The Self-Employed Couple's Coverage Gap
Priya and Anand, both 41, run a design studio as an LLC taxed as a partnership. They have two children, ages 6 and 9, a $520k mortgage at 6.2%, $90k in business cash, and $140k in a joint brokerage account. Their only life insurance is a $250k term policy on Anand through a former employer that expires in three years. Priya has no coverage. They have no disability insurance and no estate documents beyond outdated wills from before the children were born. Priya earns roughly 60% of household income. They ask whether they "need" more insurance and want to keep costs low.
1. How would you assess their life insurance needs, and what would you recommend?
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Use a needs-based analysis rather than a multiple-of-income rule. Quantify: income replacement for each earner, the mortgage and other debts, education funding for two children, and final expenses, then subtract existing assets and coverage. Priya's lack of coverage is the clearest gap - she is the majority earner, and Anand would face the mortgage and childcare on his income alone. The expiring $250k policy on Anand leaves him underinsured in three years. Recommend level term coverage sized to the calculated need and a term long enough to cover the children's dependency and the mortgage (e.g., 20 years), with separate policies on each spouse. Term keeps costs low, matching their stated preference, and can be converted later if needed.
2. What should you raise about disability insurance and the business?
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Disability is often the more probable risk for two 41-year-old earners. If either is unable to work, the household loses income and may face care costs. Discuss individual disability policies with own-occupation definitions and adequate benefit periods, and note that group coverage through the business may be limited. Also address business continuation: a buy-sell agreement funded with life or disability insurance protects the surviving partner and the family if one owner dies or is disabled. Because the business is an LLC taxed as a partnership, entity and cross-purchase structures have different tax consequences - coordinate with their attorney and CPA.
3. What estate-planning and beneficiary steps are urgent?
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The outdated wills predate the children and may not reflect current guardianship wishes; recommend updating wills, naming a guardian, and creating durable powers of attorney and health-care directives for both spouses. Review beneficiary designations on the brokerage account and any retirement accounts to ensure they align with the wills. Given minor children, discuss whether a trust or UTMA arrangement is preferable to outright inheritance, and consider guardianship and trustee selection. These are low-cost, high-impact steps that should not wait for the insurance decision.