Should Life Insurance Be Part Of Your Financial Plan?

One of the main benefits of a financial plan is that it helps to forecast how you are likely to fare financially as the years go by. But the future being what it is, i.e., unpredictable, it should also be used to test how you would fare if circumstances did not turn out as expected. If you were to die prematurely, how would the loss of your income affect your spouse, if married, or any dependents? If you are not married, and do not have any dependents, you may not need life insurance, but if you do, you may want to consider protecting them.

Just as there is insurance to protect your home or car from potential damage, life insurance is meant to help protect the finances of those closest to you in the event of your death. If any of these circumstances apply to you, then you may want to give it some serious consideration as part of a larger financial plan:

• You have a spouse who relies on your income, in whole or in part.
• You have children who are still dependents or who are unable to support themselves.
• You have debt or medical costs that will transfer to your spouse or a family member upon your death.
• Your family will need assistance covering your funeral costs, which can easily cost $5,000 - $15,000.
• To ensure that a specific expense will be paid for, such as a college education or a mortgage.
• To help prevent undue financial hardship for your immediate or extended family.

If your death would not cause financial hardship for anyone (e.g., you have no dependent children, your spouse has sufficient income or savings to sustain themselves, you have no significant debt that anyone else would inherit upon your death) then you may not need a life insurance policy. Remember, an insurance policy is meant to protect those closest to you if your income is providing assistance to them. Don't forget to factor in the loss of Social Security income, once retired. A surviving spouse may be entitled to survivor benefits, but that will still be less than the combined benefits of both spouses.

If you choose to purchase an insurance policy there are many options, but Term Life and Whole Life are two of the
most popular. In short, Term Life is typically much less expensive, and covers you for a set amount of time (e.g., 5, 10, 20, or 30 years). The premiums are usually fixed, and it pays a guaranteed death benefit amount if you die within the term of the policy, but it has no cash value, and you cannot borrow from it. It is a temporary policy only for the agreed upon term.

Whole Life policies also offer fixed premiums and pay a guaranteed death benefit, but they differ from Term Life in that they cover you for your entire life (not a set amount of time) and can generate a cash value that you can borrow from, or cash out, at some point in the future (e.g., if you need money or don't want/need the policy anymore). However, because the policy generates a cash value that builds as you pay into it, the premiums are much more expensive than Term Life premiums.

To determine which type of policy might be best for you, consider what you are trying to accomplish. If your intent is to financially protect your spouse and/or children in the case of your death, but your children will not need assistance in another 10 years (and your spouse will have sufficient savings for themselves), then a Term Life policy will be much less expensive and will provide a guaranteed death benefit for the agreed upon term. If you have family who will depend on you no matter what or want to leave an estate of a certain value, then Whole Life will provide the desired benefit upon your death at any age.

In general, either type of policy will be less expensive if purchased at an earlier age. For example, a 20 year Term Life policy for $500k purchased in your 30's might cost ~$275/year. If purchased in your 50's it might cost ~$1,000/year. A $500k Whole Life policy might cost ~$4,000/year in your 30's, and ~$9,500/year in your 50's (remember that the higher premiums are paying for a building cash value). Your medical history, age, gender, amount of coverage, and even hobbies (e.g., skydiving, scuba diving) can also affect the cost of any policy.

Aside from the cost, these are also other considerations when purchasing a life insurance policy:
• Do you need coverage for a set amount of time, or permanently?
• How much coverage do you need? Everyone's situation and needs are unique, but a starting point might be to multiply your annual income times the number of years that you will need coverage for. Add to that any specific costs that you are trying to cover (such as a college education for a child), and then subtract any existing savings that would help to cover the costs above. There's no sense in paying for more coverage than you need.
• Can you comfortably afford the premiums?
• Do you need an investment option where the policy generates cash value on its own, or would you be better off saving the cost of expensive premiums and investing that money yourself?
• Choose an insurance company that is financially sound! What is their financial strength rating (from Standard & Poor's, for example) and how likely is it that they will always be able to fulfill their obligations? The more highly rated the company the more reliable they are likely to be.
• Make sure that you read and understand - not just gloss over - all of the fine print in a policy. Do your due diligence to protect yourself, and to make sure that you are getting exactly what you think that you are getting.
• Get several quotes. You will be spending a significant amount of money over a long period of time, so it is worth the effort to ensure that you are paying the best price for the product that you are looking for.

The bottom line is that a solid financial plan involves trying to protect yourself, and your family, well into the future. If either you or your spouse, if married, should die prematurely, will the surviving spouse and/or any dependent children be protected from financial hardship? The best way to see the potential impact would be to enter different life expectancy ages for yourself into your financial plan. At each age, will your spouse be financially secure at least until age 90, and/or will your children be taken care of until they reach an age where they can take care of themselves? This will also help you to determine how much coverage may be necessary at different ages. Always consider a variety of scenarios to be as prepared as possible. That's the point of planning in the first place!

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