The Least Popular Asset You’ll Ever Own
The day I took a life insurance policy out on myself was an emotional day. The day I wrote a policy for my husband was even worse. Planning for your own death, especially at a young age, is not fun. But if you have a young family it is incredibly important. The moment we laid eyes on our newborn son we knew we’d do anything to protect him, and that meant making sure he was taken care of even in the event one of us wasn’t here (this seemed like a great opportunity to share a picture of tiny baby Roman).
The loss of a spouse and parent creates a world of unknown and hundreds of question marks. It’s important to make sure money isn’t one of those question marks. While everyone prays they never have to use their life insurance, the peace of mind it provides, knowing their family would not fall into financial disarray, is worth every penny.
Now there are different types of life insurance and each fits a different need. For the sake of this post, I am going to discuss term life insurance. Term life insurance, as it sounds, is an insurance policy you own for a set number of years. Common time frames range from 10 to 30 years. Term policies tend to be cheaper than their counterparts and have less bells and whistles. While universal life policies, that cover one’s entire life, have plenty of perks and options, the cost of a term policy is much more reasonable for most young families. Term policies are sufficient in serving the purpose for which they are purchased; protecting your young family. Now, the biggest drawback to a term policy, if you can even call it that, is the “use it or lose it” nature of the policy. If you own a 20 year term policy and don’t die within 20 years (thank heavens!) the coverage ends and all premiums paid are lost. You may be given the option to extend the policy or convert to a permanent policy but that’s for another day.
The amount of insurance needed varies by family. When determining the value of your policies there are a few questions to ask yourself. What expenses will your spouse need help with immediately? These are things such as childcare, mortgage, car payments; the things that will allow them to maintain their daily standard of living. It’s then important to think about long term financial needs. Do you want your family to stay in their current home? You may want a policy that allows your spouse to pay off the house. How will your children pay for college? This expense is discretionary and there are plenty of families in which children pay for their own college; there is nothing wrong with that. But if paying for your children’s education was part of the long-term family plan, don’t let it be derailed by an unexpected death. Life insurance is not designed to cover every expense into perpetuity. It is meant to allow your family to maintain their current standard of living while grieving and learning their new normal and to avoid complete derailment of long term financial goals. Another big question to answer when determining the amount of life insurance your family needs is how much you can afford. I am of the mindset that if you have a young family you can’t afford NOT to have life insurance, but the overall amount can vary depending on how much you can afford. You may want your children’s college to be covered, but that might not be reasonable. Find what fits in your budget but understand that any amount of insurance may stretch you a little and that’s ok.
One thing I see often is life insurance on the working spouse but not on a stay at home mother or father. While at first glance that seems to make sense, a stay at home parent has a large monetary value. If the “domestic engineer” passes away the working spouse is now left to juggle work and raising children and keeping a home. It is likely the surviving parent will need to hire outside help, which can be costly. A life insurance policy that would cover the cost of additional help around the home as well as childcare for a set amount of time (maybe a year or two) helps to lighten the load of a newly single parent. It could also potentially provide the working parent a little extra time to grieve with family.
Now, what about un-insurability? Typically, being young is a big benefit when it comes to buying life insurance. You are usually healthy and someone in their 20s is usually further from death that someone who is 80; you’re a better insurance “bet.” There are people however, who, for different reasons, are un-insurable. My sister, for example, was diagnosed with Type 1 Diabetes at the age of 7.
Because of the disease she was unable to qualify for coverage. She has a great job and is an important earner in their home. So, what now? If you are un-insurable you have a couple options. Sometimes people are denied coverage for reasons that can be changed. It’s incredible what some companies will approve. If you’ve had a heart attack you can potentially qualify for coverage if you’ve been treated and enough time has lapsed since the incident. But, let’s say it’s something, like Diabetes, that you cannot change. My recommendation in that situation is to self-insure. Take every dollar you would have spent on monthly premiums had you been approved (a hypothetical insurance illustration can give you a rough estimate) and save it. Invest it in something getting you a little yield but that is conservative should your family need it. And one day, when your children are grown and out of school you can take that nice little nest egg and go on a “thank goodness I’m not dead” vacation! Just kidding, you should save it for retirement! Definitely retirement (I’m obligated to say that; it’s my job).
So, while life insurance is the least popular asset you’ll ever own and something we all hope to never use, should the unthinkable happen it’s so important to have. It’s kind of like creating a will. Deciding who will raise your children should you die is truly one of the most gut-wrenching things you’ll ever do, but once it’s done you never have to think about it again and you have peace of mind knowing your family is going to be taken care of. If you have any other questions about life insurance or want to create a plan for your family, let me know. I am always happy to help!
Views expressed are the current opinion of Molly VanBinsbergen, but not necessarily those of Raymond James or RJFS, and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Life insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Guarantees are based on claims paying ability of the insurance company. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment or insurance decision, please consult with your financial advisor about your individual situation.
