Things To Know When Considering Life Insurance

A comprehensive financial plan often includes an insurance and risk management analysis. The purpose of this analysis is meant to help define lifestyle expectations in the event of your (or your spouse’s) death and whether there are adequate resources to meet your family’s future needs. Below is an outline of things to know when considering life insurance policies.

Note: At Narwhal, we do not provide life insurance policies themselves, but we can make recommendations on coverage, types, and help you prepare to meet with an insurance agent.

Amount of Coverage:

You may be familiar with certain ‘rules of thumb’ when it comes to determining the appropriate amount of life insurance. This can be misleading and inaccurate because these rules of thumb can fail to accommodate unique situations or expectations. Determining the proper amount of insurance coverage is often part science and part art.

One way that we evaluate life insurance coverage amounts is using the needs approach technique. What does your family need to survive without its primary source of income? This approach to estimating your insurance needs focuses on satisfying the basic financial obligations and needs of the family.

Consider the following questions when determining amount of coverage:

1. How much do you need for funeral costs? (Current average is $7,300 for a funeral)
2. How much debt do you have that you’d like to cover with your policy (house, car(s), credit cards, etc.)?
3. If your spouse is currently not working, will you assume they’ll go back to work?
4. What amount of Social Security benefit will your family receive if you die? (Need at least 40 credits to be eligible for SS benefit. When you have earned $5,440, you have earned your four credits for the year… so usually 10 years of working to qualify)
5. Considering your answers to questions #2, #3, and #4. What annual expenses will the policy need to cover?
6. Should your policy include money for your kid’s college tuition? If so, how much total? Remember to consider the other ways to pay for college and the cost of college is increasing dramatically. It may be unrealistic to consider the full cost of college.
7. What amount of savings, retirement savings, college savings, etc. do you already have?

Type of Coverage:

The same goes for the type of coverage. Term policies may be appropriate for some clients, while permanent coverage might be a necessity or provide additional advantages. Below are some popular types of life insurance.

Term Insurance: Term life provides coverage on the insured for a specified period of time (5,10, or 20 years) as long as the premiums are paid, and the policy is not cancelled.

Permanent Insurance: Permanent life provides coverage for the insured’s entire life, as long as premiums are paid on time and the policy is not canceled, and they generally allow for a build up of cash value. The most common types are:

Whole life: the oldest kind. Premiums are fixed and guaranteed and remain level throughout the policy’s lifetime. If premiums are paid on time, this coverage also provides a guaranteed cash value and guaranteed death benefits.

Universal: Allows the owner after the initial payment to pay flexible premiums. The owner may change the death benefits from time to time and vary the amount and timing of premium payments subject to certain minimums and standards.

Variable Universal: Combines premium and death benefit flexibility with allowing the policy owner to choose among different investment options. Values fluctuate based on market volatility.

Below is a chart that summarizes the different features between Term and Permanent