If you’re like most people, you probably don’t take the time to routinely evaluate your life insurance needs. Why might that be a mistake? Well, your life insurance needs change as circumstances in your life change. That’s why it’s a good idea to re-examine your life insurance needs at least every few years and certainly when big changes, or life events, occur.
Just about any life event you can imagine will have an impact on your life insurance needs. An obvious example is having a child. As you bring a new person into the world, you also bring a major financial responsibility into your life. If something happens to you, where’s the money going to come from to help provide the kind of upbringing you want your child to have?
This section will explore the major life events that might trigger the need to re-evaluate your life insurance coverage. Our Life Insurance Needs Calculator is a great resource for seeing how changes in your life, like having a child, taking on a bigger mortgage or getting a raise, might impact your life insurance needs. Once you have a general sense of your needs, you should consider meeting with a qualified insurance professional who can conduct a more thorough analysis of your needs and help tailor a plan that meets your specific financial objectives.
Having a childIt’s time to start thinking about whether to wallpaper the extra bedroom in pink or blue – your child is on the way. With your growing family, you’re probably doing all you can to save and invest for the future. But is that enough?
You have big plans for your kids and want to see them realize their hopes and dreams. It’s hard enough to make that happen with you in the picture. But what if you or your spouse – or both of you – were suddenly out of the picture? From diapers to diplomas, would there be enough income to pay for day care, a college education, and everything in between?
Your children are your greatest responsibility, and life insurance can help them to grow up in a stable environment, one in which they are physically safe and financially secure, if something were to happen to you.
Getting marriedDriving away from the reception in a blue convertible with balloons flapping in the wind, you’re headed for a bright future. Together, you both dream of a nice home, a good education for the kids and a comfortable retirement.
Enjoy these early carefree days, but make sure you talk to an insurance professional sometime soon, now that you’re financially dependent on one another. As a married couple, you share a life together, but you also share each other’s financial obligations.
What if one of you were to die tomorrow? Would the surviving spouse have enough money to pay for your final expenses, eliminate debts such as credit-card balances and car loans, and buy some time to be able to adjust to a new way of life? Life insurance can help ensure that these financial goals will be met in the tragic event that one of you were to die prematurely.
Buying a homeWhen you finish signing that huge check, your realtor hands you the keys to the cutest little Victorian three-bedroom you’ve ever seen. Mortgage payments are a little daunting. Now, it’s time to make sure you’ve thought ahead.
What if the worst were to happen? Could your spouse manage the mortgage payments without you? What about monthly maintenance, utilities and unforeseen repairs ¨ not to mention property taxes? How long would your spouse have before your dream house is back up for sale?
If tragedy were to strike, turning over the keys to the family home to the bank is probably the last thing you’d want to have happen to your loved ones. Having adequate life insurance coverage can help keep the family you love in the home they love.
Taking on debtThese days, living with debt seems to be as American as baseball and apple pie. We rely on credit to help pay for lots of important things like a reliable car, home improvements, education expenses, vacations, etc. We also pile up sizable credit card bills to pay for everyday living expenses such as groceries, gas, clothing, entertainment, etc. The truth is, living with debt is a way of life for many of us. But that’s not necessarily a bad thing, as long as you have a plan for managing your debt.
First, make sure you’re living within your means. You should never assume a debt load that you can’t keep up with. Second, if you’ve got lots of different creditors and some of them are charging you high-interest rates, it might make sense to consolidate at least some of your debt at a more favorable rate. And finally, you should carefully consider how your family would manage the payments if something were to happen to you. If you were suddenly out of the picture, you wouldn’t want to leave your family to drown in a sea of debt. You should have at least enough life insurance to pay off all your outstanding debt and provide a financial cushion to help your loved ones begin a new life without you.
Changing jobsCongratulations on your new position or your big raise. You may not realize it, but when your income rises, your spending tends to rise too. If something were to happen to you, you’d probably want your family to be able to maintain their new and improved lifestyle. That’s why it makes a lot of sense to re-assess your life insurance coverage whenever your income rises.
