A 2023 Insurance Barometer Study found a record-high number of consumers plan to purchase life insurance over the coming year. Undoubtedly, this increased demand is fueled by younger adults entering the workforce and starting families, two common times for policies to be started.
Additionally, the pandemic was tangible proof of how fragile life can be, and the repercussions of leaving those who depend on you behind unexpectedly. That’s why life insurance was created in the first place: to protect your loved ones in the event of your death.
While it’s easy to understand why insurance exists, it’s not so simple to understand the many types of insurance plans out there and why you might need them.
For example, life insurance is a critical component of your portfolio, but each family’s estate planning needs differ. So, how much life, disability, or long-term care (LTC) insurance do you really need?
What Are the Types of Life Insurance?
Because there are multiple types of life insurance policies, it can make it much more challenging to figure out how much you need. The three main types of life insurance are term, whole, and permanent.
Term Life
A term life policy covers you for a specific length of time, such as 10, 20, or 30 years. If you die while covered under the policy, your beneficiaries receive a specific benefit amount.
For example, Madison is 40, and she buys a policy that will pay out $1 million to her family members if she dies within the next 20 years.
Even though the benefit may be a large sum of money, if Madison is in good health when she buys the policy, she’s likely to have relatively low premiums. A pre-existing condition could make her premiums go up.
When her policy expires at 60, she’s expected to face higher premiums if she renews due to her heightened risk for health conditions.
Whole Life Insurance
As the name implies, whole life insurance covers you throughout your entire life. The premiums can be much more expensive because it’s not limited to a specific period of time.
However, your premiums and benefits won’t change over time, and your policy doesn’t lapse like a term life policy will.
Another significant benefit of whole life insurance is the policy has a cash value. If you buy a whole life insurance policy, a portion can be invested, so you accrue gains tax-free.
You can even access those funds while alive whenever you need to make a major purchase, such as a home or car.
Permanent Life Insurance
Whole life is a type of permanent life insurance, but other permanent options are available.
Universal policies are similar to whole life policies, but they offer flexibility. Once you purchase a whole life policy, the premium, death benefit, and growth rate are set for the life of the policy.
Universal policies allow you to change the premiums and benefits as you need, and its growth rate is based on interest rates instead of dividends. While there are definite benefits to choosing this type of policy, there are drawbacks to permanent life insurance.
High premiums, built-in commissions costs, and the chance of underperforming other investments mean permanent life insurance policies are usually not your best option.
Be aware that both whole and permanent life insurance policies are aggressively marketed in ways that over emphasize benefits, which is one reason to involve an unbiased individual like your financial advisor in your insurance decision policies. They can help you compare options and genuinely make the right call.
What About Long-Term Care Insurance?
The goal of long-term care benefits is very similar to life insurance coverage: reduce the financial burden on your dependents. But in this case it is protecting against the possibility you end up needing expensive long-term care (LTC) like a nursing home, assisted living facility, or in-home care after age 65 for an extended time.
A study from the Office of the Assistant Secretary of Planning and Evaluation indicates that 70% of adults over 65 will need paid long-term care services at some point in their life and Genworth estimates the average cost of long-term care expenses to be over $9000 a month for a private room in a nursing home.
Now, these figures may have you racing to sign up for LTC insurance, but it’s not quite that simple. Giving those figures more context, Vanguard has completed research showing that between Medicaid, Medicare, health savings accounts, and general differences in the healthcare needs of individuals, about half of people never pay for long-term care. Drilling down deeper, only about 15% of retirees can expect to pay over $250,000.
The reality is healthcare is a ballooning expense that has the potential to derail retirement savings if not planned for appropriately. But armed with the data, it can be helpful to work with your financial advisor to help select a plan that matches your financial situation and your health risks. Especially for those who have aggressively saved for retirement and contributed to health savings accounts, a LTC insurance plan may not make sense, especially as insurers have been drastically increasing premiums in the last few decades to maintain the level of care promised.
Factoring in Disability Insurance
Not to over-complicate your journey to properly insure your life, but don’t forget about disability insurance. While no one likes to think about death or the possibility of needing long-term care, many assume they will never face a disability that will interrupt their ability to work and earn an income.
The social security administration has continued to track and release data on the reality of the likelihood that at some point during your career, you will be disabled for an extended period of time. Currently, 20-year-olds have about a 1 in 4 chance of being disabled for at least 12 months before reaching retirement. Here are a few quick tips:
- Don’t assume your employer plan is sufficient. Review it with your financial advisor to ensure that it is suitable for your financial plan and appropriately protects you from a temporary loss of income.
- Skip a short-term policy in favor of contributing to your emergency fund. Long-term is where the true benefits lie.
- Match your disability insurance to your budget, and consider options to add on to employer insurance or find coverage through professional associations to reduce cost.
- Certain professions like doctors, business owners, and lawyers should evaluate disability coverage in a unique way. Be sure to speak to a professional who understands the insurance needs of these professions or other high-income, high-risk professions.
For more on disability insurance, check out this article from our Chief Investment Officer.
Can I Have Too Much Life Insurance?
It’s certainly possible to have too much life insurance. For instance, if you’re young and single, you could purchase long-term care coverage while it’s cheap, but there’s no need to have life insurance. If you have a family but bought a policy without crunching the numbers, you may have too much life insurance.
A simple way to estimate your coverage amount is to multiply your annual income by 10-15. That gives you a good starting point, but a deeper dive into your expected future expenses can deliver enormous value in the long run.
How Can I Maximize My Life Insurance Coverage?
There is no simple solution to knowing exactly how much life, LTC, or disability insurance you need, and you should be wary of anyone trying to sell the easy button solution. You want to take care of yourself and your loved ones without falling prey to over-insuring unnecessarily or having competing policies.
For this reason, we speak with all of our clients about insurance needs regularly as part of comprehensive wealth management. Your needs evolve over time, as does the market and what is available, so having a non-biased advocate on your side is invaluable.
If your financial advisor isn’t asking you about your insurance coverage, it might be a sign you’ve outgrow basic financial advice and are ready for wealth management from a firm like Plancorp. Reach out today to see how ours can help you obtain peace of mind about your future.
