Day 10 of the Legacy Notebook Series
We’re all done with the financial section of the legacy notebook and will focus next on insurance, beginning with life insurance.
What’s that you say?
No life insurance?
It’s one of those things you know you need but haven’t gotten around to yet, right?
Getting a quote on life insurance truly takes only a few minutes with a single phone call or submitting an online quote request.
If you have people in your life that rely on your income for their basic needs (typically a spouse or partner or kids), you need term life insurance to provide for them in the event of your death. Of course, if you have adequate cash savings and investment portfolios to provide for your loved ones, then you are “self-insured” and don’t need additional coverage. For most of us, particularly those with young kids, life insurance is an easy security blanket that provides you peace of mind and financial security to your family.
Please get coverage in place. Okay, public service announcement is concluded.
Life Insurance
Take a few minutes to gather information on each of your life insurance policies. You may have a policy provided through your employer, a policy offered through your credit union, and/or a policy you purchased directly from the marketplace (or maybe all three).
The only info you may have on employer-provided policies is likely to be in your employee handbook or paperwork you received upon hire or becoming eligible for benefits. If those documents are long gone at this point, just ask someone in HR for a copy of the policy so you have something to reference in your legacy notebook.
Most life insurance policies purchased privately (not through an employer), provide annual statements that show the policyholder, face value of the policy, term length, and beneficiary designations. A recent annual statement works well as a reference doc in your notebook.
In our situation, we each have a small policy provided through our employers. Often these kinds of policies might have a face value equal to one year’s salary or some percentage of annual earnings.
The policy provided through my employer is a $10,000 policy that is attached to our medical insurance. It’s a great benefit to have, but given the relatively low face value on the policy it is adequate to cover “final expenses” (burial/cremation, funeral services, etc.), but not much else. My husband’s employer-provided policy has a face value equal to his annual salary. Our combined employer-provided life insurance offers us some security in terms of providing cash to cover crucial expenses, but we opted to add additional term insurance on top of the employer-provided coverage.
There are two main reasons we purchased additional life insurance coverage.
(1) We still have a mortgage on our house.
We want to have adequate life insurance in place to pay off the mortgage on the house should one of us pass away before we get the $@#$%^ thing paid off. Not having to worry about a mortgage payment will alleviate financial stress during an already stressful time.
(2) We have young kids.
We want to have enough life insurance in place to provide for our kids in the event that one or both of us die before our kids are grown. The idea being that the life insurance proceeds will replace the income we would have used to provide for their needs (college education, basic living expenses, etc.).
We chose 20-year term insurance for our situation and I suggest that in almost every case, term life insurance is the best option. Term life insurance is fairly inexpensive unless you have medical or lifestyle scenarios that the actuaries have categorized as higher risk (tobacco use, diabetes, cancer, pilots, affinity for skydiving, and so on). As an example, my 20-year term policy premium is $30/month for $500,000 in coverage.
If you are in the market for additional coverage, get at least three quotes so you can compare or use a service provider like Zander to apply for coverage and they will come back to you with several estimates for your consideration.
There are a few instances (very few) when a whole life insurance policy might make sense, but please only venture down the path of whole life insurance if it is part of an estate plan that a trusted advisor (read as: an advisor who does not sell life insurance) has helped you put together.
When you are thinking about life insurance coverage, consider the amounts your family would need to maintain your current qualify of life if the unthinkable were to happen. One common rule of thumb is obtaining life insurance coverage equal to 10-12 times your annual income.
In full disclosure, we didn’t use the 10-12x formula to determine our policy amounts. We considered the life insurance amounts provided by our employers, our mortgage balance, the estimated basic living expenses for our children that would need to be covered and settled on an amount for each policy that made sense to us at the time.
Based on some formulas, we are a little “underinsured” but we are comfortable with what we have in place. All that to say, give some thought to your needs and the purpose the life insurance proceeds serve in your situation to come up with a coverage amount that fits your scenario.
Beneficiary Designations
While you are gathering your life insurance policy information, take a minute to review the beneficiary designations made on each policy. If the designations are outdated or no longer reflect your wishes, contact the policy provider to make the necessary changes.
Forgetting to update beneficiary designations after key life events can result in awkward situations. A family member of mine had a life insurance policy that, at the time of his death, still listed his former wife as the beneficiary. Let’s just say that their divorce was not super amicable. I’m confident he didn’t intentionally leave her on the policy. Sadly, intentions make no difference in these situations. The beneficiary designation paperwork reigns supreme and the proceeds are directed accordingly.
Make sure your beneficiary designations are up to date. Changing your designations is typically a very simple process. It’s usually just a one-page form to be signed and submitted.
Today’s Action Items:
- If you don’t currently have life insurance and have people other than yourself relying on your income, consider obtaining coverage
- Add documentation on each life insurance policy you have to your legacy notebook
- Review the beneficiary designations on your life insurance policies and update if needed
thanks for reading,
Lesley
P.S. Looking for the rest of the series? You can find it here.
Stronger Wallet’s Legacy Notebook series information is intentionally general in nature and covers typical scenarios. You may have special circumstances that need to be considered. Always consult a trusted advisor before making big decisions about your financial legacy. Feel free to send me questions along the way at lesley[at]strongerwallet.com.
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