I received a letter from my life insurance company alerting me of the option (and of course, all the benefits) of converting my term life insurance policy into a permanent, whole life policy. With a title pronounced in size 16 font, bold and blue, the letter begins, “Enjoy More in Life with Whole Life.” How could anyone resist with a promise like that? The letter details features including the ability to build cash within the policy or the ability to capitalize on tax-free withdrawals. What an enchanting proposal!
Too often, permanent life insurance (also called whole life or universal life) is proposed as the best solution without giving any thought to first evaluating what your life insurance needs are. This puts the proverbial cart before the horse. It is important to first pump the brakes and ask – does this strategy makes sense for me? From there, then you can decide which policy best fits your needs. Below are some tips to help you evaluate your life insurance needs.
- Determine the Coverage Needed
A life insurance policy is generally designed to provide a lump sum of money to loved ones in the case of an untimely death. However, that lump sum will differ from family to family. A rule of thumb is that you should have anywhere from seven to 10 times your gross salary of life insurance coverage. However, other considerations must be made to get an accurate picture of your needs.
- Do I want to totally replace my salary for my spouse or just 50%?
- Do I want to pay off the mortgage at the time of my death?
- Do I want to fund my kids’ college education costs?
- What if my spouse sells the home?
- Do I want to leave my kids a legacy gift at death?
If you are 10 years away from retirement and making $200,000 per year, you might need anywhere from $1,400,000 to $2,000,000 in life insurance coverage to replace your income. If you would like to include additional expenses (such as those stated above), you will likely need to increase your coverage. It is also important to account for future inflation of college costs and general expenditures, especially if they occur much later down the road.
- Determine the Best Policy to Cover Your Needs
I’m asked this question often: should I get coverage for life (permanent life insurance) or for 30 years (term life insurance)? Let’s look at a few questions first:
- Do you expect to have higher than $11 million ($22 million if married) in your estate at death?
- Do you plan on earmarking a certain amount of money to pass to your children?
- Does having life insurance until your death help you sleep at night?
If you answered yes to any of the questions above, permanent life insurance might be the right fit for you. If you answered no (as I assume most of you have), a term policy will more than likely accomplish your life insurance needs. Typically, a term policy costs less in monthly premiums which will allow more cash in your pocket to go towards retirement savings or other expenses/goals. Additionally, you can structure a term policy to end at your anticipated retirement date, which will keep you properly covered and reduce your expenses in retirement when the policy ends. Bottom line – a term policy will give you the greatest degree of purchasing power for life insurance needed.
- Be Cognizant of Costs
You’ll want to find a policy that can meet your coverage needs for the lowest cost possible. You can accomplish this with some simple planning to make sure you aren’t paying too much for insurance.
There is an old saying, if it sounds too good to be true, then it probably is. Keep this in mind if anyone tries to sell you a life insurance policy. Permanent life insurance policies are marketed with many bells and whistles that are generally unnecessary and go beyond why you purchased life insurance in the first place. These features generally come with additional costs that are baked into a higher premium. Additionally, permanent policies are generally pushed by insurance companies. There is a higher likelihood that you will continue to pay premiums on a permanent policy (throughout your lifetime) versus on a term policy that ends after 10, 20 or 30 years. If you were the insurance company, which revenue stream would be more appetizing?
Remember! Focus on the death benefit needed and the policy with the lowest costs. Don’t be tempted by the sizzle of a subpar steak!
If you are not sure about your current life insurance policies or believe you may be inadequately covered (either too much or too little), please give us a call. Also, just in case you were wondering – We do not sell insurance, but we pride ourselves on providing unbiased, objective advice that is aligned with your goals.
Lastly, If you have other planning questions you would like me to address, please email me at firstname.lastname@example.org
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About the Author
Montgomery Gossen joined Billeaud Capital Management in 2016 as an Investment Adviser Representative. Montgomery previously worked for Advent Software, a financial reporting software firm based in Jacksonville, FL where he served several roles assisting financial advisory firms across the country. Montgomery earned a B.S. in Agricultural Business from Louisiana State University and is a Certified Financial Planner™…. Read more.