Published January 22, 2014
Living in the moment might be a good approach to life, but it doesn’t work in the world of financial planning and insurance.
Financial planners are constantly stressing the need to plan for the future to determine what we can do today to protect ourselves tomorrow. Experts claim consumers are more inclined to abide by this future-directed outlook when it comes to their investing behaviors but don’t necessarily adhere to the dictum when it comes to making life insurance decisions.
As a result, “most people, from line workers to executives, underestimate their insurance needs," says Kent Allison, partner and national leader of the financial education practice at PwC.
Currently, 95 million Americans live without life insurance and only one-third of consumers are covered by individually-owned life policies. That’s the lowest level in 50 years, according to the 2013 Insurance Barometer Study out of the Life Foundation and LIMRA, and experts say these statistics are worrisome.
Consumers typically assume they will grow their assets by saving, ultimately self-insuring to protect their surviving family against risk, Allison says. “But people are making bad decisions and spending on ‘things’ rather than saving.”
To make matters worse, the average consumer thinks insurance costs three times more than it actually does for his/her specific age group, says Marvin Feldman, Life Foundation’s president and CEO. Plus, the 2013 Barometer shows Millennials believe life insurance is seven times its true cost.
In reality, the cost of insurance is only about 0.4% of household income on average, according to research from global reinsurer Swiss Re.
Barbara O’Neill, financial resource management specialist with Rutgers Cooperative Extension and co-author of Money Talk: A Financial Guide for Women, says the majority of people get the most for their premium dollar with term because it is pure life insurance without a cash value component.
Term is often the only way to afford coverage at a young age since most people starting their career have a long earning and life span ahead of them, adds Allison. Age is a key factor in the complex equation of how much coverage one will need to replace income. Admittedly, the number can be astronomical and the decision is individual.
Allison suggests making the number more manageable by working it down: first examine definitive needs, then ask: “’If I can afford this, how much more do I want to protect to make sure my surviving family is not at risk?’”
Here are some tips to help you become an informed life insurance consumer:
Think holistically. Monitor your overall financial behavior to gain perspective about how life insurance fits in, says Ross Linthicum, senior partner and executive vice president at MyFi, a financial education firm. Linthicum says life insurance is often first to go when budgets get stretched.
Think for your lifetime. Your income and your needs change at various stages of your life. When considering life insurance, take into account not only what you earn today but also your potential future income stream, advises Feldman. He calls this your human life value and “it’s the biggest asset you own.”
Buy more than employer group. Employees typically don’t elect to buy up their group coverage on their own dime, says Allison. “But base is never enough.”
A group policy through your employer averages about two-to-three times earnings, says Feldman. Having your additional coverage will make you self-reliant.
For example, it would take almost a million dollars to replace a $50,000 income, according to Feldman. With $150,000 in group coverage means you’re $850,000 short.
Review and reevaluate regularly. Your protection needs are dependent on various issues: having a baby and buying a house, starting your own business, or planning your estate. A regular review of your life insurance will help you determine whether you have the right policy and adequate coverage. You may want to convert from term into a permanent life policy at some point but, cautions Linthicum, do it sooner rather than later to avoid health limitations that may accompany advancing age.
“Term can expire before you do,” notes Feldman. “Less than 2% of term policies actually end up being paid out as a death benefit.” In today’s economy, some seniors are working longer and are challenged by prolonged debt and boomerang kids. A person in his/her 60s or 70s may still need income replacement protection, but be sure to sit down with a professional for detailed guidance which complements your own research.
Steer clear of the pitfalls. Wariness of over-insurance is important, too, Jean Setzfand, AARP’s vice president of financial security warns. Don’t tie up all your assets in any one insurance product but rather retain some monies for equity or other investments over which you have control, she says.
Seek guidance from a trusted source. The internet is a great way to research, price and compare offerings. Tools like the Life Insurance Needs Calculator and can help you get a handle on your protection needs. You can even purchase a plan directly online, but make sure you understand all policy benefits and exclusions, emphasizes Linthicum.
O’Neill Also recommends the Consumer Federation of America as a good objective source to determine if your coverage is where it should be.
Allison says a good rule of thumb is turning to a financial planner to fully wrap your arms around your family’s financial needs; then turn to an agent. Most experts advise seeking guidance from a credentialed insurance professional, especially if you’re considering more complex life products.
When all is said and done, don’t be intimidated if what you think you need may not be what you should be doing per the expert, says Feldman. Be confident you’ve come to the table an informed consumer.