October 31, 2016

Life insurance 101: Why, when, what, how much

As my father used to say, you always have a choice in life — except that final one. It's unavoidable: We are all going to die someday.

The truth is, we avoid the discussion of death until we can't, because it's hard to face our own mortality.

However, with the average life expectancy of men increasing to 76.4 years and women increasing to 81.2 years, this avoidance is easier than in the past — but also more costly.

According to the Life and Health Insurance Foundation for Education (LIFE), 40 percent of adults in the U.S. do not have life insurance, and among households with children younger than age 18, 11 million are uninsured. In addition, fewer than half of Americans between the ages of 25 and 64 with annual household incomes between $35,000 and $100,000 have their own life insurance policies.

It's no surprise then that most consumers admit they are not financially prepared for the death of a family member, and that such a scenario would have a significant financial impact.

Why buy life insurance?

Life insurance offers financial protection for your loved ones in the event of your death. Simply put: If you have anyone in your life depending on you financially, you need life insurance.

There are five main reasons we purchase life insurance:

• Mortgage protection

• Income replacement

• Debt/final expenses

• College funding

• Estate planning

Business owners may also use life insurance in business planning to minimize business risk.

When is the best time to buy life insurance?

It is better to buy life insurance sooner rather than later. Approval and pricing often depend on health and age, as these are the most critical factors in life insurance calculations. Traditionally, the younger and healthier you are, the less expensive insurance will be.

What type of insurance should you purchase?

There are two types of life insurance: term and permanent. Both have variations, as well as benefits and drawbacks. And both have their place depending on the needs, desires, and financial objectives of the purchaser.

Permanent insurance is a lifelong policy with an added investment component to it, with cash that builds up tax-free. Permanent insurance can be a good fit for many reasons, all of them focused on long-term need.

Term insurance is much less expensive than permanent, but you are only covered for a set number of years. Term insurance is a great way to cover debt needs such as a mortgage, college costs, and income replacement in an inexpensive manner.

If you have calculated how much insurance coverage you need and are struggling to cover the cost of purchasing enough insurance to accomplish that goal, then you should purchase term insurance. Dollar for dollar, term insurance gives you more protection for your money. Most term insurance policies also allow for conversion to a permanent policy at a later time, with no new underwriting. This could be helpful in the future if health changes make qualifying for new life insurance difficult.

How much life insurance do I need?

Whatever your age or life stage, the first step in purchasing life insurance is conducting a needs analysis. The amount of life insurance coverage you need depends on your personal financial situation. A commonly used guideline to estimate your life insurance need is to multiply your annual salary by four to 10 times to figure your potential insurance need depending on your age and need.

There are three key steps to determining the amount of life insurance that is right for you:

1. Evaluate family needs. How much money does it take to run your household? Do you have debt (including mortgage, medical bills and other outstanding debt)?

2. Consider future financial obligations. Are you planning on helping finance your children's future education?

3. Tally resources. What funds do you currently have available (income, savings, investments, retirement plans, existing life insurance) to cover these needs?

The difference between your family's financial needs and the available resources will tell you how much life insurance to get. It may sound like a lot, but if you have a mortgage, young children and debt, there are many years of cost you may want to account for should something happen. This number can and does change throughout your lifetime, and your insurance needs should be reviewed every few years to ensure you're maintaining the proper level of coverage and using the right type of insurance to meet your needs.

My advice is to make a conscious choice about the amount of insurance that is right for you and your family, and don't just avoid thinking about it!

Carol Nelson is the Pacific Region executive and Seattle market president for KeyBank.