You know how I know you are a responsible, caring adult? Because you give a crap about what happens should you pass away unexpectedly. You have officially reached adulthood when you start thinking about someone else's life other than your own. Feels kinda good, doesn’t it? Not only are you thinking about someone else, you are looking for ways to better their lives should something unforeseen happen to you. You get a gold star my friend.
In the quest of becoming a better human, you may stumble upon the most practical way to ensure your loved ones’ success should you croak. That my friends, is life insurance. If only the journey ended there....but it’s only just begun. To prepare yourself further, you need to ask (and answer!) these three questions before purchasing life insurance:
How much life insurance do I need?
Where should I get my life insurance from? -and-
What type of life insurance should I get?
Have no fear. I am here to guide you through this journey of life...insurance.
HOW MUCH LIFE INSURANCE DO I NEED?
This is where we start with all of our clients. It makes no sense to start with the product and then calculate the amount you need. Hellllooooo, you are trying to create a bucket of money for your family should you pass away early. Therefore, if the conversation with an insurance agent/broker starts with the advantages of a product, kindly (and directly) revert them to the task at hand.
To calculate how much you need, you can do one of two ways:
Dan and I like to keep things simple. Therefore, we tend to utilize strategy #1) multiply income by years of coverage. We also remind folks that there is no right answer here. We don’t know when our time will come. If Dan died tomorrow, I could remarry the super wealthy yacht salesmen and never need a dime of his insurance proceeds (cause that’s so my type…). We just don’t know. The point is, pick an amount you and your beneficiaries are comfortable with. I’m going to say that again, pick an amount you and your beneficiaries are comfortable with.
Where should I get my insurance from?
According to my quick online search, there is somewhere between 700-900 life insurance providers out there. As high as that number sounds, there were 2,000+ companies in the 1990s. Although those numbers are a bit overwhelming when it comes to selecting just one, there is a benefit: more competition = better rates for consumers!
Dan and I do not sell insurance. We used to have our insurance licenses, but we dropped them to be a fee-only financial planning firm. Therefore, when we recommend our clients to buy or increase their life insurance, we outsource this step to an insurance broker, rather than an insurance agent. We recommend this to all of our clients.
An insurance broker is able to compare rates with multiple carriers. An insurance agent works for one insurance carrier and is limited to that carrier's offerings. We spoke with our friend, Taylor Gilbert (a local insurance broker), for his perspective. Gilbert explained to us that by working with an insurance broker, the client can “leverage [the broker’s] time and not spend [their own] time reaching out to multiple different agents to gauge the overall marketplace.”
Just because you work with a broker, doesn’t mean you won’t have the ability to bundle all of your insurance like you can with an agent. Gilbert said, “we also have the ability to shop directly with certain carriers. We take the time to assess the best option whether that’s bundling or not.”
When it comes to selecting who to purchase life insurance from, consider working with an insurance broker rather than an insurance agent. It can sometimes be confusing to know how to tell the difference. Connect with us today for unbiased help on this front.
What type of life insurance should I get?
99.999999999999% of the time we recommend Term Life Insurance to our clients. Are we biased in this? Absolutely. Have we each been in the industry for 10 years, worked with thousands of clients, and have oodles of education around this topic? Right again! As two CFP® professionals, we both own (and have only ever owned) term life policies. However, it’s still important to know what exists out there in case you feel differently.
This policy is known as a “permanent” policy. The premium you pay not only provides you with a death benefit, but it also incorporates a savings component called a ‘cash value.’ The policyholder can access the cash while alive, by either withdrawing or borrowing against it. At the insured’s death, the beneficiaries receive the death benefit, not the cash value.
A Universal Life (UL) Insurance policy is a form of a “permanent” policy. Therefore, it lasts as long as adequate premium payments are made and the insured individual is alive. UL policies allow for more flexibility than a whole life policy. Owners of the policy can adjust their premium amount and death benefit. Just like whole life insurance, upon death, the beneficiaries receive the death benefit, not the cash value.
A Variable Life Insurance policy is yet again, a form of a “permanent” policy. The reason it is called “variable” is because of the investment risks (or variability) within the policy. The cash value can be invested in securities and investments. These policies tend to be the most expensive because of this added feature.
Unlike a permanent policy, term life insurance lasts for a specific amount of years. If you die within that specified time frame, your beneficiaries will receive the death benefit. There is no cash value accumulation with a term life insurance policy.
We always ask our clients how much insurance (and at what price) can they get through their employer. Most of the time (but not always!) it’s cheaper, or free! It’s difficult to get the full amount needed, but we see our clients obtaining anywhere from 1-6 times their salary through work.
If you are reading this and curious about why we feel so strongly about term life insurance, email us today at hello@fyoozfinancial.com. If you want to debate the topic, I encourage that discussion as well. Not because I am a know-it-all, but because I welcome the opportunity to learn from your perspective.
There you have it! The three questions to ask yourself before buying life insurance: how much, where to get it from, and what type. As a reminder, Dan and I do not and will not sell you an insurance policy. As fee only financial planners, we outsource this to a trusted insurance professional. Our clients benefit from us working with them and the insurance broker to be sure they aren’t over sold. If you find yourself needing an unbiased financial professional on your side, set up a time with us today to start the conversation.
- Natalie
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
