Prior to founding my company in 2019, I spent over two decades with a single insurance company. During this time, I sold countless insurance policies. More importantly, I was able to deliver some meaningful checks to a handful of families impacted by a sudden loss. These were tough conversations to have, made a little easier knowing that life insurance proceeds would fill a financial void. The emotional void always takes longer to heal, some may say it never does. Everyone handles the emotional challenges of losing a loved one differently. Knowing that businesses may continue to operate, the house may continue to be lived in, kids may maintain their friends, income continues to arrive, college educations may be paid for, and retirements may continue; all these things are powerful and made possible by life insurance.
Each family grieves differently and when financial decisions are compounded on top of a tragic life event, decisions are often difficult. Sometimes it’s just better to wait and not have to react to immediate financial decisions. That’s the value of owning life insurance from my perspective. Life insurance buys time and removes financial stress that would be compounded tenfold if a policy didn’t exist.
Talking about life insurance and death is uncomfortable, most would prefer to visit the dentist instead. By not having a conversation and “quantifying what enough means” it leaves a surviving spouse or partner and perhaps children to react to a sudden event. With few financial options available, the family is left in a tight spot and may be forced to rely on friends and a go fund me page. It doesn’t have to end like this, it can be scripted better with planning and strategy.
September is Life Insurance Awareness Month and it’s a helpful time to consider how much life insurance you own. The following questions offer some direction and tips on making the most of what you have and perhaps prompting you to fill the gap if necessary.
How much life insurance does your employer provide you? Most companies offer life insurance as a benefit to their employees. The amount of protection may be a flat dollar amount or a multiple of base income. For those who have incentive compensation or variable income as part of their pay package, it’s a good idea to understand how much coverage would be paid out in the event it’s necessary. For example, Jane is a corporate executive earning $350k a year. Her employer policy offers up to 5 times base compensation up to a maximum death benefit of $1,000,000. In this example, Jane’s coverage is capped at $1,000,000 not the $1,750,000 which represents five times her pay. I’ve found in practice that may executives can readily share the multiple of income they have elected in coverage. What’s more difficult and often unclear is recalling the maximum policy limits placed on employer provided policies.
Pro tip: Don’t count on accidental death benefits when calculating the above number. Why? For accidental death benefits to be paid out, the definition of “accident” must be met by the insurance carrier. This is more difficult than one may imagine as each insurer has their own definition. A better alternative is to increase your basic coverage or consider buying up more protection if your employer provides this option.
Have you added any family members to your employer policy? If so, how much protection is there on your partner or spouse? Any coverage on the children? It’s a good idea to create a spreadsheet of what you’ve elected or save a screen shot from your open enrollment elections.
You may have purchased your own policy many years ago when you had your first child. Now, you have three kids, a bigger mortgage, and likely more investments, assets, and cash. Many professionals and families elect to purchase individual life insurance policies to provide the right level of protection to their loved ones. Why is this? Most employer policies limit coverage as described above and don’t allow employees to take their policies with them should they switch jobs. This may cause a problem should you leave your employer proactively or reactively. As the job market continues to be competitive, there is a high probability you may not retire with your current company. This wasn’t the case for our parents and grandparents who relied on their employers to provide so many benefits, insurance included. Today’s world looks much different and like so many decisions, the responsibility falls on us to ensure we have enough life insurance for those we care about.
Pro tip: Check your beneficiaries! Updating your beneficiary elections on your policy/s overtime is important. This ensures the right insurance proceeds go to the right person or entity at the right time.
So how much life insurance is enough? In practice, I’ve found most families want to cover essential expenses, pay down debts, fund some college education goals, and replace a portion of income that’s been lost. Life insurance decisions are personal and vary based on lifecycles and lifestyle choices. The right insurance amount depends on how you choose to save and spend today and what you’d like to leave loved ones should you check out prematurely.
Life insurance needs don’t go away once the kids do. A common misconception for those in their 50s is that they don’t need life insurance once they become empty nesters. What’s easy to forget is that both spouses tend to be maxing out retirement contributions during this time leading up to retirement. Failing to insure both spouses and their incomes prior to retirement may lead to financial difficulties should a spouse pass unexpectedly.
Pro tip: Insurance premiums are directly correlated to your age, current health, and the size of the policy you are considering. Purchase a policy that you can afford that covers the risks important to you. One risk that is often underestimated is a change in health. Purchasing a policy before this happens or when it’s possible allows for more flexibility and a stronger safety net.
There are life insurance policies that last for short periods of time and policies that last your entire life. Some policies are designed to expire before you do. Some integrate long term care considerations should you be unable to take care of yourself one day. Other policies have benefits that you may utilize while alive. If Baskin and Robbins has 31 flavors of ice cream, you can bet that there are many more flavors of life insurance.
Pro tip: Select a good insurance carrier with solid ratings. Ideally you are provided several choices of companies to choose from so you may select the best option based not only on price but on company strength and the ability to pay a claim when it matters.
Sorting your insurance choices on your own may be a difficult task. It may be valuable to consider finding someone you can trust and start a conversation with. If you or your family are looking for answers on how your insurance choices relate back to a broader financial plan, reach out below as we’d be happy to chat with you.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.
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