Lately we’ve noticed an increased interest in life insurance. Client’s ask: When should I buy it? Why do I need it? When is it too late? I attribute some of the increased interest to the demographic shift as Generation X’ers (those born between 1965 and 1976) begin to think about estate planning and Generation Y’ers or Millennials (those born between 1977 and 1995) are starting families of their own.
Risk Factors
There are three main risks that life insurance aims to address. Not coincidentally, these are the three biggest risks to the Gen XY groups mentioned. The first risk is income replacement, as many want to ensure that their spouse or partner are financially stable should they pass away prematurely.
The second risk is debt coverage. Debt, or the idea of leveraging money, has become engrained in the American culture. With the high cost of homes, cars, college and kids, it is nearly impossible to be debt free in today’s age. The average American carries $137,000 in debt[i], mostly attributable to home mortgage debt. In L.A. County, the median home price is $550,000[ii]. Life insurance can play a vital role in providing peace of mind that your family can stay in their home, even if you aren’t around.
Another common concern is education or financial support for children. A college degree is often a minimum requirement for employment these days, and many kids go on to get upper level education or specialization thereafter. The average cost of attending a UC school for California residents is currently $34,700 per year and $61,444 for non-residents[iii]. To add to that headache, education costs increase at an average of 6% annually, or about double the general inflation rate[iv]. Life insurance can ensure your children will have education funding until they are financially independent.
When should I buy?
Timing tends to work itself out organically for each person. When I bought a house, I knew I should consider life insurance. When I had my second child, I knew I was taking on more risk than I was comfortable with, so I purchased a life insurance policy.
Life insurance premium pricing is carefully constructed by actuaries, but generally, it’s based on age and health. The older you get, the more expensive a policy becomes. You also want to insure before you have a serious medical illness that would make you uninsurable or make a policy too expensive.
Depending on the type or severity of illness, some insurers will still consider you for insurance after a significant health change after you show two years of stable health with medication or recovery without reoccurrence, but each case is independently analyzed.
Theoretically, some insurers will insure a person in good health up to their 80’s, but the cost benefit analysis of the policy then comes into play and the policy might not be worth the premium payment.
Term or Permanent Insurance?
Term and permanent insurances have different purposes. Term gives you the greatest leverage of your money, dollar for dollar, and is usually used to cover a time sensitive risk such as a mortgage. Permanent insurance protects against premature death as well, but can also be used as an estate planning tool because the intent is to hold the policy until you pass away, rather than to cover a temporary risk.
Permanent insurance such as Whole Life, Universal Life and Variable Universal Life have features that can cater to a variety of needs. In recent years, the cost of insurance (COI) within Universal Life policies have increased, causing policyholders to pay more in premiums than originally anticipated.
One of the best ways to shop for life insurance is through an independent agent who is not tied to a company, but rather, can shop the entire market and quote the policy that best suits your needs. Certified Financial Planners and CPAs are Fiduciaries, meaning they have pledged to act ethically in the client’s best interest, and can recommend a company or policy for you.
What else should I consider?
Another tool to protect the assets you’ve worked hard for is a living will and trust. People often think they are one and the same, but they serve different purposes and can work together well. A living will is for medical affairs and allows you to state wishes for care in case you are not able to communicate your decisions. A trust takes effect as soon as you create it, and can be utilized to hold title of property for the future benefit of your loved ones. After you pass, a trust does not need to go through the timely and expensive probate process and the settlement of your estate is private. An attorney can assist you in customizing a will and trust.
Your attorney can also bundle your living trust with a durable power of attorney, with which you can authorize someone to act on your behalf if you become incapacitated. Ensure it is HIPAA compliant so doctors, hospitals and medical staff will communicate with your designated person.
[i] https://www.nerdwallet.com/blog/average-credit-card-debt-household/
[ii] http://www.latimes.com/business/la-fi-home-prices-20170523-story.html
[iii] http://admission.universityofcalifornia.edu/paying-for-uc/tuition-and-cost/index.html
[iv] http://www.finaid.org/savings/tuition-inflation.phtml