In the realm of financial planning, the topic of life insurance has about as much appeal as a root canal.
Discussions of the stock market, investment portfolios and trading strategies get all the attention, but in most personal financial plans life insurance helps form a necessary foundation from which to build upon.
That being said, life insurance is also one of the most heavily abused financial products, and when bought (or in most cases sold) incorrectly, families can end up paying a lot of unnecessary cost for coverage that may not even meet their needs.
In order to construct a well-conceived life insurance plan, an understanding of real world variables, risks and benefits is important. From my experience, when a family endures the death of a loved one, especially the primary breadwinner, I have found the family will need a full replacement of the income being produced before the loved one passed away.
Spending habits and financial commitments are not easily or quickly adjusted, and in some situations additional child care may needed in the absence of a parent.
For families with children under age 19, some of this income replacement is likely to be provided by Social Security benefits. Surviving parents of children under the age of 16 may receive widow or widower benefits and surviving children may receive benefits to until age 18. These benefits are immensely helpful to young families, but they do reduce in later teenage years. I don’t know about you, but I’ve found kids don’t tend to get any cheaper to maintain at age 16.
Even considering these important safety net benefits, the death of any parent is likely to cause financial hardship. Life insurance is, of course, the answer.
In nearly all situations, term life insurance will provide a cost-effective solution to this problem. For individuals in decent health below age 45, term insurance can be obtained for nominal cost. As an example, I pay about $40 a month for a $750,000 15-year policy issued by a large, well-known insurance company.
The catch is term insurance is designed to be temporary, and hopefully if the policy does not “pay off," it will at some point become too expensive or even impossible to keep.
For some families, however, a permanent life insurance policy can also be an important tool. Permanent life insurance is designed to accumulate cash value in order to sustain itself in later years and hence become permanent. These policies always have higher internal and monthly costs, but can also pay attractive interest rates on cash values accumulated inside the policy.
My youngest child has Down syndrome, so I’m willing to pay more premium for some permanent additional peace of mind. Oh, and the cash building up inside the policy? I plan to use it from time to time to pay for weddings. A true multipurpose financial tool.