Life Insurance Essentials for Blended Families
Life insurance plays a vital role in securing your family's financial future, especially for blended families like yours. While it's natural to shy away from contemplating life's uncertainties, having life insurance ensures that your loved ones are protected financially in case of your untimely passing.
While life insurance has many uses, its primary purpose is to offer financial support to your family when they need it most. It provides a sense of security to you now and your beneficiaries later, knowing that they will receive a payment upon your death, helping to alleviate any financial burdens during a difficult time. Understanding the fundamentals of life insurance empowers you to make informed decisions that safeguard your family's well-being and future stability.
What Kinds of Life Insurance Policies Are There?
Understanding your options is crucial for making the right choice when it comes to life insurance. Let's simplify it into three main categories: group, term, and perm insurance.
Term life insurance offers temporary coverage for a set number of years. If you outlive the policy term, it expires, and no death benefit will be paid out. In many cases, you can renew your term policy, or you may be able to convert it to a permanent policy. Be sure to explore your renewal and conversion options and costs before purchasing a term life insurance policy.
Permanent life insurance provides lifelong coverage if you meet the policy’s premium and/or cash value requirements. There are several types of permanent insurance policies including whole life and universal life. The difference between them is beyond the scope of this article. In addition to providing life insurance, many permanent life insurance policies provide you with the ability to grow its cash value. If you follow the guidelines, there can be some income tax benefits to this cash value. You should partner with your financial planner and tax professional when using cash value from insurance policies.
Group life insurance is typically offered by employers or organizations as a benefit. Policy premiums are based on the whole group of employees or members rather than you as an individual. A very important consideration with group policies is whether your coverage is contingent upon continued affiliation with the employer or association. In many cases, it makes sense to supplement your employer insurance with an individual term or perm type policy.
How are Premiums Calculated?
Premiums are influenced by factors such as age, gender, overall health, lifestyle, and coverage amount. Generally, as you age or experience health issues, life insurance becomes more costly due to the increased risk of mortality. Shopping around for life insurance is crucial since premiums and benefits can differ significantly between companies and policy types. Ensure you find coverage that aligns with your needs and financial situation.
How Much Life Insurance Do I Need?
There are several methods for calculating how much insurance you may need, but I believe it all starts with defining what you want for your family and spouse if you were to die tomorrow. Start by asking yourself what you would want for your family if you were to pass away suddenly. Is it to pay off the mortgage? Send the kids to college? Ensure your spouse can retire early? Add up the total cost of what you’d like to cover and then subtract what you already have set aside for those goals.
Alternatively, you can utilize the D.I.M.E. formula, which involves calculating debt and final expenses, required income replacement for a specified period, mortgage balance, and education expenses for your children. This method offers a helpful rule of thumb for estimating your insurance needs.
How Long Should My Life Insurance Coverage Last?
One of the many decisions you have to make when choosing life insurance coverage is how long you want it to last. Permanent life insurance lasts your lifetime, but term life insurance only lasts for a specific number of years.
Typically, a term life insurance policy is in effect for 10, 20, or 30 years. The term length of your policy should be based on how much you can afford, how much you qualify for, and how much you need to cover your outstanding debts and financial obligations. Consider factors like raising children or paying off your mortgage. Young parents and new homeowners often require more coverage than those with fewer financial obligations.
Keep in mind, if you need to purchase a new policy when you are older, the premiums, which substantially increase each year as you age and when your health changes, may become unaffordable. Life is always changing; it may be prudent to buy a longer term than you think you need while you are younger and it’s less expensive. If the term turns out to be longer than you need, you can always cancel your policy.
Reviewing your life insurance needs should be a regular part of your financial planning process. As you age and accumulate more wealth, or kids move on to build their own families, the goals you originally had for insurance may change or disappear altogether. This doesn’t necessarily mean that you cancel your life insurance, but rather, you may just change its purpose. Just like any other asset, you should review your life policies to make sure they still fit your family’s current and future needs.
Based in St. Paul, MN, Endurance Financial Group is an Independent Registered Investment Advisor partnering with blended families to combine their household finances in a unified financial plan that works for all members of the family. They can be reached by phone at 651-605-2318 or online at efg-planning.com.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. Guarantees are based on the claims paying ability of the issuing company.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
