Life insurance is something we hope we never need, but really need to have. The number of families that have little or no life insurance is startling. I see it every day as I meet with people in the Northeast and the surrounding area. Here are some things to keep in mind to mind as you consider your own situation.
First, there are several different types of life insurance; our focus today is in on term insurance.
Many employers offer a base level of coverage, which could be flat dollar amount ($10,000 or $20,000), or one times your annual salary up to $50,000. Most companies will not offer company paid coverage above $50,000, as they are generally limited to a tax deduction for the premium cost up to $50,000. In many instances, the premium cost for the insurance is higher than you would pay to purchase your own policy.
Second, if you leave your job, your life insurance will either stop immediately or within a few weeks of your separation. In this economic environment, it could take some time to secure another position, and if you have no other coverage, you will be at risk during this period.
Third, if you wait to purchase a personal policy until you are older, your premiums will certainly be higher. Also, you could develop health-related issues like high blood pressure or diabetes, which will also result in higher premiums.
Finally, there are several different ways to calculate how much coverage you should have as well as the period of time you will apply for. I often suggest 30-year term to many folks who have young children, as this period of time can provide a significant amount of coverage during the critical years.
When calculating the amount of coverage, I generally use the Needs Analysis approach. The idea with this approach is to determine the amount of coverage that would be needed if you died today. The first consideration is the replacement of the replacement of the income that you earn and deciding how many years worth of income you want to replace.
The second is to consider future expenses that would have helped to pay for if you were alive such as college (if you have more than one child you need to mindful the cost for all). Once you sum these figures you will likely come to a significant number. It will likely be higher than you might first expect. This is your baseline to engage an insurance professional to purchase the additional coverage you will need.
One last word: coverage should be purchased for both spouses, even if one stays home with the kids.
Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.
Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)
The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security. These situations are hypothetical in nature and do not represent a specific client.