I am most thankful for my health and the good health of my loved ones. But, good news aside, I’ve been thinking a lot about the end of life recently. No, I’m not depressed or terminally ill. Just like you, I plan to live well beyond my life expectancy. Perhaps this heightened awareness of the uncertainty of life has come about due to the coronavirus and totally unrelated albeit tragic recent events within my own circle of friends. Sadly, I imagine you don’t have to think very long or hard to remember a friend or loved one who is no longer here.
In the past few years, I’ve lost three friends to cancer. Another friend was recently diagnosed requiring an experimental and risky treatment. All are/were young and still in the prime of their lives. They didn’t smoke or drink to excess. They were just unlucky, to put it mildly. One day, all was well, and the next day they were undergoing radiation, chemotherapy or refusing treatment altogether so that they could enjoy what little time they had left. I have a picture of one of my friends leaving the hospital with his wife and newborn baby. Mom and baby are pushed in a wheelchair by my friend behind them while he also pushes his own morphine drip. At that point, he was terminal and died a few days later. He held on just to see the birth of his third child, whom he will never know.
My point in going down this morbid path is to remind us of the finiteness of life (although COVID-19 has surely made us all pause on this point lately) and to encourage us all to plan for the worst. This is where insurance — specifically life and disability insurance — can be life-altering decisions for those you leave behind. No one likes to think of the scenarios that require these types of coverage. But just in my own small network and in a short amount of time, I know many families whose lives have been impacted forever by things outside of their control.
I’m going to use the rest of this article to help you think about life insurance. First, a quick definition: Life insurance exists to transfer a catastrophic risk to an insurance company for a fee, i.e., a premium.
There are two general types of life insurance: term and whole/permanent life. Term life exists for a fixed term while whole life exists for your whole life and includes a savings component called cash value.
- Term life pays a guaranteed death benefit if you die during the specified term of coverage, ranging from 10 to 30 years. Premiums are low and fixed during the specified term and do not build up cash value.
- Whole/permanent life provides coverage for your whole life while also building up cash value. Premiums are consistent, and cash value is guaranteed. This type of coverage is more expensive given the additional savings component. Other types of whole life insurance include variable and universal life.
- Variable life is a permanent life policy with the option to invest the underlying cash value into investment options, similar to mutual funds.
- Universal life is a permanent life policy with a cash value that grows based on interest rates set by the insurer. Premiums and death benefits are flexible.
- Variable universal life is a permanent life policy combining the features of both variable and universal life policies.
I’ll use myself as an example, as I am the textbook case for needing life insurance. I’m in my early 40s and the sole bread-winner for my family. We have three young kids and a mortgage. My own life insurance needs analysis is hefty: three kids to send to college, retirement savings still to be saved and a mortgage to pay off. And don’t forget about those ongoing expenses like bread, milk, diapers, etc. The cost of diapers alone justifies its own policy. These needs don’t last forever though; at some point the kids will be out of diapers and educated, the mortgage paid off, and retirement savings funded. I don’t need life insurance for my entire life, just for a defined period. So, I’ve opted for term life insurance, which can be more efficient in some situations and more affordable than permanent or whole life insurance.
Every time my wife goes away for an hour or two or, dare I say, a night or two, I question if I have enough life insurance on her. How much would it cost to replace all that she does for our family while allowing me ample time to get out of the fetal position in a pool of my own tears? It would require fourteen people to do all that she does in a given day. Just because she isn’t earning much money these days, replacing her and the work she does for our family would be costly. So yes, I also have life insurance on her life. You better believe it.
Calculating your own life insurance need is too complex for this article, but here are some key costs to consider:
- Ongoing and future living expenses
- Current liabilities
- Child or dependent care
- Retirement and education savings
- Final expenses
- Business transition
- Legacy goals
- Estate taxes
In general, if your life insurance need is fixed and doesn’t last your entire life, term life insurance may be the most efficient way to cover the risk. However, permanent life policies — while more expensive — do allow you to accumulate cash value and may provide additional flexibility with premium payments and death benefits. Contact your financial advisor for a customized life insurance needs analysis.
For you (yes you) and those you care about, I encourage you to consider if and where life insurance fits into your overall financial plan. Those you leave behind will thank you.
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.