Many families have a need for life insurance. But more times than not, they do not act because they are afraid of the process.
Life insurance is a great tool for protecting heirs that depend on an income stream or to replace the economic value of a stay-at-home parent. But life insurance is not an investment, by any means. The fees associated with mortality and administrative costs are just too high to make life insurance a good investment choice for most circumstances.
It is very unusual for us to recommend anything other than term life insurance. Term life insurance is pure protection and is the most affordable type of life insurance available. You can purchase a death benefit that matches your need for final expenses, debt reduction, education funding and income replacement. You can tailor the term to the family's personal needs. Term life insurance can be purchased with guaranteed renewal and premiums that fit your unique circumstances. You can choose 5-year, 10-year, 20-year, and even 30-year policies. If you have preschool children, a 20-year term policy might provide the protection you need until the children are no longer dependents. If you have teenage children, a 10-year policy might do the job.
Because life insurance is an income replacement vehicle, it is important to know how much income needs to be replaced. If the goal is to replace $50,000 per year of income, we divide the income to be replaced by 4% or 5% to determine the lump sum needed to replace that income. For a young couple with children, we will often add the cost of funding higher education and a mortgage pay-off amount to take any worry about expenses off the table. Finally, we subtract any investment or retirement savings from this amount, as those assets can be used to provide for some income loss.
The goal of life insurance is to provide the needed protection at the lowest possible cost. Because there is a chance that insurance agents are conflicted when it comes to calculating need and policy types, it is usually better to work with a fee-only financial planner to determine your insurance needs before you speak with an agent. CLICK HERE to access our free Life Insurance Needs Worksheet.
To discuss your personal life insurance needs and other facets of financial planning, schedule a meeting with Oak Street Advisors today.