Life is full of events—planned and unplanned, good and bad—that can have a major impact on our lives, financial plans and budget. Few events, though, will have more of an impact on a family than the death of a loved one. I cannot tell you how many people I have written life policies for that initiated them because they know someone who lost a loved one who was uninsured and now the survivor is scrambling to cover funeral expenses while trying to figure out how they will survive without the deceased’s income and presence. Not only is there an immeasurable emotional toll, but the financial impact can also be just as devastating. That’s why it’s so important to cover your assets. (For related reading, see: 5 Ways to Make Sure You're Not Over-Insured.)
How to Protect Yourself
One of the most effective ways to cover your assets (family and finances) is to acquire the right type and amount of life insurance. Many of us don’t like to think or talk about death. Let’s face it ... it is an uncomfortable topic so we sweep it under the rug or put off that sort of planning. Discussing mortality isn’t pleasant, but it is one the most important aspects of financial planning and shouldn’t go unexamined.
Approximately 35% of American families are headed by a single parent and 72% of black families are single-parent families. I am included in those statistics. I have custody of my daughters, so what if I passed away? How would my family continue to maintain and survive without me? Married couples and significant others share a similar dilemma. Let's take a look at the different types of life insurance and how having it can help us during one of life’s most emotional times.
The easiest and most cost effective type life insurance to acquire is group insurance that is provided by an employer’s benefits package. Typically, it costs a few dollars per pay period and is a multiplier of one’s annual salary or income. For example, if I made $50,000 a year, I could elect coverage at my salary or pay incrementally more for twice or three times my salary. The downside to group insurance is that it goes away when we leave our employer. Some group policies are transferable when we separate from an employer, but it becomes at a much higher cost because it is then based on one’s individual age and health status.
Another form of protection is individual term life insurance, which is probably the most practical and cost-effective way to acquire life insurance. Term insurance is purchased to cover us over a certain period of time, for example for 10, 20 or 30 years. With term insurance, the cost, or premium, is based on one’s age and health status, but in most cases it can easily fit into your budget. The younger you are, the cheaper all life insurance is to buy, especially a term policy. So, if you are in your mid-20s to early 30s and don’t currently have a term policy, then this should be high on your list of priorities.
Whole or Permanent Life Insurance
Another form of life insurance is whole or permanent life. These policies are much more costly, especially if you look into getting a policy when you are older, but this type of policy is meant to cover you for your entire life. An added bonus is they have built- in living benefits, such as cash value. As you pay your premiums, equity builds up within the policy, similar to equity building in a home as you make your mortgage payments. So you are able to tap into the cash value for emergencies or as needs arise—similar to a line of credit—as a living benefit.
Ideally, I suggest having both a whole life and term policy concurrently when you are younger and have a young family. You would employ a larger amount to cover things like future college costs, income replacement for a surviving spouse or significant other and possibly pay-off a mortgage. To complement the term policy, you could have a smaller $50,000 to $100,000 whole life policy. This is beneficial because the whole life policy is still yours 40 years later; it's there to cover one’s final expenses. By then, the kids are grown and gone, home is paid for and you have savings accumulated for the survivors.
We spend our entire working lives earning and saving money, investing for different goals and hope to leave a legacy for our children. One of the worst things we can do is to risk losing our hard work by not insuring or under-insuring ourselves, leaving our families behind to struggle financially on top of the emotional scars. You want to make sure you are protecting your loved ones sufficiently by covering your assets. (For related reading, see: Why Investors Need to Focus on the Long Term.)