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Stewart Welch Founder of The Welch Group, which specializes in fee-only investment advice to families throughout the country. Contact welchgroup.com
Most families will spend a lot of money on life insurance premiums over their lifetime so it's very important that you have the right insurance amount and type of policy for your particular situation. For the most part, life insurance is a product that is 'sold'...meaning most people don't seek out life insurance, rather they buy life insurance because a life insurance professional called on them and sold them a product. It can be a very confusing product and people often discover they have purchased a policy that isn't appropriate for their situation or that their situation has changed and they wonder if the policy they own still makes sense. Let me dissect this product by circumstances:
You're single with no dependents. In general, you don't need life insurance because if you were to die prematurely, there is no one who is dependent on your income for their financial support.
You're married but have no children. If either or both of you have debt; or you have joint debt such as a home mortgage, consider buying term life insurance in an amount that, at a minimum, would allow a surviving spouse to retire all the debt. This may mean purchasing a policy on both lives. If you're relatively young (forty or younger), term insurance is inexpensive so you might consider buying a larger amount just as added security. For example, a forty-year-old male in excellent health can purchase $500,000 of 15-year level term insurance for under $300 per year. Fifteen-year level term means that the premium is guaranteed not to change for the next fifteen years, no matter what happens to your health.
TIP: On average, women live longer than men so premiums they pay are even less!
You're married with young children. Life insurance is extremely important in this situation particularly for the primary earner in the family. Term insurance is still your best choice. To decide how much, consider how much income would need to be replaced and for how long. For example, let's assume the husband is the income earner while the wife stays home to raise the children. The family is living on $75,000 per year and the youngest child is age eight. If you wanted to replace this income until the youngest graduated from high school, simple math would suggest a 10-year term policy for $750,000 ($75,000 X 10 years). This is a reasonable starting point but you'll need to think about things like college funding, debt pay-off, and perhaps a lifetime income for the wife if she is unlikely to return to work after the children are no longer dependents. To cover a lifetime income of this nature, you'd need about $2 million. The good news is that, for young adults, term life insurance is very inexpensive. For example, a forty-year-old purchasing a 25-year $2 million level term policy would pay less than $2,000 per year. For free quotes, click HERE and then click on 'Life Insurance Quotes'.
TIP: If you don't yet have children but are trying to have children, consider going ahead and purchasing life insurance now on the (very unlikely) chance that the wife could become pregnant and the husband die prematurely without knowing of the pregnancy. After all, life insurance is about addressing financial risks.
You are married with grown children. We run into a lot of clients who have life insurance they no longer need but continue to own because they either are not sure what to do about it or feel they have paid so much in, they should keep it until it 'pays off'. Think for a moment about the reason you originally bought the policy. Is that reason still valid? In many cases, the reason was that you had young children...who are now grown and on their own. Do you still need the insurance for the surviving spouse or are your assets now sufficient that the life insurance is no longer needed? Understand that most life insurance never pays out as a death benefit because the insured outlives the policy. If there aren't good reasons to keep it, drop it.
TIP: One final issue has to do with your health. We've seen cases where there's no 'need' for the insurance but the insured is in extremely poor health and retaining the policy actually makes good financial sense.
You are retired. Being retired is a game-changer in many cases. You've shifted from 'accumulation' mode to 'decumulation' mode and retirement cash flow is of utmost importance. With the possible exception of the TIP above, dropping the insurance is often your best financial move.
You're retired and own cash value insurance. So far, we've been discussing term insurance where you don't build up any cash value. Cash values policies come in several different forms: Whole life, Variable Life and Universal Life are the main ones. We've seen significant problems, especially with Universal Life policies, where insurance companies are raising costs in later years causing the policies to become very unattractive to continue to fund. If you have a cash value policy, you'll definitely want to have a professional advisor assist you in analyzing your best course of action. Be sure this review includes an assumption that you will live a long time (we assume age 100 or longer) versus average life span (typically early eighties).
Solving the puzzle of how much and what kind of life insurance can be a very tricky process. This is a case where professional advice can be very useful.
TIP: Most life insurance agents are compensated based on commissions which can create a significant conflict of interest. Most commission payments include a large upfront payment plus a small annual payment for a number of years or the life of the policy. Be sure to ask your agent to explain total compensation for every product he or she recommends. They won't offer this information unless you request it.
Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC and WELCH INVESTMENTS, LLC, which specialize in providing fee-only investment management and financial advice to families throughout the United States. He is the co-author of 100 Tips for Creating a Champagne Retirement on a Shoestring Budget; J.K. Lasser's New Rules for Estate, Retirement and Tax Planning (John Wiley & Sons, Inc.) and THINK Like a Self-Made Millionaire. Visit his Web Site www.welchgroup.com. Consult your financial advisor before acting on comments in this article.
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