By Jason Silverberg, CLU

You insure your health. You insure your car. You even insure your diamond wedding ring. So what about your life? September is life insurance awareness month and it’s the time of year where families are encouraged to review their life insurance coverage and make sure it is the right fit for their current circumstances. To help with the process, below are some frequently asked questions about life insurance that should prove helpful.

What is Life Insurance?
Life insurance is not just a piece of paper that you pay a premium for. It is truly a gift that you give your loved ones to make sure that they will be okay. No one wants to be a burden on their family. With the purchase of life insurance, you are ensuring that the people you care about will live fruitful financial lives well after you have gone.

Who needs it?
The answer to this one is pretty simple. If you have anyone who depends on you for financial support, you need life insurance. This can be a spouse, partner, child, grandchild, parent, sibling, or even a business partner. Don’t forget, even stay-at-home moms and dads need life insurance.

How much do I need?
When purchasing life insurance, figuring out how much you need is a very individualized process. Some say you should have a multiple of salary, while others focus more on a flat amount, like $500,000 or $1 million. I often ask these people why they chose these amounts and they usually say that it sounded like a nice round number. The true answer lies in what you want to have happen. Let’s use a fictitious couple, Brenda and Nate, to illustrate how to come up with the right amount.

1. Outstanding Debts. Many times people want to pay off all of their loans, so that their family won’t have to worry about the financial burden. The big one here is the mortgage. Brenda and Nate own a home with a $350,000 mortgage that they would like paid off if something were to happen to either of them.
2. College and Retirement Savings Goals. Many families strive to put money away for the future. If either parent died, college savings and retirement accounts would probably be pushed aside for more pressing expenses. What if we could create an instant pot of money for the kids to use for school and to stimulate our retirement accounts? Brenda and Nate are saving diligently for their children’s college expenses. If either dies, they would like $100,000 put aside for each of their two kids for college. They also figure that a lump sum of $300,000 should be enough to stimulate their retirement savings.
3. Child Care. Depending on your situation, you may need to think about child care costs. Brenda is a stay-at-home mom. She takes care of the kids and if something were to happen to her, Nate would need to hire a nanny. Also, if Nate were to die, Brenda would probably need to go back to work and hire a nanny as well. They both decide to incorporate $250,000 ($50,000 for 5 years) in their life insurance amount.
4. Maintaining Your Lifestyle. This is where many get tripped up. Think about it. If you were to be given a tax free check each year to maintain the lifestyle that you are accustomed to, how much would you need, and for how long would you need it? Keep in mind, all of your debts are paid down and your savings goals are funded. Brenda and Nate figure that they would both need about $50,000 per year for 5 years in tax free income, totaling $250,000.
5. Final Expenses and Emergency Fund. When a loved one passes away, it’s hard enough dealing with the emotional loss. Many don’t want to have to worry about paying miscellaneous bills and funeral costs during this time of mourning. Brenda and Nate agree that an extra $50,000 should be added for final expenses and money to pay the bills.

In our hypothetical example, both Brenda and Nate will need $1.3 million of life insurance coverage. At this point, many people see this number and their eyes widen with shock. Here is where there is a tendency to say to ourselves, “well, do we really need to pay for college for our kids?” Or “We can do without paying off the mortgage.” When purchasing life insurance, the conversation should be around what you both want to have happen. And interestingly enough, it is not as expensive as you may think if funded with the right type of coverage.

What type should I buy?
There are many different types of life insurance. In a general sense, there are group and individual plans. Group coverage is usually found at work, where your company provides a certain amount that they either give to you or that can be purchased. Watch out, you may be overpaying for this type of coverage if you are healthy and a non-smoker. With group plans, everyone in the group usually pays the same rate. If you can extract yourself from this pool and get individually underwritten, you may be able to lower your costs.

Individual policies usually come in two flavors, Term and Permanent coverage. Term insurance is like renting your coverage from the insurance company for a specific period of time. If you miss a premium payment, you are usually dropped. Because of the “no frills” nature of term, the costs are very low. These types of plans are good for people who want to insure themselves for only a specific period of time. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges.

With a permanent plan, it is like you own your policy. These plans usually last for a long period of time or your whole life and build equity that you can withdraw or borrow tax favorably. Premiums are flexible and can be missed in certain circumstances without losing your coverage. Costs are usually a bit higher than term plans, but if there is a long term need, permanent plans will hold a greater value to the policy owner.

In our example, Brenda and Nate would probably purchase the majority of their coverage using term insurance, since they have a greater need when the children are young. They also would like permanent insurance for the longer term needs. This would give them the best of both worlds, a low cost insurance strategy that also builds cash value, with some coverage lasting the rest of their lives.

Who should I buy from?
It is critical that you choose a quality company from whom to purchase your coverage. Life insurance is simply a promise and you want to make sure that if you pay your premiums, the company will make good on their end of the deal. Take a look at a company’s ratings and see how they align with their peers.

You also want choose a knowledgeable advisor to help you navigate through the underwriting process. It can get quite confusing and having someone to guide you along the way helps make everything a lot easier, especially when you’re dealing with a topic that many don’t like to talk about.

For more information, please contact Jason Silverberg directly at Jason@finadvinc.com or 301-610-0071. Jason is a Registered Representative and Investment Advisor Representative of Securian Financial Services, Inc., Securities Dealer, Member FINRA/SIPC.

1175-2009-84573, D.O.F.U. 7-2009