Just as you should check in with your doctor each year for a routine physical, it’s also wise to assess your long-term financial health annually. That check-up, experts say, should include whether you have enough insurance to protect your loved ones in case you die or something happens to damage your earnings potential for the rest of your life.
Whether you are a young professional, a parent or someone counting down the days until retirement, you probably need life insurance and disability insurance if other people depend on your income. Besides funeral expenses, life insurance can be used to help support your children, a spouse, to pay for college and pay off a mortgage or other necessities your family might not be able to afford without you.
Depending on the policy, long-term and short-term disability insurance can help pay for a percentage of your earnings, typically up to 60%, while you are unable to work.
Here are some of the factors to consider when it comes to obtaining and maintaining enough insurance coverage:
While COVID-19 has been a looming reminder for the past 12 months that life is unpredictable, the number of adults in the U.S. who have life insurance has gradually decreased from 63% in 2011 to 54% in 2020, according to a new report from Life Happens. The same research, conducted over a decade, shows that a misperception of high premiums keeps many younger adults – even those with children – from buying life insurance.
Taylor Venanzi, CFP, owner and financial planner with Activate Wealth, says he typically encourages clients to opt for term life insurance instead of permanent or whole life insurance because it’s a more affordable option. “With term insurance the idea is that when that term runs out, say in 20 or 30 years, you don’t have debt anymore such as a mortgage,” Venanzi said.
For example, a healthy 30-year-old can get a $250,000 20-year level term policy for about $15 a month. That means if you purchase that policy and pay $15 a month every month, your loved ones (or the person you name as a beneficiary) will receive $250,000 if you were to die during the 20-year period.
Use an online calculator
The easiest way to determine how much life insurance you may need is to look at your yearly income before taxes and multiply that number by 10. So if you make $75,000 a year, purchasing $750,000 in life insurance could be a good fit, depending on how much money your spouse and children will need to live on once you are gone.
But depending on the particulars of your life – whether you have a mortgage, are intent on paying for college for your kids, etc. – you can get a more accurate assessment of your needs by taking the time to run a calculation. Here’s my easy-to-use calculator for that purpose.
Then there’s disability coverage, which will step in to cover a portion of your salary if you’re unable to work. Importantly, although single individuals with no dependents, disability insurance is even more key for them. Why? Because there is no other earner (or potential earner) in the family to fill the income void.
The problem with disability coverage is that it can be expensive. Group disability – offered as a company benefit – is affordable and the way to go if possible. If your company offers this benefit and you aren’t already taking advantage of it, make sure you sign up through your next annual insurance enrollment at work.
If you’re self-employed, here’s a guide to six disability insurers to help determine a plan that might work best for you. Note, even if you can’t afford to replace a full 60% of your salary, this is one of those instances where some insurance is better than no insurance.
“I saw how valuable this insurance can be when a client of mine was permanently disabled,” says Noah Damsky, founder of Marina Wealth Advisors in Los Angeles. “[She] was able to support herself and maintain independence as a result of her long-term disability insurance.”
With Casandra Andrews