Most people don’t want to think about life insurance. But if others rely on you financially, you need to consider how much you or your loved ones risk losing without it. Life insurance can be an affordable way to take care of your family or loved ones in the event something happens to you. Some types of insurance even provide living benefits, including funds that you can use while you’re alive to buy a home, supplement your retirement income, or cover emergency expenses. Tellingly, in a 2022 survey from LIMRA, people who own life insurance are more likely to feel financially secure than those who don’t own it (nearly two-thirds versus less than half of those surveyed).
In recognition of September being Life Insurance Awareness Month, today’s article focuses on life insurance — what it is, some top misconceptions about it, how it works, and under what circumstances you may want to consider purchasing it.
What is life insurance?
Life insurance can be one answer to a difficult question: If I were to die, would the people who rely on me financially struggle? Life insurance is simply a contract between a life insurance company and a policyholder. A life insurance policy guarantees the insurer will pay a sum of money to one or more named beneficiaries when the insured person dies. A so-called “death benefit” (you have to die to get it) is provided in exchange for “premiums” (or payments) paid by the policyholder during their lifetime.
Four common misconceptions about life insurance
1. “It’s too expensive.” Seven in ten uninsured consumers say they don’t have life insurance because it is too expensive. However, according to LIMRA and Life Happens, most people (75%) of people overestimate the cost of annual premium payments by 300%. For example, a $250,000 20-year level-term policy for a healthy 30-year-old typically costs under $200 per year.
2. “My workplace life insurance policy is enough.” If you are fortunate to work for a company that offers life insurance as an employee benefit, coverage may be adequate. In reality, the median life insurance coverage offered by employers in 2020 was either a flat sum of $20,000 or one year’s salary, according to the U.S. Bureau of Labor Statistics. With more than half (54%) of U.S. households relying on dual incomes, for many, losing one income would be devastating to the household’s finances.
3. “It’s too difficult to buy.” LIMRA reports that more than half (54%) of Americans have put off buying life insurance coverage because they don’t know what to buy or how much they need. There appears to be an awareness gap that deters many people from taking action, as fewer than one in three consumers say they are extremely knowledgeable about life insurance, and roughly 6 in 10 Americans don’t work with a financial professional. A knowledgeable advisor can be an excellent resource for evaluating insurance needs and coverage levels.
4. “I won’t need it until I’m older.” Life insurance gets much more expensive the older you get. This is because your risk of dying increases. It’s significantly less expensive for young and healthy consumers to purchase a life policy.
Many uses of life insurance
The primary reason that most people buy life insurance is to settle their burial expenses and final expenses (58% of those surveyed in LIMRA and Life Happens’ 2022 Life Insurance Barometer Survey). But there are other ways life insurance can be included as part of your financial plan. For example, maybe you want to replace your income if you pass early (38% of insureds cite this reason) have a spouse and/or children who are not independently wealthy (56% of insureds have dependent children), or wind up in a divorce. Another common use is for businesses that have partners who need a way to buy out a deceased partner’s equity interest via the life insurance payout. Other policy owners use it to establish a college savings fund or to pay off their estate tax bill when they pass on.
Is life insurance worth it?
Life insurance is worth it if someone you care about would suffer if you and your financial contributions were no longer in the picture. That’s not to say that everyone needs it. If your spouse is already financially secure, and your kids are launched and are on solid financial footing, you may not need it.
On the plus side, there are many types of coverages that can be customized to your needs and budget. Life insurance proceeds are rarely subject to federal income taxes, and some have a savings component that allows you to grow your nest egg while protecting your loved ones from loss.
How much life insurance do you need?
There is no easy answer to this question — it depends on what you want the life insurance to accomplish. Some key questions to ask include the following:
· Who do you want to protect? For most people, they want to be sure their spouse/partner or underage children are provided for. Others may want to cover, siblings, aging parents, etc. — all of which will up the level of coverage and cost.
· How long would your loved ones need financial support? What are the ages of everyone who depends on your earnings?
· Is anyone disabled or has other special needs? Some may need lifelong support
· How much debt do you have? Savings?
The best way to figure out how much coverage to buy is with an analysis of your family and personal situation, along with financial goals and objectives. Beware of simplistic formulas or online calculators — they can help you ballpark coverage, but they don’t pick up the nuances of your family situation. It’s always a good idea to review life insurance once a year, or whenever you have a life change, an income change, your net worth increases or there’s a change in the tax law.
Original article was published by Pioneer Press.
By Bruce Helmer and Peg Webb, Financial Advisors at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO AM 830 on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
