In a recent year, more than $140 billion of new life insurance was purchased in the United States. Did each individual really need to be covered by life insurance? Was the policy purchased the right one, and was it purchased from a reputable company and agent? Did the buyer pay the right price?
First Ask Whether or Not, and For How Much, Your Life Should Be Insured
Anyone whose death will result in financial losses to others should be covered by life insurance unless other resources are sufficient to cover the losses. At a minimum, there will be final expenses such as for funeral and burial. Beyond that, the need depends on the person’s family situation. Parents with minor children almost always need life insurance. People who generally do not need life insurance include children and people with no dependents who have no desire to leave an estate. People who are sometimes unnecessarily insured include retirees who may have already built up assets sufficient to provide for income for survivors and to cover final expenses. The only way to really know how much additional life insurance you need is through the needs-based calculations covered earlier in this chapter. You should do this yourself and not rely on an insurance agent who has a vested interest in selling you some life insurance.
Then Properly Integrate Your Life Insurance into Your Overall Financial Planning
Advertising and sales promotion literature for cash-value life insurance often pushes the idea that this type of insurance is a good investment and is appropriate as a retirement savings vehicle. Most independent personal finance experts would disagree strongly. Instead, they typically advise people to take a broader perspective and think of life insurance as just one facet of their plans. Specifically, you should always think in terms of the two longevity risks: the risk of dying too soon and the risk of living too long. Term life insurance most effectively solves the dying-too-soon problem. Investing through taxsheltered retirement plans most effectively solves the living-too-long problem. Your need for life insurance will change significantly over the course of your life. So should your life insurance plan. You should reassess your plan every two or three years and any time your family or employment situation changes. Keep these facts in mind:
First Ask Whether or Not, and For How Much, Your Life Should Be Insured
Anyone whose death will result in financial losses to others should be covered by life insurance unless other resources are sufficient to cover the losses. At a minimum, there will be final expenses such as for funeral and burial. Beyond that, the need depends on the person’s family situation. Parents with minor children almost always need life insurance. People who generally do not need life insurance include children and people with no dependents who have no desire to leave an estate. People who are sometimes unnecessarily insured include retirees who may have already built up assets sufficient to provide for income for survivors and to cover final expenses. The only way to really know how much additional life insurance you need is through the needs-based calculations covered earlier in this chapter. You should do this yourself and not rely on an insurance agent who has a vested interest in selling you some life insurance.
Then Properly Integrate Your Life Insurance into Your Overall Financial Planning
Advertising and sales promotion literature for cash-value life insurance often pushes the idea that this type of insurance is a good investment and is appropriate as a retirement savings vehicle. Most independent personal finance experts would disagree strongly. Instead, they typically advise people to take a broader perspective and think of life insurance as just one facet of their plans. Specifically, you should always think in terms of the two longevity risks: the risk of dying too soon and the risk of living too long. Term life insurance most effectively solves the dying-too-soon problem. Investing through taxsheltered retirement plans most effectively solves the living-too-long problem. Your need for life insurance will change significantly over the course of your life. So should your life insurance plan. You should reassess your plan every two or three years and any time your family or employment situation changes. Keep these facts in mind:
- During childhood and while single, your need for life insurance is either nonexistent or very small because few, if any, other people rely on you for financial support
- With marriage comes the increased responsibility for another person, although life insurance needs probably remain low because spouses usually have the potential to support themselves if the other partner were to di
- The arrival of children, however, triggers a sharp increase in life insurance needs. Children often require as many as 25 years of parental support, during which time they usually have little ability to provide for themselves
- As children grow older, the number of years of their remaining dependency declines, reducing the need for life insurance.
- Parents with grown children see a reduced need for life insurance because their retirement investment program will have grown large enough to cover the losses that death might bring.
- Retirement and widowhood reduce the need for life insurance or may even eliminate it altogether.
Figure 12.3 depicts a life insurance and investment plan recommended over an individual’s life cycle. This plan is built on two cornerstones: (1) the purchase of term insurance for the bulk of life insurance needs (because term insurance is more flexible than cash-value insurance and provides more protection for each premium dollar) and (2) a systematic, regular investment program. The first type of life insurance to buy is apermanent cash-value policy with a guaranteed insurability option. A $20,000 to $50,000
policy is sufficient to cover final expenses, the only permanent need that is present throughout life. The remainder of your life insurance should consist of multiple term insurance policies that you start buying when you begin to have dependents. These should be five- or ten-year, level-premium, guaranteed renewable policies in increments of $100,000 or more. The policies should be layered so that you can drop policies as your need declines. By the time you reach retirement, you will have dropped all your term policies and the cash-value policy can remain to pay final expenses or be cashed in to provide a little retirement income. Of course, this scenario requires that you implement an investment program to save for retirement.
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