When reviewing your financial goals, it is easy in this economy to focus on the stock market and how it is impacting your portfolio. Between the stock and bond markets, rising inflation, and interest rates, there is a lot to keep up with. Often times, our clients come to us with their focus on how to save appropriately for retirement or college savings, or how to pay off their house efficiently. All of these assumptions and goals focus on positive outcomes or what could go right. We look at all-time market trends and cannot help but think “What if my investments average 8 or 10% return compounded over the next 20 years? I would be set if I just keep maxing my 401k out and getting my employer match.”
As a financial planner, though, I have to redirect my clients to think a little bit pessimistically at times. Things do not always work out the way we expect them to. We get so motivated and excited while forecasting what could go right, but it is important to not get blindsided by those things that can go wrong for you in life and in personal finance.
We all know someone or maybe multiple people who have died or become permanently disabled far too young. My goal here is to highlight reasons why you may or may not need to be prepared with appropriate insurance coverage for a premature death. Such a fun topic, right? But it is a harsh reality.
It is important to note that not everyone needs life insurance. But far more people need it than those who do not. You need to be financially independent to no longer require life insurance. You should be able to say confidently that your family would still thrive financially after your death. If you cannot say that you are probably not ready to let go of your life insurance.
Some people pass away far too soon. Spouses and kids are left without a parent or parents. Without proper insurance and estate planning, you could be leaving your family in shambles emotionally; but the trauma is compounded when your family is left in shambles financially.
It breaks my heart any time I see a go-fund-me set up to help a family pay for funeral expenses for a lost loved one. Beyond that funeral, losing a loved one comes with huge potential setbacks for a family. Paying for a funeral is step one. They now have the rest of their lives to pick up the pieces, and often times, they can’t. Please do not let that be your family.
For life insurance, your rule of thumb should be to get somewhere between 8-12 times your annual income as your death benefit. There are two different types of life insurance: term and permanent life insurance. Most people are just fine with term insurance. It is less expensive and it satisfied your need for coverage over a temporary, pre-determined amount of time. Your goal with term insurance is to be financially independent and no longer have a need for insurance at the expiration date. Permanent life insurance can be a valuable tool for some, but is more expensive and nuanced.
Families should be focusing on term life insurance coverage for your life insurance needs. How long should your term be? It depends. I would encourage you to set aside time to speak with a financial advisor, who can help you evaluate whether or not you need life insurance, and if so, how much coverage and for how long should that coverage last? Why work with a fiduciary instead of a random insurance agent? Your advisor or insurance agent are compensated based on the amount of annual premiums that you pay. My hope is to lock in inexpensive, but appropriate coverage amounts, without directing too much of your money on insurance. The more money you save on your insurance, the more you can spend and save on your future.
With this in mind, here are:
10 People Who Need to Set Up Term Life Insurance Coverage for Their Family
- The stay-at-home parent
Often overlooked when it comes to life insurance, the stay-at-home parent should have life insurance coverage. We recommend a minimum of $250,000 of death benefit. While this parent does not bring home a paycheck, replacing their value to the home is extremely difficult logistically and financially. This death benefit can be used to help pay for childcare costs, therapy for kids and spouse, and hiring support around the home for tasks that this spouse used to complete (ex. house cleaning, gardening, shopping, transportation, babysitting).
- The dual income household
“My wife is crushing it at her job. She would be fine if I died.” More than likely, you’re wrong. Really take a look at your budget and figure out how much you rely on each other financially. Unless you are saving 100% of your spouse’s paycheck, you are depending on each other financially to some extent. Both of you might be saving into your company 401k plans and depending on each other’s contributions to retire someday. Maybe your plan was to cash flow your kids’ college with the 2nd income that is no longer there. Get 8-12 times your income for each of you. If someday, one of you cuts back hours permanently or decides to stay-at-home, you can always request a reduction in your coverage and premiums at a later date.
- The future or current parent
As a parent of a newborn son, I set up my term life insurance back when I was 22 years old. Now 31, I realized the other day that I bought life insurance for this little boy without knowing who he was or what we would name him. For me, there is something romantic and protective about planning for your family, even if it is before you even know who your spouse is or who your kids are. If you are already married or already have kids, but you do not have life insurance yet, you need to get it done.
