What you need to know about life insurance

Identify your goals to determine your insurance needs

When you’re considering life insurance, chances are you’re thinking about how to ensure that your family might keep their home and achieve their goals, like attending college, even if you’re not there to support them.

Identifying your family’s goals will enable you to determine how much money they may need in the event of your untimely death. If you have several large goals but don’t clearly estimate them, you may end up underinsured. If your family’s need is lower, you could be overinsured, which means you could be paying too much in insurance premiums.

Understanding your family’s financial needs and goals will help you reach the most effective level of coverage.

Three steps to calculating your life insurance needs

Step 1: Estimate how much you need to cover your family’s immediate needs and living expenses

To identify immediate needs, consider the cost of final arrangements and any debts that you might want to have paid off. Then estimate your family’s living expenses and identify which living expenses might change. Some expenses will decrease, for instance, car-maintenance bills and life insurance premiums. Some may increase, including child care, psychological counseling, educational expenses and future medical premiums. You might want to factor in at least an additional two times your current annual expense for medical insurance premiums for your family, regardless of your employer's current policies. This conservative approach recognizes the increased costs often associated with COBRA-continued group coverage, individual conversion policies and/or policies purchased through the insurance marketplace. Consider how many years of income you might want to provide for your family. Some common time frames include, until your youngest child reaches independence (often after college graduation), or until retirement for a spouse or partner. Every family’s needs and goals will be different. Estimating this amount is about determining what is important to you.

Step 2: Understand Social Security survivor benefits

If you have young children, your surviving spouse will be eligible to receive Social Security benefits until your youngest child reaches age 16. Each of your children receives a benefit until they are age 18 years old (or age 19 if still in high school). If your children are older than 16, your surviving spouse will have to wait until age 60 before collecting a survivor benefit. The amount your survivors may collect from Social Security reduces their income needed from life insurance benefits.

Step 3: Quantify the value of other accounts or income available for your surviving family that will also reduce your life insurance needs

This could include income from your spouse’s paid employment, savings and investment accounts and more. There are a few questions you should ask yourself:

• Will your family be able to replace your lost earnings or return to the job market (if they aren’t currently working)?
• How long will the replacement income last?
• Will your spouse benefit from your employer's survivor benefits, their own benefits, or get help from family? Will it be enough? 
  
  

Types of life insurance

Term life insurance

Term life insurance is often purchased when the insurance need is “temporary” or short-term, generally less than 20 years. It’s less expensive than other options, however it comes with only a death benefit (there’s no chance to invest), and it gets more expensive to purchase as you get older.

There are a few different types of term life insurance, including:

• Yearly renewable—This coverage is paid for by the year and its premium increases every year. This type of coverage is often used as a short-term solution, especially since insurers must honor the policy regardless of the insured’s health status
• Level term—This option is slated for a specified amount of time, most commonly terms range from five to 20 years, but potentially up to 30. The premiums are fixed for the duration, but may increase dramatically if you choose to continue the policy after the term ends
• Decreasing term—In this type of policy, the face value decreases while the premium payments remain the same. Mortgage insurance, which pays off the balance of a mortgage upon the death of the insured, is a form of decreasing term insurance. This tends to be a more expensive option than the other types of term life insurance
   

Permanent life insurance

Permanent life insurance is an alternative to term life insurance that may make sense if you are looking for insurance that will last longer than 20 years. Permanent policies tend to be more expensive but can be used as investment vehicles and may have tax-savings benefits.

Types of permanent life insurance include:

• Traditional whole life—This type of policy guarantees static premiums, growth of cash and a death benefit paid to the beneficiary. While its main purpose is protecting your family’s future, traditional whole life coverage can be used as a source of potential supplemental income in the future and/or as part of your estate planning strategy
• Traditional universal life (TUL) insurance—This coverage offers flexible premiums, an adjustable death benefit and tax-deferred cash-growth opportunities. You know the premium needed to sustain the TUL policy over the long term, but you have the flexibility to pay more or less. Just be sure to pay enough premium to keep the policy from lapsing. The cash value account grows based upon an interest rate declared each year by the insurance company
• Guaranteed universal life (GUL) insurance—This version of universal life coverage lets you bypass the required cash-balance of a TUL policy. GUL also allows you to maintain the same premium payment throughout the term of the policy. However, it does provide less flexibility than the traditional option when it comes to paying in extra to boost savings
• Variable universal life (VUL) insurance—VUL differs from TUL insurance because you can direct the investment strategy for the cash value
   

How can Ayco help?

If you have access to Ayco as an employee benefit:

• Ayco’s digital platform has additional insurance resources, including a calculator that allows you to ask “what if” and model different scenarios and outcomes
• Ayco coaches can help you estimate your life insurance coverage needs and review the options available through your company benefits

If you have Ayco as a company benefit, register or log in to learn more about this and other financial wellness topics. If you’re not sure whether your company offers Ayco Financial Counseling, contact your human resources representative.