Marc A. Hebert's Money Sense: How much term life insurance should you buy?By MARC A. HEBERT
July 13. 2018 2:04PM
It might be time to reduce your expenses. Perhaps you need to save money for other goals, but what should you cut? One area people often think of eliminating is their term life insurance since the premiums can be expensive. Is this coverage really needed?
Term insurance is a policy with a set duration on the coverage period, usually from one to 30 years. With term insurance, only a death benefit is paid. Term insurance has no cash value buildup or permanent protection inherent in the policy. It is designed to support you financially until you can become self-insured by your own assets.
There are a couple of clauses in term insurance to watch for. One is the renewable clause. This means that you will be able to renew the policy at a competitive rate once the designated term runs out. This could become important if a fatal disease is diagnosed just as the policy is about to expire.
The second is a convertible policy clause. This provides the option to change the term policy into a permanent life insurance policy during a specified period of time, without having to show that you are in good health.
Now that you understand the basics of a term policy, the next step is to decide whether you need life insurance. None of us knows when our time on earth is going to come to a close. Furthermore, changes in life often happen, making the amount of insurance needed difficult to predict. Here is a list of questions and comments to help you decide the answer, and maybe how much and how long to purchase coverage for:
• How much money would your spouse and children need to replace from your income over a period of years should you die? Consider how inflation will increase costs. Your lifestyle may change as you age. As your income increases, your lifestyle may become more expensive. Having a bit of a cushion in the amount of life insurance you purchase will help offset future costs for your beneficiaries.
Involve your spouse in these conversations. Review the financial plans you have in place to facilitate integrating the insurance decisions into the plan.
• Will your spouse or guardian need money to provide childcare support?
• Is there a mortgage to pay off?
• Are there shorter-term debts like credit cards or auto loans to pay off?
• Will college costs be funded?
• What are the expected burial expenses? Is there an estimate for final medical expenses or estate settling costs that needs to be included?
• Is there any other life insurance already in place? This could include group coverage at work. Remember that if you leave your employer, you most often forfeit this benefit. This may come at a time when you are uninsurable and can’t replace the coverage.
• Are there other expenses to consider? You may have costs to help individuals with special needs or family members who are older.
• How much are your other assets and are they available to pay for expenses?
• How much other income, such as from Social Security or a pension, might be available in the future?
Keep in mind that your health and youth might determine how much coverage you are able to purchase. Research the insurance companies you are considering purchasing coverage from, including the ratings from Standard & Poor’s and A.M. Best. Read and understand the fine print.
Once your life insurance coverage is in place, review the amount every few years. Maintain your list of beneficiaries and tell someone you trust about the policy. Life circumstances change and your needs for life insurance may change as well.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.