What separates successful investors from the rest of the pack? Knowing how to anticipate and manage riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. It’s a skill that’s even more important when it comes to securing your family’s future. That’s why life insurance can be a cornerstone of any financial plan. Here’s a quick read on how to determine how much insurance you may need and the type you should buy.
How Much You Need
The purpose of life insurance is to replace the family breadwinner’s earning power if they pass away unexpectedly. The amount of coverage you should have depends on your family’s needs as well as your potential lifetime earnings.
The aptly coined acronym LIFE—liabilitiesLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.)., income replacement, final expenses and education costs—is a good guide for estimating how much life insurance you need.
- LiabilitiesLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.).
- Income replacement can be trickier. A comprehensive estimate anticipates variations in income over time—in some professions these may be steep. (A surgical resident might be expecting her income to climb sharply in a few years, for example.) But a useful rule of thumb is to multiply your current income by the number of working years you’d like your insurance to cover—10 years is a good starting point.
- Final expenses include funeral costs and the legal fees necessary to dispose of your estate. A standard estimate is $50,000.
- Education costs include college tuition and/or school fees if your children are privately educated. Several factors (such as current tuition, expected tuition increases, your child’s age and how much you plan to pay for) go into making a precise estimate. Fortunately, there are online calculators that can run the numbers for you. We like the ones from The College Board and Vanguard.
Adding up the four LIFE numbers can help you determine the amount of life insurance you should get to ensure that your beneficiaries won’t have any financial worries.
What Type to Get
Figuring out the size of the policy you need will help determine the type of insurance to purchase. If you need more than $1 million in life insurance coverage, “term life” insurance is generally the most cost-effective option. Term life means that the policy is only in place for a set period—usually 10, 20 or 30 years. When that term comes to an end, the policy expires, and you’ll have to purchase a new policy (or renew your old one) to continue the coverage.
Life insurance can be a cornerstone of any financial plan.
“Whole life” or “permanent” policies have no expiration date. The policy runs from the moment you buy it until your death, and the amount your beneficiaries will receive is guaranteed. Those two conditions can buy considerable peace of mind—but come with a hefty price tag. Premiums for whole life policies can be 10 times as much as term life for the same individual.
Ultimately, the kind of life insurance you purchase should match your needs and situation. Since these will change over time, it’s a good idea to review your life (and disability, if you have it) insurance policies yearly.
If you have questions about your existing coverage or need help evaluating a policy you are considering, please contact your wealth management team. We will be happy to assist.