Scott Anderson frequently tells his clients to “kiss.”
In Anderson’s parlance, "kiss," or rather KISS, stands for Keep Insurance Services Simple, and is the principle by which the fee-only planner guides his married clients’ life insurance purchases.
As opposed to more complex policies, such as universal life, which include more bells and whistles can also be more expensive, the Newport Beach, Calif.-based CFP and CPA, recommends that his mass-affluent clients invest in simple whole life and term policies. In fact, he suggests they buy both.
Anderson views whole life as “estate liquidation insurance” and he recommends it for a very specific purpose. Ideally, the couple would purchase policies in their 20’s and pay them off in their 30’s—when something on the order of $50,000 worth of coverage would cost them between $10,000 and $15,000.
These policies, he says, aren’t meant to cover estate taxes, which most of his clients usually don't have to pay based on their income range, but to provide immediate liquidity when they reach their 70’s and their 80’s to cover the expenses they will encounter when one of them passes. The idea, he says, is to avoid having to borrow money or sell assets such as stocks or real estate to cover probate costs, attorney fees and other expenses that the survivor will inevitably incur.
All other life insurance needs, Anderson says, should be settled with term insurance, which can be layered on as the couple’s liabilities increase over time. Typically, he says, the couple’s principal breadwinner would hold the primary policy and the spouse would be the beneficiary. But Anderson also stresses that the lesser-earning spouse should also be covered, because there will be significant stress and additional expenses for their partner (such as daycare or housekeeping), should that spouse pass first.
To determine the amount of coverage for the primary policy, Anderson uses the following formula:
Multiply the breadwinner’s annual income by the number of years until the youngest child graduates from college. Add an additional $200,000 per child to cover college costs, and then add an additional amount sufficient to cover the couple’s debts--especially the mortgage. The total is the size of the policy that’s needed to provide the surviving spouse with sufficient income to run the household debt free and transition into a new life.
When they’re younger, two policies—one for each spouse with the other as the beneficiary—will be fairly inexpensive for the couple and provide another significant advantage. Should they divorce, the lesser earner will walk away with a policy on the breadwinner, providing him or her with a significant financial safety net.
Anderson adds that everyone needs a Medicare gap policy, but that the policies offered by AARP aren’t necessarily the cheapest. He tells clients that they can pay less for the same or better coverage from other groups that market to seniors.