Like most people, you probably don’t take the time to routinely evaluate your life insurance needs.
You may want to start, though, because these needs change as circumstances in your life change. It’s a good idea to re-examine your coverage options every few years, and certainly when life changes occur.
Our Life Insurance Needs Calculator is a great resource for seeing how changes in your life—like having a child, taking on a bigger mortgage, or getting a raise—might impact your life insurance needs. Once you have a general sense of your needs, you should consider meeting with a qualified insurance professional who can conduct a more thorough analysis and help tailor a plan that meets your specific financial objectives
Having a child
You have big plans for your kids and want to see them realize their hopes and dreams. It’s hard enough to make that happen the way it is. But what if you or your spouse, or both of you, were suddenly out of the picture? From diapers to diplomas, would there be enough income to pay for day care, a college education, and everything in between?
Your children are your greatest responsibility, and life insurance can help them grow up in an environment where they’re physically and financially secure should something happen to you.
As a married couple you share a life together, but you also share each other’s financial obligations. What if one of you died tomorrow? Would the survivor have enough money to pay for your final expenses, eliminate debts such as credit card balances and car loans, and buy some time to be able to adjust to a new way of life? Life insurance can help ensure that these financial goals are met if tragedy strikes.
Buying a home
There are few things more exciting in life than when your real estate agent hands you the keys to your new home. But mortgage payments, often over the span of 30 years, can be daunting, so make sure you’ve thought ahead. If the worst were to happen, could your spouse or partner manage the mortgage payments without you? What about monthly maintenance, utilities, unforeseen repairs and property taxes? How long before your dream house is back up for sale?
If tragedy were to strike, having to turn the house keys over to the bank is probably the last thing you’d want to have happen to your loved ones. Having adequate life insurance coverage can help keep your family in the home they love.
Dealing with debt
The truth is, living with debt is a way of life for many of us. It isn’t easy to make the switch from accessing easy credit to making sure you live with in your means, but that’s the first step you should take to get your debt under control. Second, if you’ve got lots of different creditors and some of them are charging you high-interest rates, it might make sense to consolidate at least some of your debt at a more favorable rate. Finally, you should carefully consider how your family would manage the payments if something were to happen to you. If you were suddenly out of the picture, you wouldn’t want to leave your family to drowning in debt. You should have at least enough life insurance to pay off all your outstanding debt and provide a financial cushion to help your loved ones begin a new life without you.
A new position or big raise is always exciting. But when your income rises, your spending tends to rise too. If something were to happen to you, you’d probably want your family to be able to maintain their new lifestyle. That’s why it makes a lot of sense to re-assess your life insurance coverage whenever your income rises.
If you determine that you need additional coverage, the first thing you’ll want to do is find out if your life insurance benefit through work (assuming you have such a benefit) has increased along with your compensation. Many group plans will tie life insurance benefits to your annual income. So if you get a $5,000 raise and your company’s life insurance plan will pay two times your income if you die, then your death benefit will increase by $10,000.
If you feel that’s not enough, many employers will give you the option to increase your coverage, often through a payroll deduction. Determining whether to take advantage of this option usually depends on your age and health status. How so? With most group plans, employees are offered the same premium as others in their general age bracket (e.g., 25-34 year olds), regardless of their health status or actual age. So if you’re healthy or near the lower end of your age bracket, this one-size-fits-all premium may be higher than what you would find if you shopped around on your own. On the other hand, if you’re an older employee or perhaps suffer from a chronic health condition, increasing your coverage through work might be a great option because you might not be able to find a policy on the open market that’s as affordable as what your employer is offering.
Supporting aging parents
Today, many people find themselves supporting their aging parents, financially and otherwise. If you’re one of them, you need to think about what would happen to them if something happened to you. Would your parents be able to afford quality healthcare and a decent place to live? Would they have to turn to friends or other family members for financial support? By figuring your parents financial needs into your life insurance plans, you can take the guesswork out of what would happen to them if something were to happen to you.
Changes in your business
One of the keys to running a successful small business is being able to adapt to change. Maybe you need to buy an expensive new piece of equipment to keep pace with a competitor. Or perhaps you have to hire a new person with a specialized skill set to expand into a new area. Whatever the case may be, any time you make big changes in your business, it makes sense to make changes to your life insurance plans.
To get a sense of whether it’s a good time to reevaluate your life insurance coverage, ask yourself the following questions:
• Has your business taken on more debt recently?
• Has your business become more dependent on a key employee or several key employees?
• Has the value of your business changed?
To learn more about protecting your small business, visit the small-business section of this website.
Changes in your marital status
If you’re on your own now, owing to death or divorce, you need to carefully reexamine your entire financial situation, including your life insurance needs.
Regarding life insurance, you’ll want to do is determine whether you still have a need for coverage. Remember, one of the main reasons you purchased life insurance was to provide financial security for your immediate family. If your spouse has died and you either have no children, or your children are grown and financially independent, you may no longer need life insurance.
