There are four areas that I believe should be a top priority when it comes to the beginning stages of financial planning:
- Have an emergency fund
- Have a handle on your cash flow
- Have a debt repayment strategy if you have consumer debt
- Protect yourself and your loved ones
Ask yourself this, “if something tragic were to happen to me tomorrow, would my family be okay financially?”
If no one is depending on your financially; insurance protection might not be a top priority. However, if your answer to the above question is no; Then it’s time to speak with your financial planner. If you have loved ones that rely on your income or you depend on a loved ones income, life insurance needs to be moved to the top of your financial priority list. I’m here if you have any questions.
Often a misunderstood topic, life insurance can be relatively simple and straightforward. I’ve seen clients on both ends of the spectrum, either under insured or over insured, because they don’t quite understand what they need or what is available to them.
Life insurance is one of those areas where your own philosophy is going to ultimately determine what you need. That is why it is important to understand the different aspects of insurance before purchasing a policy. The bottom line question to ask is, how can the purchase positively impact my loved ones in the best way possible?
Triggering Events of Life Insurance
Typically, life insurance isn’t needed until there is someone in your life who is dependent on your income or vice versa. With that, common triggering events often include:
Marriage often means you become dependent on the other’s income, resulting in a need for insurance coverage to protect you both from financial loss.
Having a Child
Having a child is one of the top reasons to make sure you’re insured. Having a child means lots of additional expenses that come about: childcare, education, etc.
Buying a House
A sudden increase to your expenses and liabilities, especially if you share this milestone with a partner, is a triggering reason to make sure you have the proper insurance coverage.
Divorce is a major life change that requires a reevaluation of all areas of financial planning. But you could suddenly become over insured or under insured due to divorce, so it’s best to have a life insurance needs analysis does.
An increase in income is a surefire sign that you need to rethink your coverage. You are putting yourself at risk of an insurance gap when you’re income increases, as this tends to mean lifestyle inflation for most.
Getting a New job
More often than not most employers will offer group term life insurance, but some don’t. So if a job change means a change to life insurance coverage, this means you’ll need to be proactive about making sure you’re properly covered by obtaining coverage elsewhere.
With retirement often comes a change in income, resulting in a change in the amount of insurance needed. Also, when you retire you typically lose your group term which could mean a sudden insurance gap.
What are the different types?
Term is very straightforward, and usually the most inexpensive life insurance out there. Simply put, it is a fixed death benefit that is paid upon the passing of the insured. You pay a monthly or annual premium for a set number of years (term).
This is a policy that does not expire. Where a term policy will only have a death benefit feature, permanent insurance typically has a savings (cash value) feature as well. The most common types of permanent insurance are Whole Life and Universal Life.
Which One is Right For Me?
This is going to come down to your personal preference and financial situation. Term insurance is going to be on the less expensive side and might be more appropriate for someone who doesn’t have a lot of wiggle room in their budget.
Permanent is going to be for someone who likes that savings feature in addition to a traditional death benefit, but this comes at a higher cost.
I highly encourage everyone to do some research to understand the pros and cons of each type of life insurance to see what resonates best with them.
How much insurance do I need?
There is no direct answer, like everything else related to financial planning, it depends. A common rule of thumb is to have a death benefit of anywhere between five to ten times your annual salary. As a baseline, determine what you want to be covered upon your passing. This often includes:
- Funeral expenses
- Mortgage payoff
- Education for children
Remember, a great place to start is by looking at your employer benefits. Most employers offer group term life insurance without the need to go through underwriting. This means no application or medical exam to obtain coverage and often it’s at little to no additional cost to you. After you’ve enrolled through your employer, take the initiative to have a life insurance needs analysis done to see if you have a gap.
If you have more questions or would like to see how much insurance you need, don’t hesitate to reach out.
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”CC
Carolyn Rowland is in the Milwaukee WI, area.