Why now is the time to get life insurance
As we reflect on two years of a pandemic that changed all of our lives, it is clear that so much has changed. We have daily conversations with clients about how their individual experience has shaped new behaviors. In particular, the experience of losing loved ones in the blink of an eye has been one that we’ve noticed has generated a need for great safety and security. Conversations about life insurance can be hard because they take you to a space where you need to imagine a time when life runs out, which is terribly sad. However, in the past six months, we’ve found that our clients are more willing to have these conversations because they want the peace of mind that their family will be safe should something happen to them, and they’re not alone. In fact, in a survey conducted in September of 2021 six in ten consumers said they had a heightened awareness about the value of life insurance and 31% said they were more likely to buy coverage in 2021 due to the pandemic.
Many people think buying life insurance is a byproduct of ‘adulting’, but few understand why they’re buying it. By the end of this post, we will build a case for why now is the time to consider purchasing life insurance, and we’ll arm you with an understanding of why life insurance is a need for so many.
What is life insurance?
First, let’s define life insurance. At a high level, life insurance is a financial product that is purchased by an individual to protect their loved ones from financial hardship in the event of a premature death. As you begin to dig into the particulars of life insurance policies, you’ll find there are lots of different types of life insurance policies. For the sake of brevity, today we’ll be writing only about term life insurance: the simplest, most cost-effective type of life insurance policy.
Term life insurance is purchased for a specified term - typically, ten, twenty, or thirty years. When you purchase a policy, you will apply for a defined death benefit - this is the amount that your loved one(s) will receive if you are no longer there. At the end of the term, you stop paying the premium and you are no longer protected.
What will your life insurance pay for?
From covering your mortgage, to childcare costs, to your weekly grocery haul, you already know that life comes with many expenses. We all do so much to take care of our loved ones in the here and now, but many people don’t consider how those left behind would manage if the unthinkable were to happen. We cannot replace the person who once was mother/ father, who picked up the kids from gymnastics, or the baseball coach. But what we can do is help come up with a plan to financially make it easier so you can focus on what really matters, family.
The objective of financial [insurance] planning is to help individuals and families meet/continue to reach their goals and objectives. For many, those goals and objectives may include:
providing income for surviving family members
ensuring that children (or a spouse) are financially able to attend college or other types of advanced education
paying outstanding consumer debt and meeting immediate cash needs
guaranteeing that surviving family members are financially able to remain in their present residence by repaying an outstanding mortgage balance
providing financial security for special needs dependents or aging parents
ensuring the fulfillment of charitable objectives
providing for the payment of estate taxes and settlement costs
guaranteeing the availability of sufficient resources to pay for any needed long-term care
providing for a secure retirement
With the death of a spouse or family member, their earned income will stop, but it doesn’t wipe out their liabilities. Instead, those liabilities become the liabilities of the deceased’s estate and oftentimes will eat into the assets the surviving family might have used to provide income. Some liabilities include:
mortgages and outstanding balances owed under equity lines of credit
credit card debt
bank and credit company loans
education debt
unpaid notes
auto loans
Most people don’t know that there are significant costs associated with passing away, and that survivors bear this expense. The principal cash needs that are likely to arise immediately following a family member’s death (generally be paid from life insurance or other estate funds) include:
unreimbursed medical and hospital expenses
funeral and burial expenses: ranging from $7,000 to $12,000 for the average funeral
federal estate taxes
state inheritance or estate taxes
costs of estate administration: probate court, attorney fees, or executor fees
immediate survivor income (usually 30 days or so immediately following death)
In addition, assets may be subject to federal estate taxation, state inheritance or estate taxes, and various estate settlement costs—estate costs that generally need to be paid within nine months of death—further depleting the total assets available to provide income for surviving family members in the event of a spouse’s premature death.
Approximately 14% of women - more than 18 million - lost their life insurance coverage in 2020, with more than a third (36%) saying it was due to unplanned job loss.
How do you purchase life insurance?
Most employers offer life insurance coverage at no cost to you, usually with a death benefit of $50,000 or one to two times your annual salary (up to a limit). Any death benefit your beneficiary receives in the amount of over $50,000 of coverage through an employer plan will be taxed. This leads us to ask: after taxes, is that enough?
If it’s not enough, there are two options:
Your employer may offer additional term life insurance at a discounted cost to you
You can purchase individual term life insurance through an insurance broker
If you purchase all your life insurance through your employer, you’ll want to figure out if you can take your life insurance with you when you leave. If you’re able to take your life insurance with you, you’ll want to know how much it will cost to maintain the same level of coverage (we’ve found that the cost to bring your life insurance with you after leaving your company tends to be more expensive than purchasing an individual life insurance policy).
Alternatively, working with an insurance broker can also open its own can of worms. There are captive insurance agents who are only allowed to sell the policies marketed by their companies; there are also independent agents who are able to sell you policies from many different companies (we prefer the latter because this enables you to compare companies for the best rate). No matter what, we recommend working with an insurance agent who has an understanding of your full financial picture and who isn’t incentivized to push specific products.
Mana’s pro tips on getting the best term life insurance for you
We’re often asked the question: When should I buy life insurance?
Our answer: Everyone's financial and family situation is different, but generally speaking, as soon as possible!
The best time to buy life insurance is when you’re young and healthy. Premiums will only increase as you get older. Even if you’re in relatively good health, you’ll still pay more for every year you don't get it. Life insurance companies use age, health and risk factors to determine how much you’ll pay annually to protect your life. If you’re applying for coverage over $1 million dollars, there is a high likelihood that the insurance company will require you to take a medical exam. Ideally you schedule this for a time when you’re well rested and have been taking care of yourself (as opposed to the week after a trip to Vegas).
We frequently meet people who are hesitant to buy life insurance because they use marjuana. Ten years ago, marijuana usage would have caused you to pay significantly more in life insurance premiums, but today more life insurers are cannabis-friendly, provided that it isn’t a daily habit. Your best bet is to work with an independent insurance agent who can work with you to find an insurer who is more cannabis friendly.
Life insurance is an important risk management tool and we hope we’ve shown you why. Before purchasing life insurance, we recommend working with a comprehensive financial planner who can help you figure out just how much life insurance you and your family need.
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Jordan Johnson is Mana’s Operations Associate. Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. Jordan has her insurance producer license. When she’s not working, Jordan loves spending time with her puppies Murphy and Mia.