Choosing the Right Life Insurance

By Greer Gibson Bacon, CFP®


Like many things in life, life insurance needs change over time.  The amount and kind you buy should be carefully matched to your personal goals and circumstance.  Here are a few things to keep in mind.  
Temporary Needs:  Term Insurance
Consider a young couple with children, a mortgage, and minimal retirement savings.  They need life insurance in case a breadwinner dies before the children finish college, the mortgage is paid, and retirement savings are accumulated.  Quite frankly, they need a lot.
These are temporary needs.  The children will finish college.  The mortgage will be paid.  Retirement savings will be accumulated.  At that point, insurance will no longer be needed to fund these goals.  Temporary needs are best met with “term” insurance.  
Permanent Needs:  Permanent Insurance 
Now, consider a retired couple with two grown children.  A family business is their primary asset and one child works in it, not the other.  In terms of inheritance, they want to treat their children equally, but not bind them financially.  Life insurance gives them a way to “cash out” the child who doesn’t work in the business.  
This is a permanent need.  The couple will die and the inheritances must be equalized.  Permanent needs are best met with a form of “permanent” insurance, like traditional whole life, variable whole life, universal life, variable universal life and so on.  These insurances have very different risk-return characteristics, and costs.  So, be sure you understand any permanent insurance you consider.  Then, if you buy a policy, monitor it regularly to assure it’s performing as expected.  
Cost:  Term vs. Permanent 
Permanent insurance costs more per $1,000 of coverage than term, sometimes quite a lot more.  Again, the amount and kind you buy should be carefully matched to your personal goals and circumstance.  For example, it’s likely our young couple can afford to cover their financial needs if they buy term insurance, but not permanent insurance.  Remember, if you need $3,000,000 worth of temporary coverage, a $500,000 whole life policy isn’t a “good investment”, especially if you die.  
How much life insurance do you need?  
There are many ways to calculate your life insurance needs.  For example, you might calculate the present value of your lifetime earnings.  You might adjust that present value for income taxes (death benefits are tax-free), Social Security and other factors.  You might calculate the amount based on specific needs, like paying for college or the mortgage, living expenses, and a retirement fund.  Or, you might use a combination of these approaches.  
A word about accidental death insurance.  Although it’s inexpensive, your life insurance coverage should be based on your financial need, not your cause of death.  For this reason, don’t use accidental death insurance to offset any portion of your required life insurance coverage.  
Finally, if you need help evaluating your life insurance needs or coverage, we recommend consulting with an experienced and reputable financial advisor or insurance agent.
This article first appeared in the January 2017 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.


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