Financial Boot Camp Series: The Many Flavors of Life Insurance.

When working with individuals and families, we strive to prepare a comprehensive financial plan that serves as a long-term roadmap to financial success.

An aspect of this overall planning process includes reviewing life insurance needs and options. For most individuals, life insurance is typically a key aspect of one’s overall plan to provide peace of mind that loved ones will be financially secure should something unexpected happen to you. 

However, starting the life insurance conversation is difficult for most. As it forces one to think about their own mortality and what things would look like if they were not around. But by not having the proactive life insurance conversation, many individuals become under insured or not insured at all, potentially leaving loved ones in an unstable long-term financial position.

In this article, we’ll highlight typical life insurance policy options and how to evaluate how much insurance you may want to consider. 

Life Insurance Basics - term and permanent life insurance

Term life insurance is the simplest form of life insurance and typically the cheapest. Term insurance protects you for a pre-defined period of time and has a fixed annual premium. According to Quotacy, a $1M, 30-year term policy for a 30 to 40 year old male or female have annual premiums in the range of $400-700 per year. 

The concept behind term insurance is over this 30-year period, you continue to expand your earnings potential and accumulate savings (i.e. 401k, IRAs, brokerage assets). Such that should something unfortunate happen to you after this 30-year period, your need for life insurance is much lower because you’ve accumulated assets that could provide financial security for loved ones. For most individuals, term insurance is the most cost-effective option to address their life insurance needs.

Where term insurance provides life insurance coverage for a certain length of time, permanent insurance offers life-long coverage. Permanent insurance, in the form of whole or universal life, typically has a cash value component that may grow over time as you make annual premium payments. Relative to term insurance, permanent life insurance policies will have a higher associated premium. 

Permanent life insurance policies could make sense for people that have a significant financial obligation that is not time sensitive. Significant financial obligations could be, but are not limited to, alimony obligations, ownership in a business, or future estate tax liability (all beyond the scope of this article). In these instances, a permanent life insurance policy may make sense as it provides coverage throughout an individual’s life assuming the policy is properly funded.       

How much insurance do I need?

The second component to any life insurance decision beyond policy type is how much life insurance coverage you might need.

While there are industry rules of thumb regarding life insurance coverage, such as 6-10x annual salary (i.e. annual salary of $100K so $600K - $1M of life insurance coverage), in practice, the amount of life insurance coverage that you need is a very personal conversation and decision. Ultimately, one is trying to answer the question: should something happen well before normal life expectancy, what would you like to provide to your heirs? 

Some examples for a young family might be: to ensure that your spouse will be financially secure enough to pay off the home mortgage, finance college for children without incurring debt, and fund future weddings, etc. Clearly articulating and communicating from a financial perspective the state that you would like to leave your spouse in is key to concluding the appropriate amount of life insurance for an individual now and into the future. 

While life insurance can initially feel a bit morbid and perhaps daunting, recognizing its purposes within your overall financial plan should help simplify the initial conversation, clarify your goals for the policy, and allow you to make a sound financial decision.

At Schneider Downs Wealth Management Advisors, we would be happy to help you review the type and amount of coverage that might be best suited for you. Please contact your trusted Schneider Downs Wealth Management Advisor for more information.

This article does not constitute insurance advice, nor does SDWMA sell any type of insurance policies. We are also not affiliated with insurance companies. 

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.