About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients starts with a focus on budgeting, insurance, optimizing employee benefits, investing, and retirement planning. Dream Financial Planning is a Fiduciary Financial Planning firm specifically designed to help individuals in their 30s and 40s take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
Insurance is one of those things most people don't like to spend money on. However, when disaster strikes and you don't already have coverage, the results could be catastrophic. I see this often with my clients in their 20s and early 30. Whether it's a lack of renters insurance, life insurance, disability insurance, or umbrella insurance. If you're in your 40s or 50s, it might be time to start shopping for Long-Term Care Insurance. As a Fee-Only firm, I don't sell any type of insurance. However, I do understand the importance of helping my clients maintain proper insurance coverage as part of a well-crafted Financial Plan. If you have any questions about your insurance coverage, feel free to contact me to schedule an insurance review.
For National Life Insurance Awareness Month, we wanted to share some helpful information about life insurance, including what it is, its different types, and how it can help protect your family in case something happens.
To help guide you in your search for life insurance, we have created this checklist. It covers key considerations, including:
- Purpose of coverage
- The appropriate amount of coverage
- Types of policies
- Rider options
What is Life Insurance?
According to Life Happens, a nonprofit dedicated to giving users unbiased insurance information, life insurance is an insurance policy that provides cash to your family or loved ones after your death. This "death benefit" helps replace your income and supports your loved ones also in non-monetary ways. Your family can use this payment for funeral expenses, mortgage payments, college tuition, and other bills.1
The Different Types of Life Insurance
There are two main types of life insurance: Term Life Insurance and Permanent Life Insurance. At Dream Financial Planning, we primarily favor Term Life Insurance over Permanent Life Insurance primarily for the lower cost, lack of hidden fees and commissions, and subpar investment performance. However, Whole-Life Insurance could make sense for a small percentage of individuals. I see Life Insurance as a tool to transfer risk from yourself to the insurance company, not to build wealth. Let's look at the differences.
Term Life Insurance
Term Life Insurance policies cover the insured for a specific period, usually between 5 and 30 years, depending on your policy. Term policies pay a death benefit only if the insured person dies during the coverage term. These policies don't carry any cash value, but the premiums are usually significantly lower than permanent life insurance premiums. So if you're trying to conserve cash or manage a tight budget, this could be the better fit.
Furthermore, term life insurance policies may offer a greater level of flexibility because you can amend your policy as your needs change. I usually recommend that clients get coverage to about age 60 or their desired retirement age. By age 60 or when you're policy expires, you should have built up significant assets that you can pass along to your family in the event you pass away. In my opinion, Life Insurance is meant to potentially replace lost income during your working years, not to be a life-long or permanent investment.
Permanent Life Insurance
Permanent life insurance policies cover the holder for their entire life. Some of these policies also carry a savings or investment component. According to US News, this cash value "grows tax-deferred over time and may be withdrawn or borrowed against while you're still alive." But remember that withdrawing these funds will decrease the policy's death benefit unless the funds are repaid.2
There are a few permanent life insurance options, including whole life (sometimes called "traditional" life insurance) and universal life. Each of these policies has its pros and cons.
When considering which life insurance policy is right for you, think about the following factors.
- Coverage duration
- Coverage amount
- Cash Value
I think Permanent Life Insurance makes sense for a very small percentage of the population. However, I do get a lot of questions about it, so I wanted to mention it here. If you do have a Permanent Life Insurance Policy, I suggest asking your Insurance Advisor for an illustration and reaching out to me to see if there are less expensive options to help you and your family build wealth.
Do You Need Life Insurance?
For most people, the answer to this question is "yes." Life insurance can help protect the people you care about if something happens to you. This could include a spouse, children, disabled family members, aging parents, or any other dependents. There are a variety of coverage limits, and depending on your household expenses, you may not have to purchase an enormous life insurance policy. Even modest protection could help your family pay the bills and make arrangements.
A simple way to calculate how much life insurance you need is to consider all your immediate, ongoing, and future expenses, as well as the financial resources that your loved ones already have. Then, subtract your financial resources from the anticipated expenses to obtain the difference. Forbes lays out the DIME method: debt, income, mortgage, and education.3
Ready to review (or begin) your life insurance policy for National Life Insurance Awareness Month? There are plenty of websites where you can sign up for a policy, or you can talk to a financial professional for help.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a family, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. So if you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments, we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.
In the June Newsletter, I provide a market update and a PDF guide with tips to help you handle inflation. I also shared a CNN article where I shared my thoughts on Crypto and NFTs, 5 savings mistakes people make when building their financial life. If you find any of this information helpful, feel free to sign up to receive future e-mail updates. If you find any of this information helpful, feel free to sign up to receive future newsletters via e-mail.
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Disclaimer: Dream Financial Planning, LLC does not warrant that this information will be free from error. None of the information provided on this website is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Dream Financial Planning, LLC be liable for any direct, indirect, special, or consequential damages that result from the use of, or the inability to use, the materials in this site, even if Dream Financial Planning, LLC or a Dream Financial Planning, LLC authorized representative has been advised of the possibility of such damages. Please consult with your own advisor before making any changes to your Financial Plan, Investments, or Insurance coverage.