In continuing our series exploring more ways to protect your wealth, we’re taking an in-depth look at a sometimes uncomfortable subject: death and disability. These are always tragic outcomes, but the potential impacts of those can be mitigated through some careful planning and risk management.
As we’ve already discussed, taking an honest look at what a devastating loss would look like for your family and determining what coverage is most effective is essential. Doing so will help you make sure your family is taken care of in case of a tragedy.
Financial Impacts of Death and Disability
If you were to die today, what would your full economic value be? If you earn $75,000 annually at age 45, your minimum income earned until a retirement age of 67 would be $1,650,000. That is the amount of money your spouse and children would be missing out on. While many say you should ensure at a rate that will pay off debts alone, covering your full economic impact will better protect your family’s future. If you account for inflation, raises, bonuses, investments, and more, that amount needed can grow to as much as $3,000,000. Determining your full economic value can be a powerful tool in deciding what amount of insurance you need.
Term Life Insurance
Term life insurance is the simplest and cheapest option to buy. A general rule that is frequently repeated is “buy term and invest the difference.” If you are disciplined or working on a tight budget, this solution can be a powerful one. The trade off is that there is no benefit to term life unless you pass away. If you stop paying your premium, the coverage lapses as well. Some tips for buying term life insurance include:
- Select level term so that your payments don’t creep up and decrease the affordability years from now.
- Explore a convertible policy in case you want other options in the future
- Understand that your protection only lasts for the time period you select and you will need a replacement strategy after it expires
Whole Life Insurance
Whole life insurance, also known as permanent life insurance, is another option. This policy has a guaranteed death benefit as well as a cash value that builds over time. You can pay a loan to yourself by accessing the cash value of this policy, accelerate death benefits if you become terminally ill, and even receive chronic illness benefits. These are often included as “riders” that you need to research and ask about to ensue they are included. As a trade-off, whole life is generally more expensive than term life insurance, so we recommend our clients to do a blend of both to keep costs manageable and receive excellent coverage and benefits. Some tips for buying whole life insurance include:
- Buy from a reputable mutual company
- Make sure your policy has a guaranteed cash value growth
- Make sure your policy has a guaranteed dividend rate (included in most policies)
- Project what would happen if you change your premium, such as stopping payment when you retire to preserve your income
Should you experience an injury that causes your permanent disability, you may never be able to work again. If you are lucky, you will be able to find a workable solution in another industry, but it may not pay as well as your current one. In either case, you need to ensure your current income is protected with adequate disability insurance.
>Many companies offer disability insurance as a company benefit. Make sure that you understand the total amount of coverage. This way you can determine what coverage you need as a secondary policy. The goal is to replace as much of your income as possibility. Some tips for buying disability insurance include:
- Make sure it has its own occupation coverage, which protects your income if you cannot work in your current role but can still work. (Think of a surgeon who injures their hands but can still work as a hospital administrator.)
- Ideally, you will be the policy owner so you can transfer it outside of your current employer without it expiring.
- Evaluate the elimination periods, the period of time before your policy starts paying a benefit. Extending your elimination can lower premiums, but you need to have a cash reserve or other solution in place to cover this time.
Determining what is right for you can be a daunting task. Plus, there are plenty of insurance salespeople out there trying to muddy the waters and sell you a confusing product. Understanding these basics will help, and we’re here to help you make sense of them. Give us a call or email for a quick conversation to see what’s right for you.