September is Life Insurance Awareness Month, making it an ideal time to review one of the most important components of a financial plan: protecting the people who depend on you.
While most people understand the purpose of life insurance, many are uncertain about how much coverage they need or what type of policy is most appropriate. Determining the right coverage often requires a closer look at your family's financial situation, future goals, and existing resources.
The goal of life insurance is to provide a financial benefit to your loved ones if you pass away. Ideally, the benefit is sufficient to help them maintain financial stability during an already difficult time.
Determining the Appropriate Amount of Coverage
Many rules of thumb suggest carrying life insurance equal to seven to ten times your annual income. While this can be a useful starting point, everyone's circumstances are different.
When evaluating your coverage needs, consider questions such as:
- How much income would your family need to replace?
- How many years would that support be necessary?
- Do you have a mortgage or other significant debts?
- Would you like to help fund a child's future education expenses?
- What assets or savings already exist to support your family?
- Would your surviving spouse or partner continue to work?
Life insurance is primarily intended to replace income for dependents. Additional goals might be to eliminate debt, allow your spouse to continue living in the shared home, or provide long-term financial support for a dependent family member.
Stay-at-home parents should also consider the cost of replacing their contributions to the household. While there may not be a paycheck to replace, a surviving spouse may need to replace services such as childcare, transportation, and other day-to-day responsibilities. This can represent a significant financial cost for the family.
Term Life Insurance: Coverage for a Specific Period
Term life insurance provides coverage for a defined period, commonly 10, 20, or 30 years. Because the coverage is temporary, premiums are typically lower than permanent life insurance. This often makes term insurance an attractive option for young families, homeowners, and individuals who want substantial death benefit protection at a relatively affordable cost.
For example, a couple with young children may choose a 20- or 30-year term policy designed to provide protection until the mortgage is paid down and the children are financially independent.
The primary consideration with term insurance is that the coverage eventually expires. A death benefit is payable only if the insured passes away while the policy remains in force.
For many people, this coverage provides protection during the years when their families are most dependent on their income.
Permanent Life Insurance: Lifelong Coverage
Permanent life insurance is designed to provide coverage for an individual's lifetime, if policy requirements are met and premiums are paid as required.
Unlike term insurance, permanent insurance is not intended to expire after a specific number of years. As a result, the premiums are generally much higher than those of a comparable term policy.
If you anticipate a lifelong need for a death benefit, you may want to consider permanent life insurance. However, if the need is tied to a specific period of time, such as raising children or paying off a mortgage, term insurance may be sufficient. Work with your financial advisor to determine how long the need for coverage is expected to exist and which type of policy may be most appropriate.
Reviewing Your Coverage Over Time
Life insurance needs rarely remain static. You should revisit your coverage after significant life events such as:
- Marriage
- The birth or adoption of a child
- Purchasing a home
- Receiving a substantial increase in income
- Changing employers
- Taking on significant debt
- Approaching retirement
A policy purchased ten years ago may no longer reflect your current financial situation, either because your needs have increased or because you've accumulated enough assets that less coverage is necessary.
Final Thoughts
Life insurance is ultimately about protecting the people you care about most.
Once the life insurance need is identified, you can work with your financial advisor to determine whether temporary coverage, permanent coverage, or a combination of both is most appropriate.
Rather than relying solely on general guidelines, a thoughtful review of your income, debts, assets, and family goals can help ensure your coverage aligns with your overall financial plan.
Contact Us
Meet with one of our financial advisors to discuss comprehensive financial planning, including life insurance needs.
Contact Fiona Morina, Administrative Assistant for Jane M. LaLonde, CFP®, at 612.431.7509 or Fiona@LWAG.com.
Our address: 2701 University Ave SE, Minneapolis, MN 55414