March 28, 2016 | Marvin H. Feldman, CLU, ChFC, RFC, President and CEO of Life Happens | 2 💬
Have you ever thought about what would happen to your family if something happened to you? All of us have at one point or another, even if it was in the form a frantic mental love note sent to family members during bad airplane turbulence. But concern for protecting your family financially doesn’t have to turn to worry if you follow these steps.
1. Take a look at what financial security means for you. Just as “rich” means different things to different people, so does financial security. Start by asking yourself what would happen if the primary breadwinner died prematurely (that could be you or your spouse or partner). You’d want your loved ones to be OK financially, but does that mean having enough income … for a lifetime? … so they wouldn’t need to move out of your home and neighborhood? … enough money for your spouse or partner to transition to a job if they are a stay-at-home parent? … to provide for your kids through college or maybe just a portion and have them pay the rest? Once you’ve established that, you can move on to making sure a plan is in place.
2. Determine needs versus wants. They are not the same thing. You may want 100% financial security—to provide for your spouse for their lifetime and your kids through college, but can you afford it? Most of us don’t have savings to achieve this, which is where life insurance comes in. You’ll want enough money or death benefit that if invested at the current market rates (2%-4%) that you can generate your (or your spouse’s) missing income. That means you may need more life insurance than in the past. Before, the invested proceeds of $500,000 life insurance benefit could have replaced, a $50,000/year salary. Now you might need $1 million of coverage to achieve the same goal.
3. Look at the full picture. This isn’t just about life insurance—that’s just one piece of the formula. You need to look at all your assets such as money in retirement plans, your benefits packages, investments you might have, what money your family would be getting from Social Security, the life insurance you already have in place, etc.
In addition, people often have multiple families to care for with economic requirements that may be laid out in a divorce decree. Or they may have special needs children who will never be able to work. In that situation, a trust should be set up—funded with assets or death benefits—to create an income stream for as long as they live. Plus, many of us will have either adult children or our aging parents living with us now or in the future who we may be responsible for financially.
Once you have these numbers, you can figure out what the shortfall is—which can be funded with life insurance or more life insurance that you currently have. This doesn’t have to be a particularly difficult task to start. Use this online Life Insurance Needs Calculator, which has inputs for this type of information and can help you get a working idea of how much life insurance you might need to cover any shortfall.
4. Get help if you need it. Sometimes our need for life insurance is straightforward. Often, though, when we need to factor in special circumstances it can become more complicated. Insurance agents are there to help. That’s their job. They will sit down with you, at no cost or obligation, and go through these steps with you and then help you come up with a solution you can afford. You may “want” a permanent life insurance policy to secure your family’s financial future, but an agent may show you that what you “need” is really a term life insurance policy that you can afford without straining your budget or perhaps it is a combination of the two. If you don’t currently have an agent to work with, you can start with tips on finding one and our Agent Locator.
5. Don’t forget about disability insurance. If you and your family depend on your income, then you need to make sure you have disability insurance. Ask yourself honestly if you were sick or injured and unable to work, how long could you survive financially without your paycheck? In a survey that Life Happens did we found that most Americans would feel the pinch in a month or less. Keep in mind that Social Security pays disability benefits that average around $1,100 a month, and it can take a year—often much longer—to even get that payment.
Disability insurance pays you a portion of your income if you become sick or injured and unable to work. It may be offered as part of your benefits package through work, but be sure to double check with your HR department, and find out what percentage of your income is replaced (often 60% or less). You can also purchase an individual policy, which you own, and so isn’t dependent on your benefits package being reduced or even eliminated. To get a working idea of how much you might need, you can use this Disability Insurance Needs Calculator. Again, this is something that an insurance agent can help you figure out as well.