Simple, to protect those you love. That might seem obvious to some, but countless families with the financial means to provide a life insurance safety net for their families simply choose not to buy that coverage.
Let’s step back a minute. I stated that life insurance is meant to protect those you love. For purposes of this discussion, I am really only referring to income and asset replacement for a family in the event of premature death. There are several other legitimate reasons to own life insurance; to protect a business in the event that a key employee or owner dies prematurely; to protect the assets of a family estate that is wrapped up mostly in illiquid investments such as real estate and businesses (otherwise, assets may need to be liquidated to pay for a substantial estate tax); to provide a family legacy for future generations; to equalize inheritances when one adult child may be inheriting an entire business or non-divisible illiquid asset – just a few of the reasons life insurance might be necessary.
Who Needs Coverage?
The typical thinking is that only the sole breadwinner or higher-earning spouse should be covered with life insurance. Not true – at least not in many cases. Assume for a minute that you are a young family with two children and one working spouse. It goes without saying that the wage-earning spouse should be covered. But what about the stay-at-home parent?
Consider this: what would happen to the family dynamics if the stay-at-home spouse was to die prematurely? What would that mean for the working spouse? Do they have a demanding job? Do they travel a lot? Could they afford child care for their young children? Could they manage both their careers and now a household that requires management of meals, schoolwork, childrens’ activities, doctors appointments, sick days, laundry, cleaning, yardwork, etc? Imagine becoming a single parent in an instant.
How Much Coverage?
This is going to depend on many factors. But the important part is going through the exercise of imagining what needs to be paid for if one spouse was to die. For the working spouse there are typically two methods for coming up with the answer; income replacement or liability paydown.
With the income replacement method, you simply look at the income being generated by the working spouse and determine how much income needs to be replaced and for how many years. With the liability paydown method, you would consider paying off all existing debts, funding future liabilities (retirement, college, etc.), and then determining what income would now be needed to maintain your lifestyle. Two different methods, but each should arrive at a similar answer.
How Much Does Life Insurance Cost?
Again, this will depend on many factors. Age, health, and occupation will be the primary factors. The single biggest variable would be that smokers have considerably higher rates. Assuming you are relatively healthy, buying life insurance in your younger years will save you a lot of money, and will lock you into a premium for the duration of the policy.
Can’t I just Get Coverage Through Work?
Absolutely. But consider these factors: first, if you leave your employ, the group life insurance goes away and you will need new coverage; second, group life insurance is typically one-year renewable term insurance, meaning that each year your cost will likely go up as you get older, and three, most employer policies don’t provide enough coverage.
With individual term life insurance (which we would recommend in most cases for family income replacement), the premiums may be a bit higher than group coverage in the beginning, but over time, the cost of group coverage will escalate, while the individual term policy premium will stay level in most cases.
It’s worth exploring for the piece of mind and protection it can provide. You owe it to your family. I wrote this article as part of the Life Insurance Movement, the inspiration of fellow finance blogger Jeff Rose over at Good Financial Cents.
Robert Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or firstname.lastname@example.org. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.