September is Life Insurance Awareness Month and its an important reminder to make sure you have enough coverage for you and your family.Here is some information on picking out the right type of coverage and when its a good time to do so:
How to determine the correct amount of life insurance coverage?
Economic Life Value – There are a number of different versions of this calculation. Regardless of the different methods of calculating, the goal of the formula is to determine the amount needed today to invest at a certain rate and replace the income of the person who has passed away.
Often times, people will think about the debts that they have such as a mortgage, credit card debt, and other liabilities. But choosing a coverage amount simply to clear these debts overlooks the need to replace future income.
What are the two types of Life Insurance?
There are two categories of Life Insurance: term insurance and permanent insurance.
Term Insurance is:
- Great for temporary liabilities
- Can typically be converted into a permanent life insurance policy so great way to lock in coverage
- Great for young families that are just starting out where liabilities may be high (i.e. young children, mortgage, student loans, etc.)
Permanent Insurance is:
- Lasts as long as premium payments are made
- Many different types of life insurance products, such as whole life, variable, universal, etc.
- Typically has a cash value component that can be used as supplemental retirement income, or act similar as a line of credit1
- The premium to fund a permanent insurance policy with the same death benefit as a term insurance policy is typically much higher than the term premium
- Great for individuals seeking coverage while also looking to build equity that can be used2.
Term vs Permanent Insurance = Renting an apartment vs. Buying a house
Why millennials should consider life insurance?
- Life insurance is based on a number of factor including age and health. The younger the person is the less premium it takes to fund a permanent life policy (and the more time they have to accumulate cash value in it).
- If there is a co-signer on loans (student loans, car loans, etc.), the co-signer would be responsible for the debt in the event of a premature death.
- Parent PLUS loans are federal loans which are forgiven. But the cancellation of debt can trigger income tax being due on the amount forgiven for the surviving parent.
- It’s typical to want to “wait until I need it” but the assumption is that one will be healthy enough to obtain coverage when they decide to do so. Health issues can make it cost prohibitive or even impossible to obtain coverage. I recently had a client who had a term policy expire and he wanted to obtain coverage but before he got around to it, he had a medical issue that prevented him from obtaining coverage for 6 months.
When to get life insurance?
- When you have an insurable need such as a starting a family or a business
- When you’re young and healthy
- Even children can obtain permanent life policies with a cash value component that can be used for college funding or any other future life events2
What are some resources you can use to educate yourself?
Lifehappens.org is a great resource. They are a non-profit organization providing information on life insurance (and disability insurance). The site includes calculations for determining how much coverage is needed.
What are Guaranteed Issue Policies
These policies can be attractive alternatives for those who cannot obtain coverage because of a specific medical issue but come with limitations. Typically, death within two years of obtaining coverage is not covered. And the premium would still reflect a “sub-standard” health rating.
What is the difference between Individual policies vs. group policies through work?
- Group policies through work can be easy to obtain
- Group policies can have limitations – usually limited to a multiple of income.
- If one changes employers, that benefit is usually gone.
- It’s typically term insurance only with no cash value component like a permanent individual policy would have.
1 Accessing cash values in life insurance may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. A line of credit is not part of the cash value component of a life insurance product and is a revolving account that is generally provided by banking institutions.
2 Life insurance permanent policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Partial withdrawals during the first 15 policy years are subject to additional rules and may be taxable. You should consult a qualified tax professional for tax advice on your own personal situation.
Have a great Life Insurance Awareness Month!