There are many great reasons to consider life insurance. They all have to do with ensuring that the lives of those left behind can be less disrupted financially so they can focus on continuing their lives through their grief. Life insurance is not only an inheritance, it enables the pursuit of specific goals. Understanding the many uses of term insurance is one of the ways we can tell how much insurance is needed so everything can still be accomplished in the event of a premature death.
Here are five popular goals that term insurance is purchased to meet:
- Paying off the mortgage – changing the earning dynamics of the household often changes whether or not the mortgage obligations can be met. Life insurance can ensure that a move is either not necessary, or can at least be delayed so that decisions about moving are not rushed and nothing is sold at fire-sale prices.
- Paying for college tuition – when a child is born, we often start a college savings fund and plan to fund it over 18 years. Life insurance can ensure that goal is fully funded.
- Paying for the continued care of a special needs child – While there can be no substitute for a care-giver, there are ways to provide quality of life improvements for a special needs child, and life insurance can help provide that. When combined with a special needs trust, it’s also possible to ensure that state benefits are not lost along the way.
- Ensuring the continued operation of a family business – Key man insurance can provide the capital needed to sustain the business operations as suitable replacement talent or a buyer is found.
- Paying for funeral or celebration of life expenses – These expenses keep rising. While for many families they could be covered from the estate, debating costs for memorial services while grieving is a difficult process. By providing for those costs separately, some of that anxiety can be avoided.
When considering a whole life insurance policy, one might try to achieve all the goals (and others not mentioned) at once. One might try to get a bigger policy to cover future goals too, because one can lock in a premium rate for a lifetime. This is a great solution for many people, but it lacks the flexibility that term life insurance can provide, where you can buy policies for your specific goals until they are outgrown.
With a term life insurance policy, you can define shorter time periods of coverage, which can make the plans more affordable. Remember that the most desirable outcome is not a payout, but to outlive the policy. You can also stack the insurance policies as your needs change. Perhaps you start a 20-year policy to fund a child’s college tuition when they are born, but ten years in you’ve already saved enough that the insurance isn’t needed to achieve that particular goal. You could keep the policy based on providing additional financial security for the family, or let it lapse and invest the premiums instead. Either way the goal has been achieved. Perhaps you start a supplemental 10-year policy just until we have eradicated COVID completely to hedge against that risk, but end up not needing it in a couple years and it lapses.
Because of the flexibility of these plans, the potential to lapse goes up, but that also means the cost goes down for active policies. They are very affordable, and most people don’t realize they could afford the coverage and enjoy the peace of mind that comes with it. In fact, according to a LIMRA study in 2020, more than half of American households estimated the cost of coverage to be three times larger than it actually was, and many younger Americans estimated the cost at five times higher!
If you want to calculate overall needs instead of trying to define what the money could do for specific goals, another method to determine insurance needs could be to try to figure out how much would be needed to replicate your current income, and ensure that all debts and obligations can continue to be paid off. However, realize that inflation will eventually take its toll on purchasing power. This is why so many insurance agents recommend coverage of ten to fifteen times your current income or more.
A client advisor, such as those at Arvest Wealth Management, will be able to help you develop objectives, assess your resources, and identify which life insurance choices may be best for you and your family.
You can’t avoid all problems, but you can plan for some of them, and enjoy the peace of mind that the financial barriers to achieve your goals can be taken care of even should the worst come to pass.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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