When you’re building a long-term financial plan, the first decision you should make is life insurance. Why? Because it protects the most important asset to your financial plan.
Your ability to earn an income shapes the life you provide for your family—whether that means covering everyday expenses, taking vacations, buying your home, or saving for college. Life insurance helps ensure those goals remain achievable, even if the unexpected happens. What would your family do if an income earner was to pass away prematurely?
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Here’s another way to think about it. If you had a machine in your basement that printed $250,000 a year, would you insure it? Of course! Even if the chance of it breaking was small, you’d protect that machine at all costs. Your income is that machine. Life insurance ensures that, even if something happens to you, the “income machine” keeps providing for your family.
So, what kind of life insurance is right for your family? Use this simple decision tree to walk through the three biggest questions.
- How much coverage do I need?
The most important decision to make is the amount of coverage. Life insurance isn’t a universal right or something you can wait on forever. Many people put off the decision, assuming they are young enough or healthy enough not to need it. But what many don’t realize is that at some point, whether due to health changes or age, everyone will lose their ability to secure coverage. The best time to get life insurance is before you need it and definitely before someone tells you that you no longer can qualify for coverage.
Many people underestimate how much coverage they actually need. For example, if you earn $250,000 a year and plan to work for another 20 years, your future earning potential is $5 million. A $1 million policy might sound like a big policy, but that only replaces four years of your income. Will that be enough to sustain your family’s lifestyle over time?
A common reaction is sticker shock at the recommended coverage amount. But think of it this way: you’re not insuring your life, you’re insuring your income. Your loved ones rely on that income every day to live their lives. With this in mind, aim for a policy amount relative to your future income earning potential and hopefully secure it at the highest possible rating. The good news is that you can reassess and adjust your coverage over time as your circumstances change.
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- What kind of life insurance should I get?
Once you know how much coverage you need, the next question is what type of policy to choose. The two most common types are:
Term life insurance and whole life insurance:
- Term Life Insurance: This is temporary coverage, often 10, 20, or 30 years, and is designed to protect against the risk of premature death.
- Whole Life Insurance: This is permanent coverage that lasts your entire life. Not only does it allow you to protect against unexpected, premature death, it also allows you to build wealth and extend that protection through the much more likely scenario of living a longer, healthy life.
Keep in mind that there is no one policy type or length that is the perfect solution for you at all times. Oftentimes, utilizing both types of life insurance in conjunction with one another works best. If you’re unsure what will work best for your situation, don’t rely on “advice for the masses” that you find on the Internet or Chat GPT. Instead, consult a financial professional who can help you create a strategy customized to your goals and your family’s needs.
- Who should own the policy?
This is a less obvious but critical question: who actually owns the policy? In most cases, individuals own their own life insurance within their taxable estate. But in some situations, especially for higher-income families or those doing long-term estate planning, it may make sense for a trust to own the policy.
Why does this matter? If a trust owns the policy, the proceeds may not be included in your taxable estate, potentially saving your heirs a significant amount in taxes. The right ownership structure depends on your broader financial plan and goals.
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At the end of the day, life insurance isn’t a “set it and forget it” decision. As your life changes—marriage, kids, buying a home, career shifts—your coverage needs may change, too. That’s why it’s important to regularly review your policies and make sure they’re still aligned with your goals.
Having a trusted advisor by your side can make all the difference. They can help you navigate the nuances, adjust when needed, and feel confident that your family is protected, no matter what the future holds.
Gary Blum is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Strategies for Wealth is not an affiliate or subsidiary of PAS or Guardian. Not practicing CPA for Guardian or its subsidiaries or affiliates. CA Insurance License # 0M10186.
All life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Whole life insurance policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
