Let's imagine one of your employees needs help deciding how to figure out their family’s life insurance needs and options. Your Money Line has an expert team of Financial Guides to walk them through journeys just like these.
One of our Financial Guides, Stacy L., breaks down our team's general approach to financial wellness solutions. We'll start with a hypothetical employee. We can call him John.
Issue
John is part of a two-income household; They have a mortgage, car payments, two children under age five, and expectations that they will be funding their children's undergraduate college education in the future. John has life insurance through his employer that he recently signed up for during the company’s open enrollment period. Neither John nor his partner has ever bought a private life insurance policy. Life has been busy with full-time schedules and activities, and they just haven’t gotten around to the conversation. They have always been good savers and figured they have the go-to cash needed if emergencies arise. John lives in the same area as his extended family, who they often see. Finding childcare and other family support has not been a problem. Things have gone well for John and his family; they have not experienced any financial shocks that would profoundly impact their finances. John has an investment account with a local financial firm; however, they have never discussed life insurance. It became evident to John that if he or his spouse died, their combined assets and life insurance from work would be both insufficient and depleted to cover their mortgage, other outstanding debt, and daily expenses. Furthermore, providing for the future financial needs of his surviving family members would be grossly impacted by the absence of John or his spouse. This absence of adequate insurance coverage puts John's family at catastrophic risk of financial loss and overall family well-being.
Catastrophic risk is not what John has in mind for his family.
What could John do differently to change his family’s future and legacy; get life insurance and enough of it!
Solution
Determining the life insurance needs of John and his family is less complicated than it can feel. Life insurance is a puzzle piece in our overall lives. One framework that John can consider to assess his life insurance needs includes determining his income replacement level, debts and expenses, current savings, and insurance.
Income Replacement
This will be an individual determination for both John and his spouse. If John made $50,000 per year - how much of his income would his family need, and for how long? John’s children are under five, so if things went awry today, it would be at least fifteen years (not including the college years) his family would need his income. As a simple starting point, John could use his full gross pay of $50,000 annually and multiply this by fifteen to develop an income replacement need of $750,000. This calculation is just a baseline number that does not include pay increases and inflation over time. As mentioned, John’s spouse should make a separate calculation for their own insurance needs.
Step 1: $50,000 x 15 years = $750,000
Debts and Expenses
The loss of a loved one is a time of tremendous transition. Maintaining the stability of housing and other essentials can help in the healing process. John must account for the family’s current and future financial obligations: shelter/mortgage, home maintenance and repairs, everyday living expenses including childcare costs (even if relatives live close by), debts including credit cards and loans, hospital bills, funeral and burial costs, legal fees, and future education expenses. Lump-sum numbers for each category will help simplify this calculation. Let’s say John needed $400,000 in today’s dollars to cover these costs; he would add this to his life insurance needs calculation.
Step 2: Lump sum needs = $400,000
Current Savings
In determining a family’s life insurance needs, insurance companies will subtract current savings and investments to arrive at a more precise number that reflects the family’s needs. If John had $55,000 in their sayings, checking, and investment accounts, this would offset his insurance needs but should not include John’s workplace insurance policies.
Step 3: Calculate savings and any other private life insurance policies
Life Insurance Needs
John can now arrive at a number that signals what his family would need (in today’s dollars) if he passed away.
Step 1 Total: $750,000
Add
Step 2 Total: $400,000
Minus
Step 3 Total: $55,000
Equals
John’s Life Insurance Needs: $1,095,000
The How
John had a conversation with his Financial Guide to discuss a framework for filling this puzzle piece. They teamed up to review any actions he had taken and his overall thoughts about his family’s situation. He was able to clarify his life and financial goals, uncover threats to his family’s sustainability and stability and begin to remedy the things that gave him a sense of anxiety.
To begin with, John’s Financial Guide helped educate him on how life insurance calculators worked and defined some of the foreign terminologies. They also reviewed the specific due diligence tasks John could take to become a more empowered advocate for himself. John now felt confident enough to reach out to life insurance companies and his financial institution to find the best pairing of products and professionals to help him pursue his goals. John’s Financial Guide encouraged him to:
- Research the financial strength of the insurance company
- Check with his State regulator to verify the credentials of the agent that he contacted and company licensing.
- Ask the financial services representative if they were required to act in his best interest and as a fiduciary.
- Carefully review educational materials and ask questions on how term and permanent life insurance policies work.
- Ask about any unique situations where life insurance proceeds will not be paid as expected (suicide, illegal activity, misrepresentation, etc.)
- Compare his baseline numbers with the ones the financial service representative offered and ask for clarification on any data points unfamiliar to him.
- Check-in with his life insurance agent when he experiences a life event such as the birth or adoption of a new family member, etc.
John decided that the best option for his family was a 25-year term policy to cover his needs. His spouse also bought a policy based on her unique numbers. The term policy allows them to purchase enough life insurance according to their needs and affordably. John and his spouse worried less after taking care of this aspect of their finances and continued to enjoy the life they had built.
Conclusion
Our human experience is layered, complex, and challenging. The future to us is mainly unwritten, but some parts of it are known—the death part. Narrowing our view to just today's happenings and dwelling only on the here and now of our present circumstances is hiding from the light of death’s reality - a type of neglect. Death is one common denominator of the human experience that we all share. Our natural fears and anxiety can take hold when discussing our mortality, but acknowledging the reality of death is a profound step towards financial well-being and walking in this world.
