This year has sparked a lot of conversation about insurance. COVID brought the prospect of death to the forefront for some, and many had a temporary loss of income which gave them a glimpse of what life might look like without a paycheck. These are good motivators for checking both your life and disability insurance policies to make sure you have the right coverage.
The information below is offered as informational; Mission Financial Planning does not sell insurance, just advice.
Check your life insurance to see how much coverage you have, how long it lasts, and who will receive the payout upon your death.
What kind of life insurance do you have? Term insurance may be renewing annually with increasing premiums, or can have a set period of coverage like 10- or 20-years (with a set premium) before coverage stops. “Permanent” insurance, like whole or universal life, can provide lifetime coverage, with contributions above and beyond the insurance-related costs going to cash value which can increase the death benefit.
Do you need life insurance? The first job of insurance is usually to replace lost income. If your beneficiaries wouldn’t be able to cover their obligations and lifestyle without your income, you may need life insurance. Another use is to pay off debts, to fund future needs like education, or to pay taxes on an illiquid estate.
How long will your insurance last? If you have a term policy, it’s a limited contract with a specific time of coverage for the premiums you’re paying. Whole or Universal life can last a lifetime, as long as the policy is kept in force through premiums paid by you or from the cash value. Have your provider provide an illustration of how long the policy should last based on your plans for the policy. You may want to see what happens if you take loans against the policy to pull out cash value in retirement, for example. You can do this tax-free, as long as the policy remains in place. Tax problems can arise if the net returns in the policy don’t keep up or if you can no longer pay premiums; that’s a topic for another post.
Who will receive your insurance payout? If it has been a while, look into your beneficiaries to be sure they are who you want receiving your death benefit. Stories of loved ones finding out too late that the money went to the wrong person come up often enough to believe that it is a good idea to check. List contingent beneficiaries in the event that your primary beneficiary has pre-deceased you or wants to disclaim the benefit for estate planning purposes.
How much disability insurance do you need? Like life insurance, disability insurance replaces income when you’re unable to work, and is purchased based on the monthly income benefit it would provide. Income loss could be temporary or permanent, due to a catastrophic or a chronic condition or an injury that keeps you from earning. Estimating needed disability coverage is much easier than life insurance. If your paychecks stopped, what would it take to “keep the lights on”? Social Security can cover some of the need, but those government benefits usually come into play only in very serious disability situations. Private insurance usually has a more liberal interpretation of disability.
Most policies allow disability benefits to continue as long as you are disabled, up until a certain age (usually around 65/67), some older policies pay for a lifetime. “Own Occupation” policies would allow you to find other work outside of your occupation and continue to pay benefits. Check to see if your benefits increase with a cost of living adjustment.
Be sure you’re paying for disability with after-tax dollars; this allows the benefits – should you ever need them – come to you tax free.
You don’t need insurance if you have other ways to cover that need – a sufficient nest-egg or spouse’s income for instance. You need to own life and disability insurance only until you can Self Insure; in most cases once you reach financial independence, you’re probably independent from the need for life and disability coverage as well.
Download our Insurance Worksheet to do a self evaluation, and give us a call if you want to discuss.