If you determine that you need additional coverage, the first thing you’ll want to do is find out if your life insurance benefit through work (assuming, of course, that you have such a benefit) has increased along with your compensation. Many group plans will tie life insurance benefits to your annual income. So if you get a $5,000 raise and your company’s life insurance plan will pay two times your income if you die, then your death benefit will increase by $10,000.
If you feel that’s not enough, many employers will give you the option to increase your coverage, often through a payroll deduction. Determining whether to take advantage of this option usually depends on your age and health status. How so? With most group plans, employees are offered the same premium as others in their general age bracket (e.g., 25-34 year olds), regardless of their health status or actual age. So if you’re healthy or near the lower end of your age bracket, this one-size-fits-all premium may be higher than what you would find if you shopped around on your own. On the other hand, if you’re an older employee or perhaps suffer from a chronic health condition, increasing your coverage through work might be a great option because you might not be able to find a policy on the open market that’s as affordable as what your employer is offering.
Supporting aging parentsWhen you were growing up, your parents made lots of sacrifices for you. They did all they could to provide for your basic needs, and then some. And they probably did so without ever thinking that they’d need to rely on your financial support later in life. But that’s not always the way things work out.
Today, many people find themselves having to support their aging parents ¨ financially and otherwise. If you’re one of them, you need to think about what would happen to them if something happened to you. Would your parents be able to afford quality healthcare and a decent place to live? Would they have to turn to friends or other family members for financial support?
By figuring your parents financial needs into your life insurance plans, you can take the guesswork out of what would happen to your parents if something were to happen to you.
Changes in your businessOne of the keys to running a successful small business is being able to adapt to change. Maybe you need to buy an expensive new piece of equipment to keep pace with a competitor. Or perhaps you have to hire a new person with a specialized skill set in order to expand into a new area. Whatever the case may be, anytime you make big changes in your business is an ideal time to find out if it also makes sense to make changes to your life insurance plans.
To get a sense if it’s a good time to reevaluate your life insurance coverage, ask yourself the following questions:
- Has your business taken on more debt recently?
- Has your business become more dependent on a key employee or several key employees?
- Has the value of your business changed lately?
Changes in your marital statusIf you’re on your own now, whether through death or divorce, you need to carefully re-examine your entire financial situation, including your life insurance needs. In fact, you almost have to start from scratch because going from two spouses in a household to one will affect just about every financial calculation you can imagine.
With regard to life insurance, the first thing you’ll want to do is determine whether you still have a need for coverage. Remember, one of the main reasons you purchased life insurance in the first place was to provide financial security for your immediate family. If your spouse has died and you either have no children or your children are grown and financially independent, you may no longer need life insurance.
But what if your spouse has died and you now have to raise young children on your own. Then instead of dropping your life insurance, you actually might need to increase your coverage. Think about it. As a single parent, you’re the primary caregiver, breadwinner, go-to person and so much more. Your children are probably entirely dependent on you. By having adequate life insurance coverage, you can help ensure that your children will have the kind of lifestyle and opportunities you’d always dreamed they’d have.
Another important consideration is beneficiary designations. Most people will list their spouse as their primary beneficiary. So if your spouse has died, you should immediately change the beneficiary designation. Otherwise, a surrogate court judge might be the one to decide how to distribute your life insurance proceeds among your children or other family members.
If you have children, deciding whether to list them as beneficiaries will depend, in part, on their age. If they’re minors (under age 18), you should probably establish grantor trusts for each of your children and name the trusts as the beneficiaries. If you go this route, you’ll also need to appoint a trustee (It’s also a good idea to appoint a successor trustee, in case something happens to your first trustee). When you die, the trustee will be responsible for distributing funds to your children in accordance with your wishes. When the children are minors, trustees are often granted the discretion to make distributions as needed, within certain parameters. Once they’re older, wills will often specify that distributions be made to the children in lump sums when they attain certain ages (For instance, you could arrange for your children receive equal payouts when they reach ages 20, 25 and 30). Alternatively, you could name adult children as the beneficiaries of your policy. But just know that if you do that and, say, your son or daughter gets divorced or is divorced when you die, the proceeds may be subject to equitable distribution. And would you really want half the proceeds to go to someone who’s no longer in the family. Trusts can help prevent that from happening.
