Harry N. Stout
240- The Key Reasons to Buy Life Insurance Protection: Life Insurance Awareness Month
September is Life Insurance Awareness Month (LIAM). The non-profit organization, Life Happens, has been organizing well-received LIAM campaigns every September since 2004. You can find out more information about life insurance and read real life stories of how the product has protected individuals and families by going to the Life Happens website.
Life insurance should be one of the building blocks of your personal financial safety net. When properly structured it delivers cash, on a guaranteed basis, in the future when it is needed to help pay the costs of unexpected life events such as death, disability, chronic illness or a long-term care event.
Today’s life insurance also plays an important role in a comprehensive financial plan. I often get asked if I could simply explain (1) the financial risks life insurance protects against and (2) how much protection a person should buy? In this post, I will provide simple answers to these questions.
Financial Risk Protection
To determine the risks and amount of protection you need, you must carefully review your life situation (assets and liabilities), who is dependent on you for financial support and what other financial actions you would like to take to benefit others should you pass away before accumulating the necessary assets to make these bequests. You do this by identifying and estimating the amount of each of the key financial risks you face or charitable actions you would like to take upon your death and then subtract from these identified risks the assets you own that can be converted to cash to pay for the risks identified. In my view, this is best done by working with a properly licensed financial professional.
After determining what protection you need, you will need to determine what you can afford to buy based on your budget constraints. Life insurance is a medium to long-term financial commitment. You must continue to pay the required premiums, or the policy will expire or lapse. If this happens, you will not have coverage.
The Risks to Protect Against
The risks you are typically looking to cover with the proceeds of life insurance include the following items:
Burial costs—the costs of a full burial or cremation
Final expense costs—the costs of a final illness including medical deductibles and coinsurance amounts
Living cost income replacement (sometimes referred to as income replacement) for your dependents so that their standard of living is maintained either in the short term or for longer periods
Your share of the funding of the expected retirement savings for your partner or spouse
Your unpaid debts—this would include mortgage, car, cosigned student loans and installment obligations
The remaining unpaid costs or expected contribution toward the college or trade school educations of dependents
Funds for special situations: - Providing for special needs children who have a physical disability or cognitive impairment - Providing for caretaking costs for an elderly family member - Repayment of large business-related debts
Business ownership transfer—this would be coverage on you that a business partner would use to buy out your interest upon your death
Estate or donation creation—leaving a legacy for your family, a charitable organization or church
As you do your own research, you will encounter online tools, calculators and rules of thumb (e.g., you need eight to twelve times your gross income in coverage) to help you determine the amount of protection you need based. These rules of thumb are a shortcut method to determine the coverage needed based on the results of applying a very rough protection calculation to a variety of different family situations. I recommend that you take the time to look at your own situation in more detail and see firsthand what your protection needs are. You don’t want to shortchange yourself in this very important area.
It’s important to explore ways to use life insurance as part of your personal financial safety net and overall financial plan. I believe this is best done working with a qualified financial professional. Also, please take 10 minutes and look at the Life Happens website for information, tools and stories about the value of life insurance and how it is a tool you can use to make your financial life better.
As a way to recognize Life Insurance Awareness Month and support improving knowledge of life insurance products, the FinancialVerse is providing a 15% on all sales of the Today’s Life Insurance book at financialverse.com/life. Just use the codes LIF15 to get the print and eBook discount for all purchases made directly from the website.