The annoying thing about life insurance and disability insurance – or just about any type of policy, actually – is that it's a product you buy in the hope that you don't really need it.
However, it remains an important part of protecting your financial plan, together with you and your family. Nobody wants to think of facing a worse scenario, but adequate protection could provide some peace of mind.
It can help you rest a little more easily knowing that even if things go wrong, you and your loved ones have at least guarantees against financial difficulties.
Another annoying aspect of getting the right insurance? The fact that "getting the right insurance" can be difficult if you don't educate yourself on the process first.
Understand your needs before purchasing a policy
Insurance, both life and disability, is a product sold by sellers or brokers. These people generally earn commissions from your purchase, which can present a conflict of interest.
Knowing that those who sell insurance can have an incentive to present larger, more complex and therefore more expensive policies – because they earn more money when buying those as opposed to cheaper options – is a good reason to make sure you have at least one & # 39; idea of the type of policy you actually need before looking around.
I am a paid financial planner, so I don't sell insurance. But many of my clients come to me with existing policies and often:
They have too much insurance and are paying more than they need for their policy
Having the wrong insurance for their situation and it would be more suitable with a different product
And of course some have no insurance, even when they need it, because the process of purchasing the right policy can be confusing to navigate alone.
The right insurance policies for you will be those that, in the case of life insurance, protect anyone who relies on all or part of your income from financial suffering if you should die and can no longer support it financially. And for disability, the right policy is one that protects against the risk of losing the ability to earn an income during the working years.
General considerations for determining the need for life insurance
In very general terms, you need a certain amount of life insurance if someone who is financially dependent on you would face financial difficulties if you die.
So if you are single and nobody depends on you financially? So life insurance may not make sense.
However, some sort of coverage requirement almost always applies if you have minor children; it will usually apply if you are married and share finances, especially major debts (or are in a long-term partnership in a double-income family).
For example, even if you have no children but you and your significant other work and earn income … your spouse would be able to pay the mortgage on your home without the financial support that income creates if you come to to miss? Would they be able to maintain their current lifestyle and achieve goals only on their income?
If the answer is no, it might be worth looking into life insurance, so none of you would stay in one place if you couldn't manage your financial responsibilities without the support of the other.
The same is true if you are married but one of you does not earn an income – you may still want that person to have a policy, even if he does not have a salary or a salary, because they probably contribute to the family in other ways that you would struggle to maintain alone. without paying help.
If they die, should you pay for childcare? Housework? Cooking and running errands? Contributing to your family in general goes beyond just making money, so consider these other contributions as well.
Empirical rules for coverage amounts
This should help you understand if you are someone who needs life insurance – and when it comes to determining how much, a basic rule of thumb is to say that the amount of benefit should be ten times the current income.
So if you make $ 100,000, you may need $ 1,000,000 worth of coverage. Keep in mind that this is only a starting point; you can adjust this amount up or down depending on things like:
How comfortable you are with risk; if it prompts you to maintain minimal coverage, a slightly larger policy may reduce anxiety.
To what extent do you and your partner believe it is your financial plan; if one of you dies, would the other still want to maintain the same lifestyle or progress towards the same goals? They may be fine with their income if they no longer pursue your current and shared goals.
How many financial obligations you currently have and how much liquidity you would like to leave to the beneficiaries; you may need more coverage if you have many debts that would have fallen to your heirs if something were to happen to you.
There is a lot of nuance here and none, the only "best" answer for what's right for everyone. But this should make you think in a good direction in terms of how much you may need coverage to adequately protect yourself.
Make sure you get the right type of insurance
The type of insurance is also an important consideration. Most of the time, for most people, term life insurance is a good choice.
There are other options out there, including whole, permanent, universal and others – but for most people, a term life insurance policy will be the solution that best suits their needs.
The term allows you to take out the insurance policy for a specific period of time, for example 20 or 30 years. Your policy automatically decreases at the end of the term and you will no longer have to continue paying premiums.
This makes the term much more convenient for most people … especially considering that you may not need life insurance forever. For example, if your kids are currently 12 and 14 years old, a 10-year policy might be perfect for you – because in 10 years, the youngest will be 22 years old and, in the worst case scenario, could take a job to support themselves financially at that point.
There are circumstances in which other life insurance products, such as whole or universal life, make sense. These are not inherently bad options; they just don't make sense for most people's security needs. Unless you are dealing with an exceptional family situation, term living is probably a safe bet that is convenient and does not require you to pay forever in the policy.
Think through the need for disability insurance
In addition to life insurance, you need some sort of disability insurance if you need the money you earn from an income to pay for your living expenses and achieve important goals.
This applies to almost all of us. Because if we have 10, 20 or 30 years of career ahead of us, this means that we risk losing 10, 20 or 30 years of loss of income if something happens where we were unable to work.
Disability insurance, if necessary, would pay a monthly allowance to make sure you maintain an income stream, even if you can't earn a paycheck.
Coverage usually gives you an advantage of around 60% of your current monthly income. (The reason it isn't 100% closer is because insurance companies don't want to incentivize people to apply for disability if they don't need it.) But sometimes you can get a little more (about 70 %), or you may need less.
Here's what to consider when determining how much is sufficient, but not too much, in disability insurance:
Do you currently have debts or other financial liabilities? How much? Your policy should be large enough so that the benefit allows you to continue paying the balances without defaulting on the loans.
How much money do you need per month to maintain your average lifestyle? Your policy should pay enough so that you can afford all the fixed, non-negotiable costs. You may want to consider additional healthcare costs or how your lifestyle could change if you were no longer able to work.
How much money do you currently save per month towards your goals? You would like to continue funding those goals if you have had a disability. Your policy should pay enough to stay on track for existing goals that will require significant funding over time, such as college savings for a loved one.
You might also think about what kind of elimination period makes sense; this is the time that elapses between the request for disability and the beginning of the benefits. A longer elimination period can help you save on premiums, but this can only make sense if you keep an emergency fund large enough to cover the gap between potential disability and when your benefits start paying off.
Speaking of emergency funds, it is often advised to save your cash reserve to use if you have not managed to earn your usual income for 3 to 6 months – and use it as protection instead of disability insurance. short term whenever possible. Short-term self-insurance can help you save some money on premium costs.
Long-term disability is the most important policy, because it covers you for years, even decades, rather than a few months.
Also consider how long you need benefits. You may not need it from now until the age of 65; covering up to 55 or even 50 might be enough.
Finally, think through the cyclists that you may need or want. Some may come for free with your policy; others may be an additional charge. A really important aspect that many people forget, but most people could take advantage of, is the cost of the cyclist who adjusts to life.
This means that your advantage automatically adjusts over time, to ensure that the amount that would be disbursed to you is up to date with inflation.
There is a lot to digest here – and this too only scratches the surface of the conversation about planning for protection. However, it is a starting point and I highly recommend continuing your reading and training in order to feel more confident and informed of your potential insurance needs before collecting quotes for policies.
The more you understand, the better you will be able to make big decisions about which products best suit your needs.