insurance, so please reach out to a professional to discuss this further.
Let’s talk through your goals, risks and options—so you can protect what matters most with the right life insurance plan. Reach out today to connect with one of our experienced CERTIFIED FINANCIAL PLANNER® professionals.
Disclaimer: This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
