When I was younger, I loved reading the stories of the Greek gods. The gods had a majesty to them. They could go anywhere, change shape and wield great power. And, they were immortal. Of course, I could dream of immortality even as I understood it was not possible for me.
Every day there’s a news story about a person who died unexpectedly. In Colorado, where I live, there was a story this June about a person dying from a skiing accident. There are no shortages of people passing away from car crashes, unforeseen health crises or other accidents.
As a financial planner, we talk about life expectancy in my work. We have to make some assumptions about how long we will live so that we can take action to save and invest today to be able to enjoy life and have funds to pay for expenses for our entire lives. For families with special-needs members, we also plan for second generation and seek to devise strategies to fund trusts to pay for future needs and have these funds available whether we live long lives or leave this earth earlier than expected.
Life insurance provides cash for your family members. It can be a useful tool in special-needs planning. Unfortunately, I see too many instances of people using life insurance in ways that do not fit their financial lives – they buy too little coverage for too much money with policies that try to do too much.
Let me give you some tips.
- Buy the right amount of death benefit. Life insurance covers lost income and a lack of savings. Funds paid out can be used to pay off or pre-pay expenses, like funding a trust or college. The most important piece, in my opinion, is to cover lost wages. There’s a basic rule of thumb saying you need seven to 10 times your income in benefit. That is a good starting place but work with your agent to fine tune it to your needs.
- Start with term insurance. 20-year or 30-year term is usually the right type of coverage for most people, especially those getting started building income and assets. You get the most bang for the buck with term insurance – the lowest premiums for the most coverage.
- Review your coverage, at least every 10 years. If you save, invest, pay off debt and build wealth, you will need less coverage over time, not more. For some, they will need coverage to last longer and buy an extra policy as time goes by, especially if they didn’t focus on building wealth. You can ladder policies to meet needs. I have several clients with staggered policies to meet specific needs.
- Don’t mix investing and insurance. This is true most of the time. Certain policies have cash values that have the potential to earn a return. In my practice, I’ve seen that those who sock away funds into retirement and investment accounts save more than they do inside their life policies with cash values.
- Update beneficiary designations. In special-needs planning, we don’t want to leave money to our family members with intellectual and developmental disabilities. Their share of the estate typically goes to a special-needs trust. Review your policies to ensure you’ve made the necessary changes.
Financial planning requires us to look at difficult aspects of life, like our own mortality. We can dream of living an eternity and of outliving our family member with a disability. We cannot guarantee it. In my book, “Protect Your Family,” I give more thoughts on how to think about insurance. Whatever you do, put a strategy in place to provide financial support for your loved ones.