By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Most people either know very little about life insurance or hate it. As financial advisors, we don’t love it, but we understand that for most relatively successful people it is a necessity for protecting the financial security of loved ones.
Often, life insurance is sold, and not bought. This means the life insurance salesperson sells whatever policy he or she thinks you need. It might be too much or too little insurance. It might be the wrong kind of insurance. It might be insurance to try to solve a problem that you don’t have.
Occasionally, however, a life insurance policy turns out to be a good deal for all. It provides a reasonable amount of coverage, for a term that makes sense, at a price that is affordable from a company that is financial secure. This is a great outcome!
In 98% of the situations we see, we think of life insurance as a risk-protection vehicle. It is not an investment or a tax-reduction tool. When used well, it provides a low-cost way to protect the earnings power of the insured until his or her known liabilities (e.g., funding college, paying off a mortgage, building up retirement savings) are covered. If both spouses work and their income is used to maintain the household, then both spouses should have life insurance.
In the remaining 2% of instances, high-net-worth households may find a compelling resource for estate tax coverage and liquidity using whole life or universal life policies.
With this background, here are some ideas about buying life insurance at different decades throughout your life. These are suggestions, and if you need to buy life insurance, we encourage you to contact a life insurance broker that you trust to review your personal situation.
Younger than 20-years-old
Our perspective is that you don’t need life insurance in this age group. If your parents bought a policy on you and you are under age 20, ask them to stop making payments and keep the premium.
In Your 20s
Unless you have a spouse and dependents, or you have taken on the financial responsibility for another person, you probably don’t need life insurance when you are in your 20s either. If you are single and have no dependent and very little assets, life insurance is a waste of money. If you are married, have one or more children, and have any assets, however, then buying a low-cost term life insurance policy on each breadwinner makes sense.
In Your 30s
Often, this is the beginning of the sweet spot for both life insurance buyers and their salespeople. Prospective buyers have likely acquired some assets and dependent(s) and, thus, have a need for protection. Moreover, term life insurance policies are still very affordable for this group due to the very low likelihood of premature death. The amount of term insurance to buy should be based on the insured’s financial contributions to the household, and the total current and projected living expenses and debts of the household. For instance, if the total living expenses of the household are $75,000 per year and $50,000 of this is earned by the person buying insurance, then you will want to replace that person’s income for a period with term life insurance. You will also want to use this insurance to pay off current debts like a mortgage or student loans. If the household debt level is $350,000, then we suggest buying a policy would pay for at least 3 years of lost earnings plus the amount of the debt. In this case, the policy should have a death benefit of at least $500,000. If the intent is for the spouse to not have to work for several years, a larger death benefit is necessary to replace earnings over a longer period of time.
In Your 40s
During this decade, the expenses of the household tend to go up as mortgages remain large, education expenses rise, and income increases. New term life insurance policies become somewhat more expensive as age advances, but still offer very good value for healthy individuals. At this point in your life, it makes sense to acquire term life insurance policies for as long as 20 years, and to better understand the desired level of coverage. This will require you to think about both the prospect of income growth and debt levels over the next 20 years. Forecasting is difficult to get right—you will likely feel that you either don’t have enough or you have too much life insurance. If you are buying insurance in this age group, work with an advisor who can help you understand your current and planned financial situation and can recommend a low-cost policy that will provide you with peace of mind.
In Your 50s
If your children’s education costs are paid for, the amount of life insurance you need during this decade might actually go down. For many, however, education costs are not yet finished, so life insurance amounts should include money for key living expenses: surviving spouse, education costs, mortgage payoff and reduction of other debt.
If you are buying term life insurance around this age, you should ask yourself a few important questions.
• How good is my health and do I expect it to be better or worse in the next decade?
• How long will I need this policy? (We usually like to have our client’s term life insurance policies lapse on the day they retire.)
• Are there any other financial milestones that I expect in the next decade that could increase or decrease my need for insurance? Examples of these could be receiving an inheritance, which could reduce your need for insurance, or a job change or starting a business that might increase it.
In Your 60s
For most, this is the last decade of their working years. The closer you get to paying off debts and reducing your support to kids, the less life insurance you will need. Moreover, in your 60s, term insurance becomes prohibitively expensive, so we discourage our clients from buying a policy at this stage.
Generally speaking, when it comes to life insurance, we find that most people are underinsured. Even if they have employer group coverage with a death benefit of one or two times salary, there is usually a need for additional coverage, preferably until the tail-end of their working career. It may also be wise to have privately purchased insurance coverage so that when/if you change jobs, you will have an ongoing level of base coverage that is not lost due to change in employer.
Most people have an aversion to life insurance. However, it plays a vital role within the financial plan of those with assets and dependents. After all, it will be there for your loved ones when you are not able to be.
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