Says no one ever. Why is that? Because that means you have to pay for something that may never benefit you. Another reason why people tend to avoid buying insurance is due to the pushy sales culture within the insurance industry. In this article, we are going to discuss the need for life insurance and property and casualty insurance.
A basic risk management strategy will include automobile, homeowners or renters, and umbrella insurance policies.
Each of these policies protect you and your assets against many different risks, while also providing liability protection. Each insurance policy will carry a certain amount of liability coverage, and it is very important that you ensure that you have the required liability coverage amounts for each policy. If you do not, your umbrella policy (which provides liability coverage beyond your traditional homeowners and auto coverage) may not provide the protection you thought it would.
In addition to the policies above, a basic risk management strategy also includes life insurance. In this article, we will discuss how to evaluate life insurance needs. In future boot camp articles in 2021, we will delve deeper into other insurance policies and associated planning considerations.
Life insurance can be very complex, but ultimately its purpose is to provide security to loved ones should something unfortunate occur.
To illustrate the life insurance planning considerations, let’s assume we are talking with a married individual who is the primary breadwinner, with a spouse that stays at home with two young children.
To determine the individual’s potential life insurance need, we will want to first gain an understanding of their overall personal balance sheet, illustrating all of the couple’s personal assets and liabilities. Along with this couple’s personal balance sheet, a review of their monthly cash flow, including any potential large future purchases, should be performed.
With a good understanding of their personal finances, we then begin to evaluate how much life insurance they want to consider purchasing. When advising our clients, we try to simplify life insurance as much as possible. Typical questions posed to frame the life insurance need discussion include:
- Does someone depend on them for my income?
- Do you have any debt that would need to be paid off in the event of my death (i.e. mortgage)?
- Are there any future debt obligations on the horizon (i.e., education for young children)?
Note: Life insurance can become complicated quickly depending on the policy (i.e. term, universal life, whole life) and any potential policy riders (i.e. additional benefits added to a life insurance policy often requiring additional premium payment). The type of life insurance and other add-on features to a policy are beyond the scope of this basic article. Also given the personal and sensitive nature of life insurance considerations, these more in-depth conversations are best discussed with a trusted advisor.
Through conversations with the couple, we determined that should something unfortunate occur to the income earning spouse, they would like to be in a financial position to pay off the home mortgage and build up a comfortable nest egg for the surviving spouse to maintain their current standard of living, as well as materially fund future education expenses for the children.
While the above example is overly simplified, the review of personal finances, as well as future aspirations, are critical financial planning steps needed to determine one’s potential life insurance need.
If you have life insurance related questions or would like to have a more in-depth conversation, please contact our team at Schneider Downs Wealth Management Advisors to learn more.
