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When you’re considering life insurance, chances are you’re thinking about how to ensure that your family might keep their home and achieve their goals, like attending college, even if you’re not there to support them.
Identifying your family’s goals will enable you to determine how much money they may need in the event of your untimely death. If you have several large goals but don’t clearly estimate them, you may end up underinsured. If your family’s need is lower, you could be overinsured, which means you could be paying too much in insurance premiums.
Understanding your family’s financial needs and goals will help you reach the most effective level of coverage.
Step 1: Estimate how much you need to cover your family’s immediate needs and living expenses
To identify immediate needs, consider the cost of final arrangements and any debts that you might want to have paid off. Then estimate your family’s living expenses and identify which living expenses might change. Some expenses will decrease, for instance, car-maintenance bills and life insurance premiums. Some may increase, including child care, psychological counseling, educational expenses and future medical premiums. You might want to factor in at least an additional two times your current annual expense for medical insurance premiums for your family, regardless of your employer's current policies. This conservative approach recognizes the increased costs often associated with COBRA-continued group coverage, individual conversion policies and/or policies purchased through the insurance marketplace. Consider how many years of income you might want to provide for your family. Some common time frames include, until your youngest child reaches independence (often after college graduation), or until retirement for a spouse or partner. Every family’s needs and goals will be different. Estimating this amount is about determining what is important to you.
Step 2: Understand Social Security survivor benefits
If you have young children, your surviving spouse will be eligible to receive Social Security benefits until your youngest child reaches age 16. Each of your children receives a benefit until they are age 18 years old (or age 19 if still in high school). If your children are older than 16, your surviving spouse will have to wait until age 60 before collecting a survivor benefit. The amount your survivors may collect from Social Security reduces their income needed from life insurance benefits.
Step 3: Quantify the value of other accounts or income available for your surviving family that will also reduce your life insurance needs
This could include income from your spouse’s paid employment, savings and investment accounts and more. There are a few questions you should ask yourself:
Term life insurance is often purchased when the insurance need is “temporary” or short-term, generally less than 20 years. It’s less expensive than other options, however it comes with only a death benefit (there’s no chance to invest), and it gets more expensive to purchase as you get older.
There are a few different types of term life insurance, including:
Permanent life insurance is an alternative to term life insurance that may make sense if you are looking for insurance that will last longer than 20 years. Permanent policies tend to be more expensive but can be used as investment vehicles and may have tax-savings benefits.
Types of permanent life insurance include:
If you have access to Ayco as an employee benefit:
If you have Ayco as a company benefit, register or log in to learn more about this and other financial wellness topics. If you’re not sure whether your company offers Ayco Financial Counseling, contact your human resources representative.
For disclosures relating to this article, please click here.
Insights from Ayco InnerCircle 2021