But what if your spouse has died and you now have to raise young children on your own? Then, you actually might need to increase your coverage. Think about it. Your children are probably entirely dependent on you. By having adequate life insurance coverage, you can help ensure they will have the kind of lifestyle and opportunities you always dreamed they’d have.
Another important consideration is beneficiary designations. Most people will list their spouse as their primary beneficiary, so if your spouse has died, you should immediately change the beneficiary designation. Otherwise, a surrogate court judge might be the one to decide how to distribute your life insurance proceeds among your children or other family members.
If you have children, deciding whether to list them as beneficiaries will depend, in part, on their age. If they’re minors (under age 18), you should probably establish grantor trusts for each of them and name the trusts as the beneficiaries. By going this route, you’ll need to appoint a trustee. It’s also a good idea to appoint a successor trustee, in case something happens to your first trustee. When you die, the trustee will be responsible for distributing funds to your children in accordance with your wishes.
When the children are minors, trustees are often granted the discretion to make distributions as needed, within certain parameters. Once they’re older, wills often specify that distributions be made to the children in lump sums when they attain certain ages. For instance, you could arrange for your children receive equal payouts when they reach ages 20, 25, and 30. Alternatively, you could name adult children as the beneficiaries of your policy. But just know that if you do that and, for example, your son or daughter gets divorced or is divorced when you die, the proceeds may be subject to equitable distribution. Would you really want half the proceeds to go to someone who’s no longer in the family? Trusts can help prevent that from happening.
The different scenarios described above all assume that your spouse is deceased. If you’ve just divorced and have young children, things can get more complicated because your ex-spouse may be the one to care and provide for your children if you die while they’re still minors. Again, this is where trusts can be a good option by ensuring that the money is used to support your children’s needs.
A final word of advice: These are important, complex decisions that may require the advice of not just an insurance professional, but an attorney and an accountant as well. If you’re suddenly in the unfamiliar position of having to make financial decisions on your own, don’t try a do-it-yourself approach. The stakes are way too high, especially if young children are involved.
Planning for college
As college costs continue to skyrocket, you need start planning earlier than ever to achieve your college savings goals. Meeting this challenge requires a disciplined approach to saving and investing. But a smart investment strategy is just one part of a sound college-funding plan. A smart risk management strategy using life insurance is also important to ensure that your college savings goals will be achieved, even if you’re not able to complete them due to illness, accident, or death.
Saving and investing for college
Federal and state-sponsored college-savings programs, such as Section 529 plans, are popular vehicles that let you save and withdraw tax-free. Permanent life insurance is another option to consider because it, too, allows you to save and withdraw tax-free, while also providing the protection you should be building into your college savings plan (see below). Withdrawals and loans are subject to interest charges and can lower the ultimate death benefit. Because of the insurance component, your costs may be somewhat higher than with a Section 529 plan.
Protecting your college-savings plan
Protection products form the foundation of a sound college-funding program by ensuring that your college savings plan won’t be lost if you die or become disabled. Life insurance can complete a college-savings program that hasn’t matured, while disability insurance can help make sure that you can continue to set aside money for college, even if you’re unable to work for a period of time.
Planning for retirement
Mention retirement planning, and most people think about their 401(k)s, IRAs or mutual funds. Keep saving, invest those savings wisely, get to age 65—and you’re set for retirement.
Maybe. But what if things don’t work out as planned? What if you die prematurely or become disabled? What will happen to the people in your life, especially your spouse or partner, who may be depending on your retirement savings to help support them into old age? A retirement plan without insurance is just an unprotected savings and investment program.
Below are three ways life insurance can help you meet important retirement planning objectives:
Prevent your retirement plans from dying when you do. If you die before retirement, your survivors would miss out on both your salary for living expenses and the money you were setting aside for the future. People who die prematurely haven’t had as much time to put together an investment program that can really pay off. If you have sufficient life insurance, it can help pay your family’s expenses and even your spouse’s retirement.
Supplement your retirement income. Suppose your circumstances change and you no longer have anyone who would need the proceeds of a death benefit. With a permanent life insurance contract, you have the flexibility to surrender the policy and supplement your retirement income with the funds that have accumulated in the policy’s cash value account.
Preserve your estate assets for your survivors. If you’ve accumulated a large estate, life insurance can help foot the estate-tax bill from Uncle Sam, preserving assets for your heirs. Or, if your estate is more modest, life insurance can provide a legacy for your children and grandchildren even if you use up most of your assets during your retirement years.
One of the most common questions people have about life insurance is “term or permanent?” Well, it depends on a number of factors, including how long you need the coverage, how much you can afford, how much risk you can tolerate and how much flexibility you need.
To help you gain a better understanding of which type of insurance might be right for you, use our interactive Product Selector that walks you through the decision-making process.
While this interactive guide is not meant to be a substitute for working with an insurance professional, it’s a great way to familiarize yourself with some of the issues you’ll need to think through in making this important decision.