They say save 10% to 15% of your income for retirement. You can estimate that your portfolio should double in value every 10 years or so. But, then there are some things in financial planning that you just cannot apply a rule of thumb. The most obvious to us is life insurance.
Brokers and agents will suggest five to 10 times your income, but that greatly depends on what you are trying to protect. We find that many investors are over-insured, carrying more than they need. While it may make you feel better to be over-insured, you don’t want to be in a position where you are worth more dead than alive—then you’ll be sleeping with one eye open rather than sleeping better at night.
When developing a financial plan for an investor, we begin with a budget of your spending and savings, and then plan for emergency reserves, insurance coverages, and other liabilities. We believe investors should first plan for the unexpected. Without those in place, any setback that jeopardizes your future income could significantly derail your financial plans.
Of course, the question remains, “How much insurance do I need?” The answer most often starts with asking, “What are your trying to protect?” Life insurance can be used to maintain the lifestyle of your spouse should you die; provide resources for your children to attend college; protect a source of income after a divorce; secure your home by paying off the mortgage; protect the transition of your business; provide for an aging parent or other dependent, and charitable giving, enabling you to make a larger gift than you otherwise could afford.
That being said, it is important to remember that life insurance is not the base of your financial plan. When there are competing goals, such as a death benefit for your heirs, cash value to borrow against, and asset growth for a future expense, an insurance product may not be the answer, which is why it is important to define what it is you want to do. Your life insurance product should fit into the bigger picture of your overall financial plan.
While some families look to provide a payout for their beneficiaries, we prefer to look at the economic impact to the family should you die. We seek to answer how detrimental is it to the financial plan if you are no longer in the picture. How does your death affect the longevity of your saved assets? Deriving this answer cannot be done without looking at the numbers within your overall plan.
Furthermore, at some point, if you’ve planned properly, you will no longer have a need for insurance, because your asset base will be enough for your surviving family members to pay the mortgage, and your heirs will have plenty to live on.
Because life insurance needs change with a family’s circumstances, we generally recommend term insurance; however, the new life and long-term care hybrid policies may change that discussion. A hybrid policy is basically permanent life insurance with a long-term care rider. For a fixed premium over the life of the policy, your beneficiaries receive a death benefit when you die, but if you need long-term care, your death benefit is advanced to you as a predetermined monthly benefit, regardless of your actual costs. The money used reduces the death benefit. Should you die, any amount leftover is paid as life insurance to your beneficiaries.
Overall, life insurance should be used to solve for missing pieces in your plan. If you have questions regarding your need for life insurance coverage, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
