Do I Have Enough Life Insurance?

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As a fiduciary, fee-only wealth management firm, we don’t sell insurance (or anything else), but it doesn’t mean we don’t discuss insurance as part of our financial planning process.

It turns out that people—even those with an agent—have a lot of questions about insurance, and life insurance in particular. One of the biggest is, “How do I know if I have enough?”

It’s a logical question. Unlike homeowner’s or auto insurance, there aren’t any hard or fast rules for how much coverage you need. That often means dealing with aggressive agents who have a vested interest in getting you to buy as much coverage as possible—even if it doesn’t align with your current and future needs.

It's really the insurance industry that has pushed this narrative of how much life insurance is “enough.” Here at Cedar Point Capital Partners, we see “enough” as a relative term. Is it enough to pay off your final expenses, or pay for your children’s education? Is it enough to provide for your family for decades to come by essentially replacing your income?

The key to answering the question “how much life insurance do I need?” lies in understanding your own expectations, and aligning your coverage to meet them. We can help you sort through all of that.

Life insurance considerations

You may already be familiar with the two main types of life insurance, but in case you’re not, here’s a quick primer:

Term Life Insurance: This form of life insurance provides coverage for a specific term or period, typically ranging from 10 to 30 years. If the person covered passes away during the term, the beneficiaries will receive a payout. It’s typically the most affordable and it’s often used to provide financial protection during specific points in life, such as when there are mortgage payments to cover or dependents who rely on the insured’s income.

Permanent Life Insurance: Permanent life insurance comes in two flavors, whole and universal, both of which provide coverage over a person’s entire life. They offer a death benefit and a cash value component that potentially grows at a fixed or variable rate over time. The premiums, however, can be many multiples higher than comparable term life policies; they may also be fixed (whole life) or variable (universal life). These policies remain in place until the insured’s death or the policy owner discontinues paying their premiums and the policy’s cash value is depleted.

While the life-long, blanket protection of a permanent policy often sounds attractive, we typically find most clients to be better served by a term life policy to cover their needs. That’s because term life insurance does not require any sort of long-term commitment—making your insurance coverage more flexible as you may cancel, change, or acquire new coverage altogether without surrender penalties or fees on your cash value premiums that permanent life insurance policies often require.

It also allows for (possibly big) premium savings to be funneled into tax-favored accounts like Roth IRAs, where the funds can be allocated and invested more efficiently, without ongoing insurance expenses and costs on your savings.

That’s not to say there isn’t a time and place for permanent life insurance policies. Universal and Whole life insurance policies can be purchased for a specific reason—potentially as a tax shelter (though in many cases, other tax shelters may exist), or as a way to help pay for possible future long-term care expenses, or even as a ‘non-market-correlated’ investment vehicle (in the case of whole life).

How much life insurance do I really need?

If you just want to ensure your final expenses are covered, you may well have enough coverage between your own savings and the generic company-paid life insurance policy given to employees as part of their benefits package (often a multiple—one to five times—of your salary).

Alternately, if you want to pay off your mortgage and any other debts, leave an inheritance and/or ensure your family is financially secure for decades to come, you’ll probably need to seek additional life insurance coverage.

How much coverage you want and how much coverage you need may not be the same number, depending on your particular point in life. Term life insurance will generally provide well-rounded coverage that can help financially protect your family from the unexpected. It’s all about perspective and what makes the most sense based upon your overall financial plan.

There are several popular approaches out there for estimating how much life insurance you may want, and plenty of online calculators to play with. They range from the (overly) simple—your income times 10 plus X for inflation—to the complex, like Human-Life Value calculations (HLV), which attempt to quantify your future earning potential and replace it for a set amount of time.

Don’t worry too much about the math right now. If we know your long-term goals and expectations, we can help you work through the details. The goal is to find the right life insurance coverage that protects your legacy, while also respecting your current financial reality.

And if the thought of dealing with an insurance agent already has your blood pressure climbing, know that we can connect you with a number of unaffiliated, independent insurance agencies that specialize in placing people in low-fee, low-commission policies. As a fiduciary, we don’t receive any sort of commission or payment for referring people—we just do it because it’s the right thing to do for our clients.

If you’re ready to get your life insurance situation in the right place, we’re here to help as part of a holistic financial review. Give us a call and let’s talk through it.

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