Nobody “likes” life insurance. Let’s face it . . . considering our own ultimate demise is not the most pleasant thing to dwell on. Then, there is the invasive physical exam and all of the ongoing premiums that need to be paid.
Still, we consider life insurance the true cornerstone to most financial plans, especially for those of you who are still working. After all, the purpose of having life insurance is to provide liquidity and protection to those people who are dependent on our income and who would be adversely affected should we predecease them.
So, if that’s you, or you have young adult children starting a career and/or a family, let’s review some mistakes that people make that everyone should strive to avoid.
- People who need it won’t buy it.
A recent survey (bestow.com) shows that 70% of American adults don’t have any life insurance! And, even worse, nearly 75% of millennial parents don’t have it either. Leaving your children exposed to the financial ruin of losing one parent’s income is really unacceptable.
- Even people who own life insurance don’t own enough.
Most of us don’t know how to calculate just how much insurance we really need. If a family spends, on average, $4,000 each month until their last dependent child turns 21, that $4,000 monthly number multiplied by 240 months (20 years) equals $960,000 . . . and that does not account for inflation or their college education.
- People think it’s too expensive.
According to our life insurance website, a healthy 30 year old non-smoking male can purchase a 25-year, $1 million term insurance policy for about $1.50 a day. A woman can buy the same coverage for about 12% less.
- They get it at the wrong place.
Most young people, if they have life insurance, get it as a group benefit at their place of employment. Although this is better than not having any coverage, there are some drawbacks. First of all, it’s not “portable” coverage. If you leave the company, your life insurance protection is left behind. Also, since there are typically no health-screening requirements, heathier employees tend to subsidize the cost of insuring unhealthy employees. Finally, you’re typically capped at how much coverage you can actually receive and, in a lot of cases, it may be inadequate. So, if you’re young and healthy, you might want to consider purchasing insurance on your own from a reputable insurance company.
- Only the primary earner is covered.
Many families question why they might need insurance on a stay-at-home parent who really has no earned income. What is important to understand, however, is that someone who fills that role, despite not “working” still has significant economic value. If that person dies, consider the cost that the surviving parent incurs – especially the cost of childcare.
- Insurance coverage ends too soon.
In the “old” days (40 or so years ago when I came of age), there was an expectation that children would be self-sufficient at age 22. Therefore, many life insurance policies were structured to expire when children graduated from college. Well, consider a couple of things. First, few, if any, children graduate from college in four years. Many of them are coming back to the roost to live because they struggle to find jobs that pay them enough to venture out on their own (or, they have trouble finding jobs . . . period!). So, be careful how long your insurance protection runs. Chances are, it might need to be longer than you think!
- Your children will inherit the money . . . when?
Suppose you’ve gone through each of these points and determine that you need to purchase or increase your life insurance to better protect your family. Then an accident occurs and you and your spouse are both killed. In most states, the money that would come into your estate for the benefit of your children would be theirs the minute they turn 18. Well, I’ve been 18 before, and can probably count on one hand the number of “good” decisions I made at that age. Imagine how disastrous it might have been (and how soon I would have run through the money) if, all of a sudden, as a senior in high school, I had $500,000 handed to me. Setting up a trust for the ultimate disposition of life insurance proceeds, where heirs only get money based on attaining a certain age, or meeting certain behavioral standards, is something we strongly encourage you to consider.
- Don’t cancel insurance policies too quickly.
There is a tendency to cancel coverage once your kids, for instance, are no longer your financial responsibility (mine are all in the late 20’s and 30’s, and I’m STILL waiting for that to happen!). After all, why continue to make premium payments on a policy that was meant to protect your responsibility as a parent. But, that could be a mistake. Gauge whether or not the current coverage you have still makes sense in providing for your spouse. Also, and here’s an idea I love, if the benefit of inheriting tax-free life insurance proceeds is solely for your children, have THEM pay the premiums. In essence, they are simply protecting part of their inheritance, and it is a very good investment on their part!