Disclaimer: Ferguson-Johnson Wealth Management and our advisors do not sell or place life insurance, nor do we have any financial incentive to recommend or refer life insurance for our clients.
Life insurance isn’t fun to think about. As a planner, some of the hardest conversations we have with clients center around this topic. You’re planning for your own death. Moreover, you’re setting into place systems that offer benefit after you’re gone. It’s an unpleasant aspect of financial planning. However, having proper life insurance in place is one of the most important aspects of your financial plan.
Most of what I will describe today concerns the application of term life insurance. Term life insurance provides a death benefit over a fixed period of time. At the end of the period, coverage is typically discontinued. The idea is that you have specific obligations that need to be met, irrespective of your death (caring for children, paying liabilities, etc…). Term insurance is designed to be in place when you have these obligations and terminate when they no longer apply.
Term insurance is usually the cheapest way to obtain life insurance coverage if your intent is simply to provide financial protection in the event of premature death.
At the end of this post, I will briefly touch on permanent life insurance (whole life, universal life, variable life, index life insurance). Be warned, if your need for life insurance is just income replacement, permanent life insurance policies are probably not appropriate for your needs.
Children and Other Dependents
If you have kids, you need life insurance. This is the number one trigger for necessitating life insurance coverage. The cost to raise a child is daunting. According to the U.S. Department of Agriculture, the average cost to raise a child born in 2015 through age 17, for a middle-income, married couple was $233,610. Note that this does not include college expenses. In the event of your death, your children are going to need the proceeds from life insurance to maintain their lifestyle. The same rationale applies to an earner caring for other dependents, such as elderly parents or disabled siblings, as well.
As a homeowner, you likely have a mortgage and a hearty monthly payment to go with it. For married couples, the mortgage you qualified for was likely based off your combined income. In the event of the premature death of a spouse, the surviving spouse may not be able to afford the mortgage payment on their own without assistance. Having an affordable term policy in place to make up for the loss of income can help prevent the surviving spouse from not only losing their significant other, but being forced out of their home, too.
Partners and key employees of small companies are decent candidates for life insurance. In many cases, a rainmaker or driving force in a small business is essential in the operation and on-going revenue of said business. Key people in a company should have life insurance policies in place on their fellow principals to either provide funding to hire (a likely expensive) replacement or to insulate surviving owners from a drop in the profitability of the business.
Many entrepreneurs reinvest heavily in their businesses. Sometimes, this is at the expense of personal and retirement savings. A retirement plan could hinge on the eventual sale of the business. Unfortunately, for many sole proprietors, the business ceases to be a going concern when the owner dies, leaving minimal value to the family.
When we talk about the life insurance needs above, all of these relate to replacing income or assets in the event of premature death. However, there is an intrinsic value to a stay-at-home parent as well. Infant care, day care, and after school programs all cost a pretty penny. Furthermore, the role of homemaking is extremely time-consuming and would likely require outside help for a solo-earner.
Many of us have been approached by a life insurance agent at some point who suggested we could benefit from a whole life or universal life insurance policy. “It builds cash value!” they say. The application of permanent life insurance policies are a lot like annuities. In certain, narrow situations, they can be a powerful tool in your financial arsenal. However, we’ve found in many cases where these policies are recommended, there are better ways to accomplish an objective than with a whole life insurance policy. Commonly, if you require both life insurance and savings with growth, simply buying term life insurance and investing the difference between the two premium amounts could be the better way to go.
A notable exception to this line of thought may apply if an individual’s estate is large, illiquid, and subject to probate. In the event that liabilities or taxes become due as a result of death, an estate without the necessary liquidity to meet these obligations could be forced to sell illiquid assets at significant discounts. In order to provide the cash necessary to meet these obligations, a life insurance policy can play a valuable role in an estate plan. For older individuals in this situation, term insurance will typically be unavailable, so permanent policies are often the only option.
Be careful when considering a permanent life insurance policy. The agent selling you the policy has a great financial incentive for writing the coverage on you and may not have your best interests in mind. The mechanics of these policies are very complex and deciphering the literature presented to you can be overwhelming. Work with an independent advisor (who isn’t collecting commission from the sale of a life insurance policy) to determine what type of approach would be best for your situation.
As I mentioned at the top, our firm does not sell life insurance. However, we want to ensure our clients have a sound, comprehensive financial plan. Life insurance is a piece of that. We want to review your situation and make sure you have the right coverage to protect your family. Let’s do some planning. Schedule a free consultation today!
Once you determine that it might be time to work with a financial advisor, it’s important to find the right advisor for you and your family. We’ve put together a guide of questions that are essential to ask an advisor before you hire them.
Don’t make a mistake by working with the wrong financial advisor. Ask the right questions the first time to determine if a financial advisor is right for you.