The various scenarios described above all assumed that your spouse is deceased. But what if you’ve just divorced and have young children. Then things can get more complicated because your ex-spouse may be the one to care for and provide for your children if you die while they’re still minors. Again, this is where trusts can be a good option. They can help ensure that the money is used to support your children needs.
A final word of advice. These are very important and complex decisions, and may require the assistance of not just an insurance professional, but an attorney and an accountant as well. So if you’re suddenly in the unfamiliar position of having to make financial decisions on your own, don’t try a do-it-yourself approach. The stakes are way too high, especially if there are young children involved.
Planning for collegeWith college costs continuing to skyrocket, you need to plan earlier and more carefully than ever to achieve your college-savings goals. Meeting this challenge requires a disciplined approach to saving and investing. But having a smart investment strategy is just one part of a sound college-funding plan. You also need a smart risk management strategy to ensure that your college savings goals will be achieved, even if you’re not able to complete them due to illness, accident or death.
Saving and Investing for College
Federal and state-sponsored college-savings programs are increasing in popularity because they let you save and withdraw tax-free. Education IRAs, now called Coverdell Education Savings Accounts, let you contribute $2,000 annually per child, but phase out contributions at higher income levels. Section 529 plans, a more flexible option, permit much larger contributions (over $200,000 per beneficiary in most states), and generally have no income restrictions.
Permanent life insurance is another option to consider because it, too, allows you to save and withdraw tax-free, while also providing the protection you should be building into your college savings plan (see below). Withdrawals, and loans, which are also subject to interest charges, can lower the ultimate death benefit. Because of the insurance component, your costs may be somewhat higher than with, say, a Section 529 plan.
Protecting Your College-Savings Plan
Protection products form the foundation of a sound college-funding program, ensuring that your college-savings plan won’t die or become disabled if you do. Life insurance can complete a college-savings program that hasn’t matured, while disability insurance can help make sure that you can continue to set aside money for college, even if you’re unable to work for a period of time.
Remember, a college-funding plan without insurance is just a savings and investment program that can die or become disabled when you do.
Planning for retirementMention “retirement planning” and most people think about their 401(k)s, IRAs or mutual funds. Keep saving, invest those savings wisely, get to age 65 and voila! You’re set for retirement.
Maybe. But what if things don’t work out exactly the way you planned? What if you die prematurely or become disabled? What will happen to those people in your life, especially your spouse, who may be depending on your retirement savings to help support them well into old age? A retirement plan without insurance is just a savings and investment program that dies or becomes disabled when you do.
Below are three ways life insurance can help you meet important retirement planning objectives:
Prevent your retirement plans from dying when you do. If you die before retirement, your survivors would miss out on both your salary for living expenses and the money you were setting aside for the future. People who die prematurely haven’t had as much time to put together an investment program that can really pay off. If you have sufficient life insurance, it can help pay your family’s expenses and may still be there for your spouse’s retirement.
Supplement your retirement income. Suppose your circumstances change and you no longer have anyone who would need the proceeds of a death benefit. With a permanent life insurance contract, you have the flexibility to surrender the policy and supplement your retirement income with the funds that have accumulated in the policy’s cash value account.
Preserve your estate assets for your survivors. If you’ve accumulated a large estate, life insurance can help foot the estate tax bill from Uncle Sam, preserving assets for your heirs. Or, if your estate is more modest, life insurance can provide a legacy for your children and grandchildren even if you use up most of your assets during your retirement years.