Do I need life insurance? It’s a question I never asked myself until a few years ago… and spoiler alert, the answer was yes. Why? In short, I’m married with a one-year-old and I have a mortgage. In this blog post we are going to try to address this question further as well as the way it is approached by a financial advisor. We obviously cannot answer whether you, the reader, specifically need life insurance, but we can guide you in the right direction with information and give you background on how we think about it.
And, if you need help, give us a call. Part of what we do is life insurance. Through our services, we’re able to shop out insurance quotes between the majority of carriers to show you the best rates from a highly rated life insurance company. Armed with new information, you can take our quote, compare it to others out there, and you’ll likely find that we are the most competitive or right there with them. All right, enough of the sales pitch.
Reliable Insurance is not an investment; it's protection
Generally speaking, and from a financial planning standpoint, life insurance is about risk management. For most people, life insurance is not an investment; it is protection. The angle we take is that when we design a comprehensive financial plan for you, we ask ourselves, what are the holes in this plan? What are the risks that could take the plan and/or the investment portfolio down? From that assessment, we come up with ways to address the risks and manage them.
By “holes in the plan”, what we mean is exogenous risk. What are the exogenous risks that might make the plan fail? What might make the investment portfolio go down because of unplanned withdrawals? Obviously, market volatility could cause the investment portfolio to decline, but hopefully the plan already addresses market volatility through asset allocation, a long-time horizon perhaps, and/or downside protection planning.
So really what we’re asking is, what else, other than market volatility, could cause the plan and the portfolio to blow up. A common answer to that question is an unexpected, low probability, high impact event (meaning it’s an event that has a low probability of occurring, but a high impact on the individual or family’s life or lifestyle when it does happen). It might be the loss of primary income through either death or disability, or a long-term care expense such as skilled nursing care. These low probability/high impact risks usually can be transferred to an insurance company through the purchase of a reliable insurance policy.
Comprehensive financial planning is approached as a pyramid*. The bottom rung of financial planning is cash flow management, i.e. where does your money come from and where does it go? Income, savings, investments, fixed and variable expenses. Without addressing this rung, there is little need to progress to the next rung: risk management. This rung is about protecting what you have and protecting the ones you love. In this post we are focusing mainly on life insurance. But know that this rung applies to long-term care insurance, disability insurance, property insurance, and health insurance.
Do I need life insurance?
So that kind of provides some context and information on how a financial planner addresses risk management and life insurance. But what about the individual, what about you? Back to the original question, Do I need life insurance? The simple follow up question is, If I died, would my loved ones’ lives be affected in a financially negative way? If so, how? Because the loss of income would cause them to struggle to afford the mortgage? Then, yes, reliable life insurance is probably a good idea. Because the loss of income would make it so paying living expenses, not to mention children’s future tuitions, much more difficult? If so, then yes, life insurance is probably a good idea.
How much life insurance do I need?
As with most things in this industry, this depends on your specifics, but there are some rules of thumb. Usually, you will want your life insurance death benefit to cover all your debts, including final funeral expenses and your mortgage. This way the surviving spouse or relative is relieved of having to make mortgage payments and to pay off your debts and final funeral expenses. That’s the first and second rule of thumb. The third rule of thumb is to include your children’s tuition needs, especially for college. The fourth rule of thumb is to calculate how many years your family will need support and then multiply your annual income by that number. Obviously, this will apply differently to different spouses, whether both are working or if one stays at home. Typically, a family would need 60-80% of total current income when one spouse dies.
What is Term Life Insurance
At One Bridge, we primarily sell term life insurance for this protection. Again, life insurance, in our view, is not an investment and shouldn’t be viewed or sold as one. Instead, it is just that: insurance and protection. We typically recommend term life insurance since this is the most straightforward, and least expensive form. If you don’t use it, you lose it – just like property insurance. It’s based on your age and health, and you can select different terms to cover the length of need that you have.
Let me sum things up with a quick example. Bob, from Saint Louis MO, is an employee for a local services business. He is married with three kids aged 4, 6, and 8. The family just bought a new home with a 30-year mortgage. Bob’s wife, Sue, also works full time for a local Saint Louis Missouri business. The kids are all in private school. Bob and Sue plan to pay for their private education throughout college if they can. They are looking for reliable life insurance St Louis MO has to offer. Upon assessing their situation, a possible solution to their risk management needs could be term life insurance with a 30-year coverage. For Bill, the amount could cover the mortgage balance, estimated college tuitions for all kids, and 10 years of Bill’s lost income (and the same with Sue’s lost income for her policy). Why 30 years? After 30 years, their kids will all be on their own financially, and their 30-year mortgage will be paid down. Even if one of them did die after the term was over, the need for the original coverage most likely wouldn’t be there anymore.
Life insurance isn’t for everyone. Some people genuinely don’t need it. Additionally, the other more common life insurance solutions we recommend for some clients are life insurance with a long-term care rider and disability insurance. We also use life insurance to fund a buy/sell agreement for the succession plan of a business owner. But we’ll save that for another post.
Lastly, reliable life insurance St Louis MO residents and those throughout the country can choose from varies. When you are considering life insurance, I’d recommend you don’t go directly to one of the life insurance companies that is a household name, like Northwestern Mutual or Allstate. The problem that I’ve seen, most of the time, is that people are loaded up with too much insurance when they go this route. Think about it: the only product most of those companies sell is insurance. Therefore, you’re probably going to be sold more of it than if you went through a financial advisor. So instead, find an independent financial advisor, like us, who is or at least knows an independent agent (like us) who can shop it out for you so that you can compare prices easily. It is usually no additional cost to use an agent vs. buying it direct. Whether you live in Saint Louis Missouri or elsewhere, we can provide you options and advice when it comes to reliable life insurance. Are you also interested in Social Security tax? Find out does Missouri Social Security get taxed today!
