March 13, 2018
You should talk to your adult kids about...  

 
   
    
Insurance. Life insurance. Term life insurance to be specific. Why? Because too many young adults are under-insured for the catastrophic event called 'premature death'.  They're under-insured for simple reasons like:
  • They focus on the issues of today and not the risks of tomorrow
  • They don't think there is room in the budget
  • They assume they are well-covered by their employer's group life plan (usually group life insurance is about 2x salary and disappears the minute employment stops)
To be clear, we're mostly talking about your married kids.  The spouse and kids are at a huge risk from a premature death of one of the young parents.  

This is why your kid's insurance is important to you:  parents (you) will feel obligated to provide financial help to your son/daughter who is now a single parent.  As a widow/widower they are not likely to have the time and savings to raise a family in the way everyone expected before the spouse's death.  Term life insurance will help relieve the financial stress of such an unfortunate event.
 
In our work as financial advisors we've learned too often that well-intentioned and intelligent parents just haven't helped their kids realize the importance of having life insurance.
 
So, have the talk. These tips may help:
  1. Start with priorities.  Protecting a lifetime of future earnings should be one of the most important.
  2. Talk cost. Term insurance is a relative bargain and is "purchased" with one's age and health. Most twenty-somethings possess both. (Explore insurance now!  Good deals, or even access to any life insurance, may vaporize if a health event arises.) 
We use the website   www.term4sale.com  to get a good idea of the cost of life insurance. No personal information is required to generate a real-time quote in seconds.  Easy.

Here are some sample quotes for various term policies:  (all assume excellent health)

$1 million 20-Year Term Life

Age
25 30 35
Male $390/year $390/year $400/year
Female $290/year $332/year $355/year

 $1 million 30-Year Term Life

Age
25 30 35
Male $605/year $665/year $760/year
Female $465/year $480/year $625/year
Source:  www.term4sale.com

The big question: How much?   There is no right answer, but we think the following should be considered:  
  • Be debt free. Buy enough insurance to pay off any debts (mortgage, student loan, auto) that the survivor might have to repay.
  • Cover education costs. Add the expected cost (at least 50%) of educating all the children.  
  • Replace income for about 20 years. This calculation is most subjective and personal. Most young workers are far from their expected annual earnings potential. But since life insurance proceeds aren't taxable, the insurance payment would be like getting a 20-30% raise on today's income.  Insurance proceeds, if invested well, should provide substantial investment earnings over the years. Offsetting these factors are inflation and other cost surprises - all of which are likely to be negative.
In the end, the insurance buyer needs to evaluate the cost of additional insurance versus their view of lifestyle creep and other goals that the young family might have.
 
For a 30-year-old making $100,000 the math might look like this:

Annual Salary $100,000 * 20 years
$2,000,000
Mortgage debt
$500,000
College education $120,000 * 3 kids
$360,000

Total insurance
$2,860.000

 
Finally, how long should you have term life?
 
The largest amount of coverage should be in the early years.  When earnings  potential  is great, so should term life insurance coverage. When financial independence is achieved the need for life insurance generally disappears.   However, financial independence doesn't come quickly, so most initial term life policies should be in the 20+ year range. A good case can be made for "layering-in" various term policies to approximate expectation of future risk exposure. For example, one could buy a $1 million 30-year term policy and a $2 million 20-year term policy.

Our disclosure:  CAVU Wealth Advisors does not sell any insurance products.  If you want more information specific to term life, we can help by referring you to insurance specialists who have given CAVU clients a pleasant experience.  By our policy, we have no financial relationship with any insurance providers.  (i.e. our referral is truly free!)

 
The CAVU Team
 
David Sylvester, CFA, CFP®                                 
Founding Principal    
Hilary Disher, CPA (non-active)
Tax Strategist
Chad Lawyer
Associate Advisor

 
 
Plan well. Invest Wisely. Live Richly.
 
CAVU Wealth Advisors LLC