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That was the response from clients when we discussed how much life insurance they needed. They are a young couple with a new baby, a mortgage, and private student loans. They also rely on both incomes and are behind with savings so the life insurance they had through work was not going to cut it. The idea of getting over $1,000,000 of life insurance seemed like a lot, but once we added up the costs, it all made sense.
 
Our current public health crisis has cause many of us to visit (or revisit) our insurance and estate planning needs. Before you scramble to take out a life insurance policy, make sure you understand the purpose of the policy, the best option for your needs, and the basics of how these policies work.
  • How much life insurance do you need? The purpose of life insurance is to provide financial support for your spouse, children, or anyone who depends on you in the event of your death. To determine how much you need, you should consider your financial obligations. This would include your income that would need to be replaced, any debts you’d like to pay off, and future needs such as college expenses or funeral costs. From there, subtract any existing savings and investments that could be used for this purpose. The gap is the amount of life insurance you need. There are many ways to calculate your insurance needs as well as a few rules of thumb (if you’re not up for calculations). This article explains several methods in detail. If you’d like a quick and easy calculator, check out this one.
  • What type of life insurance do you need? For most young professionals, level term insurance makes sense. Term life insurance covers you for a period of time or term, such as 10, 20, or 30 years, and with a level term policy your premiums remain the same every year. At the end of the term, the insurance expires and you stop paying premiums. This type of insurance is ideal because it only covers you for the period of time you need it. Term is also simpler and more affordable than permanent policies that have an investment component.
  • What if you’re single with no kids? Generally speaking, there’s no need for life insurance if no one depends on your income and would be financially impacted by your death. If you anticipate the need for insurance in the future, it doesn’t hurt to get insurance while you’re young and healthy. There are several other reasons why a single person might consider life insurance. This article explains seven in detail.
  • What about group life insurance? Many employers offer a base level of term life insurance as a company benefit, sometimes at no cost to you. While the death benefit can vary, it is often one to two times your current salary. If you need more coverage than the base benefit your employer provides, I suggest looking for an individual policy outside of work. That way, a job change does not impact your life insurance coverage. One exception is if you’re unable to qualify for life insurance because of health issues. Most group insurance provides some level of coverage without proof of good health, so if you have a health condition, get as much insurance as possible through your employer.
One final note: When you’re shopping for term insurance, look for a policy that is convertible. This feature allows you to convert a term policy to a permanent policy at a later date without going through the health qualification process again. Having a convertible feature can provide some protection if your health declines during the term and you later have an ongoing need for insurance coverage.
 
Still have questions about life insurance and what’s appropriate for you? Need help finding an agent you can trust? Let’s have a conversation!
Back in May, I offered tips on mindfulness practices that can change how we think about money. This Sunday, I’m discussing money mindset with Ashley Freeman, executive coach, corporate trainer, and founder of Flourishing Work, LLC.
 
Join us live on Instagram this Sunday, 8/23 at 3PM EST. You can watch our chat here!

Take care,

Chloé A. Moore, CFP®
Founder, Financial Staples

 
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