Ask a Fee-Only Financial Planner: Do I need life insurance?
Welcome to our “Ask a fee-only financial planner” series, where Nicole Sullivan, co-founder of Prism Planning Partners, shares her expert insights on common questions about financial planning topics.
Question: I am in my 30s, and I keep hearing my friends talk about getting life insurance. Is this something I actually need? It looks like there are a lot of different types out there—what do I do?
This is a great question that people have MANY opinions about. I am excited to share my honest and unbiased thoughts! As a fee-only financial planner, I am not paid to sell insurance products or via ongoing commissions—I’m only paid by clients to give my advice.
Consider Your Situation
The answer to this question is that it depends. You need to take a look at your situation. Consider asking yourself these questions:
Do you have kids and/or anyone else who is financially dependent on you?
Can your household sustain on one income?
Is your spouse staying at home to take care of your family?
Did your spouse co-sign on a loan with you?
Do you own a business? Do you have debts? Do you have partners?
Is your retirement fully funded?
And, most simply, if you died and your income went away, would anyone else be harmed financially?
Life Insurance Types: Permanent vs. Term
For the majority of people out there, one or all of these questions might resonate with you, and it could be worth considering getting life insurance.
There are two kinds - permanent and term. If funded appropriately, permanent insurance pays out when you die, whether that’s tomorrow or decades from now. Term is generally less expensive and pays out if you die during a certain period - say within 20 or 30 years.
I like to remind people that life insurance is INSURANCE. It is there to protect your family against what would be a huge loss. I don’t generally view life insurance as a wealth accumulation tool, although it can be in nuanced circumstances, generally for the very wealthy.
Choosing the Right Coverage
If you’re a young family, you have a lot of expenses and a long time to work. If one or both incomes suddenly went away, it would be catastrophic to your family finances. There are many cases where you might need millions of dollars to replace your lost income over several decades. It sounds daunting, but it doesn’t have to be. In this case, you’d want to consider the least expensive, most robust coverage, which is typically term insurance.
In many cases, term coverage provides a tax-free death benefit if you die during a certain term. In theory, when that term is over, you won’t need the coverage anymore. Eventually, your kids will be “off the payroll,” your debts (like a mortgage) will be repaid, and you’ll have amassed a nest egg for retirement.
Instances for Permanent Life Insurance
There are some instances where permanent life insurance could make sense—such as if you’re very wealthy and may have death tax obligations, you have ongoing financial dependents, or you want to equalize an asset transfer to beneficiaries. However, for a younger couple just starting out, I generally don’t recommend a more costly permanent life policy.
Cost of Life Insurance
Life insurance costs are dependent upon your age, your health status, and how long you need the coverage. The older you get, the more costly the coverage becomes. Moreover, if you have chronic health conditions or certain habits (like smoking), that can drive up the cost of coverage.
Conclusion
Especially if you have financial dependents, life insurance is critical coverage to have. As fee-only financial planners, Prism Planning Partners does not sell life insurance. We are not compensated via commissions for selling insurance products. However, our firm is not anti-insurance AT ALL. We happily make outside recommendations to other professionals if the situation warrants.
Still trying to figure out what to do?
First and foremost, it’s always advisable to check with an accountant, tax or financial professional before making financial decisions.
The team of fee-only CFP® Professionals at Prism Planning Partners can help! If you want to learn more about your finances with my help, click the link below to book a call with me!