Choosing life insurance to protect your family

Just over half of Americans have life insurance in place—meaning the other half risk leaving their families unprotected in an emergency. Of the folks who do have life insurance, many purchase coverage through their employer. While an employer plan is better than no plan, this approach can create problems for both you and your loved ones in the future.

When used strategically, life insurance can be an integral part of a holistic financial plan. It can help you protect your family and the assets you work so hard for. In this article, we’ll discuss the different types of life insurance, how much coverage you may need, how to evaluate plans and premiums, and how we may be able to help.

Term life vs. permanent life insurance

Term life insurance covers you for a set time period, or a term. If you have employer-sponsored life insurance, it’s likely term life insurance that covers you while you’re employed. Employer-sponsored coverage can be a great option if the alternative is no life insurance; these plans tend to be more affordable than life insurance purchased in a marketplace, as employers may be able to access discounted group rates.

Still, you may want to consider supplemental coverage that isn’t tied to your employment. Employer plans often offer insufficient coverage. And while you may think you can simply purchase term insurance if you lose your job, you never know what your health or circumstances may be when that happens. Remember, you’ll never be this young again, and if you’re healthy, it may be a good time to purchase supplemental coverage affordably.

Permanent life insurance, as the name implies, covers you permanently—it never expires. It’s often referred to as whole life insurance since it covers you for your whole life. These plans may come with more flexibility than term insurance, as well as a much higher price tag—whole life premiums tend to be five to 15 times more expensive.

While term life plans only offer a death benefit, whole life plans may offer different perks beyond that, including long-term care riders or the ability to borrow against the cash value of your policy. While that may sound promising, the higher premiums associated with these perks can lead folks to buy less life insurance than they need. Plus, many of the additional benefits associated with whole life plans can be addressed by other means as part of a holistic financial plan.

How to use life insurance

For most people, the purpose of life insurance is to provide income and financial support to their families in a worst-case scenario. Ideally, as families build wealth, the need for this type of supplemental support lessens as other sources of potential income grow.

However, certain circumstances make whole life more appealing. For instance, if you have a child with special needs, a permanent life policy protects that child in a more substantial way (often, this is used in conjunction with a special needs trust). Additionally, certain whole life policies (known as transfer-on-death policies) can be a helpful estate planning tool for some families.

Beyond these specific instances, it’s important to be skeptical about whole life insurance; these policies often come with significant commissions for the salesperson. Any information you get from a broker is likely part of a sales tool to promote coverage you may not need.

For instance, consider it a red flag if an insurance broker describes a life insurance policy as an investment tool. The purpose of insurance is to protect your family and your assets; these accounts are not designed to foster growth and investment returns.

At Reason Financial, we sell life insurance policies on need basis only. We can also help you evaluate any existing policies alongside your current obligations, expenses, and goals, to see if your coverage level is appropriate.

How much life insurance do I need?

Which type of policy you choose, and how much coverage you purchase, depends on your personal circumstances and goals. We can talk you through these factors, but at a high level, consider:

• How healthy are the rest of your finances? Life insurance is income replacement, so consider any additional sources of income your family may have if you die unexpectedly. Does your spouse work? Will they be eligible for government benefits? Additionally, think about your expenses. How much of your family’s spending is discretionary? And finally, what are your family’s future goals? What happens to your child’s college fund, for example, if you suddenly stop contributing?
• Is your future debt-free? When you die, your estate is responsible for settling any debts you owe. The assets within your estate must cover those liabilities. If you worry your assets won’t suffice to cover any outstanding debt, life insurance can help and ensure your heirs don’t inherit your debt.
• Do you have long-term care insurance? If not, whole life policies may offer the option of accelerated death benefits or ADBs. Morbid name aside, this option—which you may have to pay more for—can be helpful if any health issues arise in retirement. ADBs allow you to use a portion of the payout you’ve purchased to cover medical costs while you’re still alive, like those associated with a terminal illness or nursing home care. Keep in mind, Medicare rarely covers nursing home stays, so you’ll need to pay for that out-of-pocket should you need it (unless you qualify for Medicaid). Some life insurance policies now bundle long-term care insurance more officially into the plan, so you won’t need to use ADBs.

At Reason Financial, we help you work through these considerations by asking you a number of questions about your family’s habits, goals, and circumstances before using different algorithms to help estimate the amount of coverage you may want to purchase.

For instance, my wife teaches our children at home, and we want to continue that practice if something happened to one or both of us. When deciding on my own life insurance policy, I estimated the cost of hiring a private educator to take over this responsibility until my kids reach 18, then ensured my life insurance policy is large enough to cover that (in addition to other costs and considerations).

While your personal circumstances may be different than mine, the overarching point is: Avoid one-size-fits all guidance on how much insurance you need. Experts will suggest a million-dollar policy or advocate for 20x your current income, but these broad rules ignore many of the most important parts of your financial plan.

Beyond your target coverage amount, you’ll also need to consider the cost of your plan. A number of factors affect life insurance premiums, including your age, gender, location, health, and more. Generally, men pay 23% more for life insurance than women. Even moving from one county to another can impact the cost of your plan.

At the end of the day, life insurance can and should be part of your overall financial plan. How much coverage you need will depend on where your life, family, and finances are headed. To review your existing coverage, or to discuss whether you may need a more robust policy, set up a call.