For the young adult who strives to someday get married and/or have kids, it is a good investment to lock in cheap insurance coverage at a young age. As we get older, our doctors start warning us about things that could happen to us medically in the future (from watching our weight to diabetes, cholesterol, heart disease, etc.). And as time passes, the likelihood of something negative happening to you medically increases and results in worse test results on your life insurance application. Not all of us are clean eating marathon runners who have haven’t missed a day of work in 20 years and haven’t eaten a carb since 2004. An ER visit, a DUI, a surgery, a prescription for anxiety, depression or cholesterol medication all have the ability to greatly increase rates for life insurance. As do risky hobbies such as sky diving and scuba diving.
The good news is once you lock in your premiums on term life insurance coverage, for most policies, you never get re-assessed and your rate stays the same. Most of us can agree, we are not the same as we used to be when we were 22.. I’m glad I set mine up before I needed the coverage, because it would be a lot more expensive for me to apply today for the same coverage.
As an example, a 30-year-old male applying for a term insurance policy for 30 years with $1 million of coverage would cost about $53/month at a preferred plus rating (which means a nearly perfect health record). That gets him coverage to age 60. Let’s say that same 30-year-old who is in great health, waits until age 40 to get life insurance, and at age 40 has regressed to a standard rate class due to a few minor health conditions. Still looking for coverage that lasts to age 60 and wanting $1 million of coverage, that policy at age 40 would cost approximately $100/month. That results in a higher overall cost of $6,000.
30-year-old policy: $53/month x 30 years = $18,000
40-year-old policy: $100/month x 20 years = $24,000
Premium cost difference for starting at 30-years-old vs 40-years-old = $6,000
Locking in a fixed premium while you are young ensures that your family or future family will be taken care of you by you financially, even if it is from beyond the grave.
- The future or current homeowner
If you have a mortgage and/or sizable property tax payments, or you plan to in the future, you should have term life insurance coverage. Providing a death benefit to your family allows for your surviving heirs and beneficiaries to make wise decisions on whether to sell or keep your home. Without it, your dependents could be foreclosed on, or forced to sell the family home against their wishes.
- The family who is behind in saving for retirement
For those who are over the age of 50 and still working, if your retirement savings is not yet fully funded or ahead of pace, your premature death could cripple your family financially. If you are behind in saving for retirement, your death or disability poses a huge risk to your family’s financial future. It could result in your spouse having to work until they are 70 or 75 years old, for example. Your family would lose valuable earning years near the end of your career and your spouse would only live off one social security income, unless he or she remarries.
Often times, the average American focuses on securing life insurance coverage that lasts until the kids are out of the house, the house is paid off, or until kids have graduated college, I tend to believe that it is best to project when will you be financially independent. Often times, my standard projection is age 65, but it depends. A lazy rule of thumb would be that if you are 30 years old, get a 35-year term policy. At 40, 25 years of coverage, etc. Hopefully by 65, you have reached financial independence. At that point you are Medicare eligible, and you are close to full retirement age for social security.
A 61-year-old dying and leaving behind a spouse of the same age without life insurance proceeds could force that surviving spouse to work longer than planned or return to work. Without enough money saved in retirement accounts or other passive income sources such as real estate or a pension, that surviving spouse has to make some tough life decisions. They will consider pulling social security at the earliest possible age, 62, which is a 30% reduction from full retirement age benefits. A life insurance death benefit allows that surviving spouse to potentially retire or stay retired, allowing them to deal with their grief. That life insurance benefit could also allow the surviving spouse to wait until full retirement age to pull social security benefits, rather than taking a 30% reduction in income for the rest of his or her life.
- The couple whose surviving spouse would suffer after losing one of the two social security benefits or a pension
Let’s just say that you and your spouse are in your 50s or 60s and quickly approaching retirement. When planning for retirement, it is easy to look at the world with rose-colored glasses. Imagine a couple who has generally had similar incomes throughout their work lives. Each of them project to have about $2,500/month from social security at full retirement age (let’s call full retirement age 67 years old for this example).
