As Ben Franklin so famously wrote some 230 years ago, “In this world, nothing can be said to be certain, except death and taxes.”
Somber but true, the quote leaves many of us regularly thinking about how much we’ll owe our esteemed employer, the federal government, each year, and how many years we’ll be here. And while the answers are hopefully not much and many, respectively, we unfortunately each face the possibility of premature death — and, consequently, the possibility of leaving our loved ones struggling to make ends meet when we and our income are no longer around.
At this point, of course, you might be thinking, “I already know all of this, and it’s why I have a life insurance plan through FEGLI,” or perhaps that, because you don’t have any financial dependents, there’s no reason for you to be among the 59 percent of Americans who own life insurance. But September happens to be Life Insurance Awareness Month, making now an opportune time to consider the many factors that make your policy right for you — that is, a policy that properly protects your family for the appropriate amount of time and at the best price.
Answering these questions will help you find the policy that’s right-sized for you.
What type of life insurance makes sense for you?
There are just two broad types of life insurance to choose between:
- Permanent Life Insurance, which is designed to last your entire life, builds cash value over time, and includes a “death benefit” that will be paid out to a beneficiary or beneficiaries.
- Term Life Insurance, which acts as a short-term financial safety net by covering a finite need, or needs, for a finite amount of time.
Because most life insurance needs go away over time, term insurance, which is generally far less costly than permanent insurance, is often the preferred option. While the “use it or lose it” nature of term insurance can turn people away, your goal is not to be “insurance rich,” but rather to acquire and maintain an appropriate level of coverage that fits within your financial plan and meets your ever-changing needs. The need to cover a baby, for example, could be adequately covered by a 20- or 25-year term policy, while a new mortgage might require a 30-year term.
Given this, it’s always important to make sure your policy reflects any major life changes (buying a home, getting married or divorced, retiring, etc.); lists the correct beneficiaries (trust me, it’s nearly impossible to settle things retroactively if a long-divorced spouse is listed); and recognizes the unique intricacies of the federal system (e.g., while your CSRS or FERS retirement disability automatically increases with your salary, your coverage will actually erode over time if you’re under 45).
How much life insurance do you need?
Turning to this more complicated question, there’s no perfect calculation to determine what dollar amount of life insurance that you should buy — and, as a quick Google search will prove, there is much debate over how much you should have.
There are, however, three well-regarded methods of estimating your coverage needs based on calculating your long-term financial obligations, subtracting your assets, and looking at the result, or gap, which is what your life insurance will need to cover.
- Method 1: Multiply your annual income by 8-12.
- Method 2: Multiply your annual income by 10, then add $100,000 per child whose college expenses you plan to cover.
- Method 3: Under the “DIME” (Debt, Income, Mortgage, Education) formula, add up your debts and funeral expenses, multiply your annual income by the number of years your family would need support, calculate your remaining mortgage, and estimate all, if any, college costs.
The last of these methods is obviously the most comprehensive, but even it may not consider all of your specific needs. Finding your best amount will likely require you to discuss your family’s current and future financial obligations and liquid assets with both your spouse and a financial planner. After doing so, you may want to consider our third, and final, question.
How many life insurance policies should you have?
It’s easy to assume that one person should have one policy, right?
Though this is a very common misconception, it often makes more sense for you to buy multiple, smaller policies with varying termination dates instead of one large policy. Also known as “stacking,” this approach allows you to align your coverage supply with your coverage demand, with coverage declining as policies within the “stack,” and the needs that they were intended for, terminate.
Though there’s clearly a lot to consider, answering these questions will help you discover, and obtain, the coverage that’s right for you and your family.
And isn’t that what Life Insurance Awareness Month is all about?
Greg Klingler, director, wealth management, CFP, ChFEBC, joined the Government Employees’ Benefit Association — a nonprofit promoting access to insurance and investment options — in 2010, serving as director of products and member services. He has since transitioned to focusing solely on wealth management, advising state and federal employees in retirement planning using pensions, survivor pensions, employer sponsored insurance and retirement plans, as well as portfolio analysis, estate planning and college planning.