Comedians answer the When-should-I-get-life-insurance question the best: “The day you die . . . And not a day before.”
Ha! If only life, or life insurance, were so simple.
Of course, if we all knew when we were going to die, it would be an either-or prospect. We’d either plan to run out of money on time and go to sleep quietly, or buy as much life insurance as companies would give us and, three days later, kiss the oncoming bus.
People should ask me the next-best question: “When do you need the most life insurance coverage?” Answer: When you have the most people depending upon you for the most expensive reasons.
And then they should ask “What’s the best type of coverage for these situations?” Answer: Depends.
In this installment, we’ll consider a common situation and an every-day life-insurance solution. In subsequent blogs, I’ll address more complex situations with other solutions.
Term Life Insurance
This is the cheap and temporary type—-only for a “term” of coverage, not a lifetime of it. Get as much of this type as you can when you’re young and healthy, and keep it until you don’t need it any more, no matter how long the actual term may be.
Let’s look at a couple different scenarios where term is appropriate.
- When your mortgage is more than half the value of your home. Most of my clients include their mortgages as part of their total coverage and then reduce the coverage amount as they pay down their mortgages. That way, they’re never paying for more coverage than they need.
- When you have a family to support with lifetime income and education needs. Here again, make these numbers part of your overall calculation, and then reduce your overall coverage as you retire the need.
For instance, let’s assume a 30-year-old male has a $400,000 mortgage, two children whom he’d like to send to private university 15 years from now and a spouse whom he’d like to provide with 20 years of survivor income. His current income is $100,000 per year, or roughly $6,000 per month after tax. The total life insurance need would be calculated by adding the current mortgage ($400,000) to the education need ($60,000 per child per year today, doubling in 15 years at five-percent growth = $960,000) and the survivor income number ($6,000 per month after tax that will double in 20 years at about three-percent growth = $2,160,000). His total need would be $3.52 million for the first year, and then less and less in subsequent years.
Good news: He’s 30 and healthy and doesn’t smoke. His premium for a $3.5 million 20-year term policy would be about $175 per month.
More good news: He would consult with his life insurance agent every three years and reduce the coverage amount according to his reducing need, using a number of different methods.
At the end of 20 years, he could convert the last amount of coverage to a permanent policy (the subject of my next blog), or simply let it expire. That coverage will have done its work when his second child is on his or her way into the world, college diploma in hand.
If you’d like to have a seasoned pair of eyes evaluate you particular circumstance, I’d be happy to take the time to listen to your scenario and help you plot a course of action. Just fill out the contact form below and I will get back to you right away!