“$5,000/month doesn’t sound too bad. I won’t be taking the toll roads or putting money in my 401k anymore. We’ll figure it out. Eventually the house will be paid off too.”
What happens when one of these two spouses dies? The smaller of the two social security benefits is gone. For this couple in my example, they go from $5,000/month of income to $2500. Let’s just say it’s less dramatic. One spouse’s social security was $3300 and the other had $1700. That is still a massive drop off, losing 34% of your monthly income if that $1700/month disappeared. This should also be one of your biggest factors in deciding if you are ready to retire or not. Could one of us survive financially without a job anymore if we lost one of our guaranteed income sources?
So what can you do? As an example, $500,000 of death benefit coverage could replace about $2,000/month of social security benefit. If your retirement could be wrecked by a premature death in your 60s, 70s or beyond, consider purchasing term policies for either both spouses or the one spouse who is more likely to pass away first. Mortality tables project men to pass away earlier than their female significant others of the same age. We can help work within your budget to purchase an appropriate amount of coverage that allows you to keep as much as you can for today, but doesn’t leave you or your spouse hurting financially in later years.
- The “My family is wealthy” excuse
Even if your parents or grandparents are well-off, do not bank on them for your own financial success, and especially to ensure your future in the event that you, your spouse, or both of you were to pass away. “My parents would step in and take care of the kids if something happened to us.” Great, so you can afford $100/month then to give them even more support to help your kids pay for their college someday or to help buy their first car or first home. Remember that people change. An inheritance is never guaranteed.
- The family caretaker
Do you have a parent, sibling, or loved one who depends on you financially? For many of us, this has become a reality that mom, dad or even both could move in with us someday or maybe they already have. Likely, they are depending on you financially. You are a blessing to them and can continue to bless them beyond the grave if you were to unexpectedly leave the earth before they do. Ensure that you have life insurance coverage that could last as long as they are alive. This would provide valuable funds to house them and pay for their medical and long-term care needs.
- The special needs caretaker
Caring for someone with special needs requires love, patience, and money. Without you in the picture, what would happen to your special loved one? This goes beyond just life insurance coverage. Proper special needs estate planning should also be considered here. Touch base with me for help finding a referral to a great local attorney in your area. For this case, you want to not just consider the dollars that would be needed to care for your loved one, but also the longevity. You don’t want to outlive your coverage and leave your special needs child without any financial support, or a team lined up to care for him or her. It is one thing to say, “I need coverage to make sure my 4-year-old can graduate college debt free if I’m gone.” It is another thing to say, “If my non-verbal son with Down Syndrome outlives me by 25 years, who will care for him and what will be his standard of living?”
- The frugal/savvy spender
If you think any of the above situations may apply to you in the future, consider getting term life insurance now rather than waiting. For the most part, the earlier you lock in your term insurance coverage, the cheaper it will be. Every year that you wait, the cost goes up by age for life insurance. You become closer and closer to your mortality date, making your life more expensive to insure. And unless you’re an anomaly, most of us gradually have our health decline over the years and not the opposite. If you someday think you will start a family, or buy a home, or have parents or a family member relying on you for income, you can lock in a rate now (sometimes as low as $15-20/month) instead of waiting for the price to go up substantially over time.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
Ian Massey co-founded Providence Wealth Planning in 2016. He now serves as firm’s CFO, while faithfully servicing his clients as their financial advisor. In 2021, Ian earned the Accredited Investment Fiduciary (AIF) designation. In August 2016, Ian was named as a Dave Ramsey SmartVestor Pro, providing advice and guidance to Dave Ramsey followers. Ian has been helping the Dave Ramsey faithful work towards financial freedom since 2013.
Ian is an Investment Advisory Representative and has Series 6, 7 and 63 registrations held with LPL Financial, and Series 65 held with Strategic Wealth Advisors Group, Inc., as well as California life and long-term care insurance licenses.
Ian Massey is a registered representative with LPL Financial.