[This is part 9 of a 9-part series. For a full overview of topics, see the Life Insurance Basics page.]
The purpose of this Life Insurance 101 series has been to take away some of the fear and mystery about this important subject. By understanding some of the basic concepts of life insurance, you should be a more informed buyer. Here are some final thoughts:
- Providing lost income is the primary purpose for life insurance for most families. While a large lump sum of life insurance benefits can be used to pay off a mortgage and other large debts, it should not be looked at as a "windfall" for your family. The real issue is to provide a large sum of money that can be properly invested to produce a stream of income that you would have provided if you were still alive. In some cases, this income may need to last the lifetime of a surviving spouse. The age of a surviving spouse, alternate sources of income and interest rate assumptions are key factors in determining how much insurance you need.
- Most families are woefully underinsured. Determining the amount of coverage you need should be a priority before shopping for life insurance. The use of common thumb rules such as ten times your salary should be avoided. Use a needs-based calculator such as the one available on Navy Mutual Aid Association's website.
- Permanent coverage can add value to you overall financial plan. While term coverage will satisfy most of your life insurance needs, do not overlook what adding some whole life to your portfolio can do for your family's financial security. Permanent coverage can provide immediate needed funds for your family long after your term coverage has expired. The cash surrender value inside the policy is available through policy loans and can be a great source of emergency funds. Some policies include a long term care feature which can provide an excellent source of funds to pay for long term care later in life.
- Don't overlook family coverage. Most families understand the importance of coverage on the primary wage earner. However, spouse and child coverage also need to be considered. Many families today rely on the dual incomes of the husband and the wife to support the family, yet many female spouses have little or no life insurance coverage. The need to cover a stay-at-home spouse may be even more important to provide quality child care if that spouse dies. A Family Rider can be added to most policies. However, these riders usually provide very minimal coverage. It would be wiser to buy individual policies, especially for a spouse. Buying a permanent policy for a child can be fairly inexpensive and is an excellent way to plan for the child's future by providing coverage they can use to protect their own family one day.
- Understand all of your survivor benefits. Active-duty military have a significant array of benefits in place for their families. The Department of Defense (DoD), Department of Veterans Affairs (VA), and Social Security all have survivor benefits available. Some of these benefits can carry over after separation or retirement from the service. Make sure your family understands these important benefits. These benefits need to be coordinated with your life insurance portfolio. Those leaving active duty need to pay close attention to replacing all the benefits they will lose.
- Life Insurance Planning is not easy. Below are some common life insurance mistakes noted by life insurance professionals:
- Naming your estate as beneficiary.
- Failing to name contingent beneficiaries and failing to keep beneficiaries up to date.
- Failing to review you coverage periodically to ensure that your coverage is adequate for the changes in your life (e.g. marriage, birth of a child, home buying, and increases in income/lifestyle).
- Failing to buy the right type of life insurance (Term and Permanent insurance both have a place in your plan).
- Not having enough insurance.
- Making policies payable outright to minor children/grandchildren.
- Forgetting the termination date of your term plan. Remember most term policies will expire before you do.
- Buying insurance as a commodity - Seek the help of a knowledgeable life insurance professional, especially when buying permanent coverage.
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