by Dave Kutcher
Life Insurance – one of the most misunderstood financial resources. It is Life Insurance Awareness Month (LIAM) and we are here to shed some light on this topic for you.
Depending upon what generation you are today, your understanding of life insurance; how it works, how much to buy and the cost of accessing coverage varies across the generations from Millennials to the Gen Z and ultimately the Baby Boomers.
Nobody really wants to think about Life Insurance – let’s face it, the topic forces us to confront the potential for an early demise, not exactly a fun thing to think about. But if someone relies upon you for their financial support, you really shouldn’t be sweeping this one under the rug.
With the goal of providing at least a minimal amount of information today for your consideration, we hope we can impress upon all of you to use LIAM to spark some interest and concern for evaluating your family’s current situation in this regard and perhaps get you to take some action that you might not have done otherwise.
A vast majority of Americans freely admit they know they need more life insurance to properly protect their family from financial disaster if a breadwinner dies prematurely. The reasons for not following through and removing any gap in needed coverage include a lack of understanding of the various choices available today, incorrect assumptions about the cost of owning more life insurance and a lack of understanding as to how much they need … and so, many opt not to do anything about it and leave their families facing financial risk that could be mitigated quite easily.
Let’s start by dispelling a few myths on this topic…
Myth 1. Your family can rely on loans, friends and family to meet their financial needs in the event a breadwinner’s premature death. While we know family and friends come to the rescue often when someone faces financial difficulty due to a death in their own family, this myth does not afford the reality of the emotional and financial shift that occurs when a breadwinner dies. This is not the time you want your loved ones trying to make ends meet and, more particularly, perhaps overburdening other family and friends when those same people could be helping your loved ones in other ways.
The fact is, everyone has their own difficulties, goals, objectives and needs in life and you simply cannot count on others to be there with enough financial resources to be meaningful for the ones you will leave behind.
It is imperative that you arrange for your own family’s financial protection without having others be your primary resource to assist your family when you are gone. Remember, doing so could put those other families at financial risk too by depleting or infringing upon resources that were likely earmarked to serve their family in important ways … college tuition, special needs funding, taking care of their own home or saving for a new home purchase and their own retirement are just a few important financial resource needs of most families. With many folks barely providing for some of these things today, having to provide additional support elsewhere may be quite a burden on others.
Myth 2. I can’t afford it!
In reality, if money is tight today, you can’t afford NOT to have it. Everyone has bills … rent, mortgage, utilities, car payments, childcare, food, fuel etc. are all part of our basic financial lives and so you really need to consider how your surviving family is going to deal with this if things are already difficult while you are here, well and working. Life insurance provides a simple solution to provide financial resources at just the right time to help your surviving family meet their essential needs since you are no longer there to do so.
Myth 3. My kids are going to get a free ride in life.
The fact is, your children will see and learn how important it is that you took the time and perhaps made sacrifices needed to consider your personal financial responsibilities and they will have seen you setting goals and expectations for your family’s financial well-being, they will understand the choices that need to get made in budgeting for a family and the discipline it takes to ensure our responsibility to our loved ones. This is a valuable lesson to pass on to the next generation.
Myth 4. It cost too much.
There are a multitude of life insurance products today. Each is designed to result in solving various needs and wants of the life insurance consumer. In all cases, the primary purpose is to provide a death benefit which will be used to help solidify the financial needs of the beneficiaries. Life Insurance policies come in all flavors and colors … term life insurance, permanent life insurance being the two main categories, and the within each of those categories, there are a variety of options that will be available for some to fine tune their policy to more specifically meet their needs in the most cost-efficient manner.
In basic layman’s language, term life insurance provides coverage for a specific period of time and permanent insurance provides coverage for someone’s entire lifetime, including into their retirement years. Permanent insurance may include other benefits beyond the level death benefit originally being purchased such as cash value that can be used of a multitude of things while the insured is alive, increasing death benefits to help keep pace with inflation and even living benefits such as chronic expense reimbursement through acceleration of death benefits, again, while the insured is still alive. The various benefits and features are all part of the pricing of a policy and as with many things in life, you get what you pay for.
However, providing basic death benefit coverage for your family is likely far more affordable than you think. As an example, a 45-year-old male in relatively good health today can purchase a 20-year level term policy in the amount of $500,000 for less than $60 per month. This would provide substantial financial help for a family left behind and would do so through the primary working years remaining for this person. The younger you are when you start and the healthier you are when you start, the less expensive the cost will be to maintain this coverage for any particular duration.
How much Life Insurance do I need?
This age-old question does not have to be complicated. How much you need depends on your specific needs and objectives. Everyone is different in this regard as other factors will help determine the total coverage you may want. Other life insurance you may already have through work, what other financial resources you may already have on hand such as savings and investments are just a couple of variables that can be part the equation in determining your total coverage needs.
Everyone’s situation is different and while we would recommend working with a professional to help determine your needs, a simple rule of thumb in determining a family’s total needs is about 10 X the income you are trying to replace in the event of a death. This is not a perfect answer, but it gives you a starting place to work from that, if followed, is far better than doing nothing at all because you are stymied by the question of “how much do I need” … a phenomenon we see often. Sometimes we call this paralysis by analysis…people get caught up in what they think is a complicated process and then choose to do nothing because they can’t find their way through to the end of the puzzle.
Life Insurance is NOT as expensive as people think, there is help to assist in determining amounts, durations, plan features and benefits that will best serve you and it is important to remember that life insurance is not for the dead, but for the living! Whether the “living” refers to those you have left behind in your death or refers to yourself, assuming the policy you choose includes living benefits such as cash value and/or accelerated benefits for chronic long term care expenses … not to mention the peace of mind knowing your family will be financially secure … Life Insurance is for the Living!
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio and on Tuesday mornings, KFQD News Talk Radio AM 750 and FM 103.7. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577; (907) 795-7452.
