We do our best to avoid taking on too much risk. When driving, always obey the speed limit. Safe boaters wear a safety vest. While skiing, icy surfaces are avoided. When creating a financial plan, build assets that align with your risk profile and purchase life insurance.
Life insurance needn’t be a boring topic. It’s the foundation of a sound financial plan. Moreover, protecting our family’s financial future is of great interest.
When building wealth, life insurance offers the ability to manage unforeseen risks. Let’s look through a longer lens to see life insurance in action. Life insurance protects against income loss, and the adverse effect that less income can have on a family if one were to die or have a disability.
Building on that foundation, by increasing assets and net worth via investing, it is essential to occasionally reassess the necessary level of life insurance coverage. Caring for others is at the root of life insurance planning:
- There are many family responsibilities. Adequate coverage allows a surviving spouse and surviving family to maintain their current lifestyle.
- Life insurance proceeds can support a stay-at-home parent caring for the children. If one parent’s income is currently relied on to provide all living expenses, the death of that individual may cause financial insecurity for all family members, especially when a stay-at-home parent is caring for the children.
- Life insurance protects children. The coverage needed will be affected by:
- The number of children and their ages
- Educational expenses of the children
- The current value of invested assets
- Current and necessary future income
- Debt accumulation
- Future employment goals versus stay-at-home parenting
- Overall financial goals
Beneficiaries and children need consideration. Young children can be established as secondary or contingent beneficiaries, thus allowing them to receive the death benefit if the parent or primary beneficiary predeceases them. On behalf of children, a trust can manage funds to protect the income uses as directed via a will. It can direct the proper investing of the life insurance proceeds of the death benefit to create a guardian income for loved ones.
Continue coverage throughout college or university. When children attend college, many of us tap into our savings to help cover their tuition and housing expenses. If a parent or guardian dies without providing continuing support, a young adult child may need to quit seeking a higher education due to a shortage of funds.
Protecting a significant income in case of disability is possible. Think about how becoming ill or injured could affect children’s financial security. Would household income be reduced, placing them under duress? Disability insurance is designed to replace approximately 70% of pre-disability income and is especially necessary for the self-employed.
Life Insurance can pay off all debts. A car loan or credit card debt can be cleared up and paid off. Greatly reduce financial risk by paying off a Home Equity Line of Credit (HELOC). HELOC debt is a liability many do not understand. Debt is often closely tied to the value of home real estate, enabling banks and financial institutions to offer quick credit, especially in markets where home values rise rapidly. The downside is that many may be unaware that they are spending the value of their home equity. Expenditures on a trip, a car, or a home renovation can increase HELOC debt while depleting home asset value.
Eradicate business debt. By using life insurance, businesses can settle outstanding debt. If the debt is personally assigned, there can be liens against personal assets, or in some cases, the home. Upon an owner’s death, business debt is redeemed if enough life insurance has been purchased on all shareholders or partners using a buy-sell agreement.