Life Insurance FAQ

Over the past few weeks of talking with people about financial planning, I have received two types of questions.  The first is always about my take on the stock market and the economy in the near term.  The answer is…I’m not quite sure.

However, regardless of your opinion of the market in the next 6 months, 12 months, 3 years, 10 years, etc., you should be building your financial plan according to your age, income, needs, and goals.  If you’re young and looking to save for 30-40 years before retirement, it doesn’t really matter what happens in the next 6 months.  If you’re near retirement, hopefully your financial planned advised you to put your retirement savings in very low risk investments, and you haven’t been hurt too badly.  If you’re just starting out with a spouse and family, you might want to make certain you have certain items taken care of before worrying about investing.

As I stated in an earlier post, an amount of money invested each month in a life or disability insurance policy goes much farther should the unfortunate need arise, than does that same amount in the stock market.

That leads to the next set of questions I receive.  They usually cover life insurance.  I’ll try to highlight some of them here, and some answers.

Q.  I’m single with no kids, why do I need life insurance?

A.  This is a very common question.  I can give a few thoughts on why you might want to consider a policy.  First, if you own a home, you might want to make sure you have a policy that would cover your mortgage if you should die prematurely.  You don’t want your parents to have to cover the mortgage in that case.  Even if you don’t own a home, there are some costs associated with death – funeral expenses, estate taxes, debt payment.  You don’t want parents or siblings to have to cover these costs.

Another good reason is that you will never be as young as you are today.  Insurance is used to protect you against the unforeseen.  You never know if something will happen in the next year to make your potential premiums go up, or worse, make you uninsurable.  If you plan to have a family at some point, it might be a good idea to already have some life insurance in place so you know you’ll have it to protect your family.

Q.  I’ve heard I don’t need Whole Life Insurance, just buy Term Life Insurance and invest the difference.

A.  OK…that wasn’t really a question.  I’ll explain anyway.  Whole Life Insurance will be more expensive than Term.  However, it is an asset that will most likely build in value at a relatively steady rate over time.  Therefore, you get the comfort of having the death benefit the entire time you own the policy, along with a relatively stable investment.  It won’t match the S&P over the long term, but it won’t lose value either.  If the year you need to borrow from your cash value happens to be a year in which the market is down 40%, you’ll feel good about your choice.

Term is great also for the death benefit.  The great part about buying Term, especially if you’re single, or just starting your family and can’t quite afford the Whole Life premiums, is that you can convert it to Whole Life later, and usually won’t have to take another medical exam.  If you own a Term Life policy, and later contract a heart disease, or cancer, you can convert the Term to the same amount of death benefit.

Either way you go, just make sure you at least have some protection to cover unforeseen events.

Q.  How much insurance do I need?

A.  That is different for each situation.  A good rule of thumb is 7-13 times annual salary.  Of course, it depends on items like mortgages, family size, age, etc.  Your financial planner can help you determine the right amount for you.

Q.  What if I can’t afford all the insurance I need?

A.  There are certain ways you can get started with life insurance to make certain there is some coverage.  You can put certain items in place so that you can buy more insurance in the future, and reduce the risk that you become uninsurable later.  Your financial planner can help you work this out.

Q.  Are you telling us all this just to sell us insurance?

A.  Absolutely not!  As I mentioned in previous posts, there are probably some people unscrupulously attempting to just sell.  However, I’ve learned that a vast majority of financial planners genuinely care about their clients.  Insurance is part of a good financial plan, and our job is to build the plan including life insurance.  Your financial planner should explain how life insurance, disability insurance, retirement plans, college savings plans, asset allocation, wills, trusts, long term care insurance are all part of a good financial plan, and how that plan will change over time based on your age, income, family situation, etc.