You always think loss will happen to someone else—until it happens to you. Rachael, a 26-year-old wife and expectant mother, was living the all-American dream when her 30-year-old husband was killed in a accident. I came alongside Rachael to help her make sense of her new normal; the memories of that painful journey remain vivid to me to this day.
Gratefully, her husband had lovingly prepared for the unthinkable by purchasing several types of life insurance policies after they married. Rachael and her son’s world were turned upside down, but an uncertain financial future was not part of the equation.
Interestingly, not a single widow or widower has ever told me. “I wish we hadn’t had so much life insurance.” I’ve seen the effects of the opposite, however, more times than I can count. There is no one-size-fits-all when it comes to this area of planning, as much depends on the stage of life. While various types of life insurance should be considered, the balance of this article will focus on basic protection for growing families. Consider these points as you evaluate your need.
What are you trying to replace and how long do you anticipate this need to exist? The most common need is income replacement. Other considerations include debt repayment, funding of important goals like college, retirement, and assets acquisition or replacement. There are death expenses, too, such as funeral costs, estate settlement and taxes. Don’t forget to factor appropriate inflation adjustments in this step, too.
What assets do you have to meet these needs? This may include savings, retirement accounts, current life insurance, real estate, business interests, etc. You must consider not only what you have, but also how liquid these assets are—you do not want to have to sell an asset at the wrong time—and how much they have the potential to grow.
How much risk am I willing and able to retain vs. how much do I want to transfer? Subtract your available assets from your total need and you will have an idea of the need. Trying to insure every scenario would be cost-prohibitive for most families so give careful consideration to how much is enough to provide for the needs of your family. If funds are limited, cover the primary income earner first. Don’t neglect the lower-earning or stay-at-home spouse, however, as the costs to replace their services can be substantial, especially if you have children.
What is the most cost-effective solution for the period(s) of time coverage is needed? If funds are limited, consider term insurance, as you will receive the most coverage for the least amount of money. Be aware that term is designed for a specific period of time and will eventually price you out of the marketplace with higher premiums. It is more like renting coverage than owning it so carefully review your ongoing needs as your circumstances change.
So much of the insurance I see seems to have been bought or sold based on an emotional tug rather than facts. In some cases, people have purchased more insurance than they really need, wasting valuable dollars. Others have purchased the wrong type of insurance and still others are grossly underinsured. A thorough analysis and consideration of all your options will help you choose insurance that will cover your present needs and provide flexibility as life changes.
As a financial planner, I’ve walked this very dark valley of loss with widows and widowers from age 26 to 96. No amount of insurance assuages the grief. The difference is seen in the options they can consider as they try to move forward.
For one middle-aged widow, insurance proceeds allowed her to pay off her mortgage and comfortably remain in the home she loves. For another, she was able to focus on raising her teenage children without being forced to get another job. Rachael, the young expectant mother, has been able to spend the last 13 years raising her son and volunteering in causes close to her heart. In matters of life and death, it’s all about options.
Thompson is a certified financial planner, and co-founder and CEO of One Degree Advisors, Inc. She speaks on financial topics and is a mentor for financial professionals, she also serves on the board of directors for Kingdom Advisors. Learn more at onedegreeadvisors.com. Advisory services offered through One Degree Advisors, Inc. Securities offered through Securities America, Inc., Member FINRA/SIPC. One Degree Advisors and Securities America are separate companies.