by Erica Gellerman, The Worth Project
You’re doing all of the things that signal you have your financial life together: you’re paying down debt, you have a monthly budget, and you’re putting money away for your golden years. But even though you’re doing all of the right things today, do you know if you’re covered should something unexpected happen down the road?
Life insurance plays an important — but often overlooked — role in a financial plan. Only 60% of households have life insurance and the National Bureau of Economic Research reports that a significant number of households are underinsured.
In this article, we’ll break down how you can use life insurance to make your financial plan run smoothly, no matter what life throws your way.
What’s your financial plan?
You may not realize that you have a financial plan, but if you’re setting savings goals and putting away money for a rainy day, you’ve created the start of your financial plan.
The easiest way to think of a financial plan is as a roadmap for where you want to go in life. It starts by identifying where you are and breaks down exactly how you’ll achieve those goals. Your financial plan can include things like planning for retirement, buying a home, and sending your kids to college.
Once you’ve created your plan, either with an advisor, or on your own, you’ll know exactly what you need to save and earn for years into the future. Your plan probably has things mapped out neatly: if you save X dollars each month, you’ll be able to help your child go to the college of their choice. Or, if you keep making your mortgage payments, in 15 years you’ll own your house free and clear.
Accomplishing these mid-life goals can enable you to achieve long-term goals. When your mortgage is paid off, you can then use that payment to travel the world or start a hobby refurbishing classic cars. Retiring early is now possible with the child’s college paid or mortgage paid.
Your financial plan has helped you create a life that’s exciting. But what if things don’t quite work out that way?
How insurance plays a role
It’s uncomfortable to think about, but if you or your partner passes away early, there will be a big hole left in your financial plan. Saving each month for college or making mortgage payments becomes substantially more difficult. Your plan was built based on making payments, saving, and investing for years. When you or your partner no longer has those years, you need a contingency plan to fall back on.
Life insurance is your contingency plan. You hope to never need it, but you’ll be glad that it’s there if you do.
As part of your financial plan, life insurance will ensure you or your loved ones can cover the day-to-day responsibilities, like childcare and household bills. Not only that, it ensures that the big things are covered — like paying off your mortgage, funding your children’s education, and making sure retirement is taken care of.
Because you didn’t have decades to make your plan work, life insurance steps in to fill the gap left in your financial plan.
For example, let’s say that you and your spouse are saving to send your child to college. You estimate that by saving $350 per month, you’ll be able to send them to a great in-state school. Ten years into saving, your partner passes away and you have trouble making those monthly deposits into the college savings account.
The previously well-thought-out financial plan is now no longer feasible, leaving your child with a college account that is only partially funded. If your partner had life insurance, the proceeds from the policy could help finish funding the college savings and your financial plan could stay intact.
Term life insurance makes contingency planning easy
Now that you know it’s important, how do you get the right life insurance to support your family’s financial plan? Term life insurance makes it easy.
With term life insurance you choose the right amount of coverage for the right amount of time at the right price.
The right amount of coverage: Ladder term life insurance allows you to apply to increase or decrease your coverage as your life changes. As your kids graduate from college, your mortgage gets paid off, and your retirement nest egg grows, you’ll need less insurance.
The right amount of time: With term life insurance a person pays a regular amount for coverage over a set period of time (the “term”). If they die during that time, the insurer pays the coverage amount. You can choose a term length that will cover you when your financial plan needs it most, whether that’s a 10-year term, a 30-year term, or something in between.
The right price: Term life insurance is also significantly cheaper than whole life insurance for the same amount of coverage. That makes it easier for you to fit the insurance payments into your monthly budget.
Protect your plan
If you want to create a financial plan that will support your family no matter what unexpected situations come your way, term life insurance may be the piece that you’re missing. If you want to figure out how much coverage you need, use this insurance calculator to get an estimate and then start your application.