Many of us put off buying life insurance because it doesn’t seem like a priority. Why worry about life insurance if you’re relatively young and healthy? Well, if you have people who depend on you for financial support (spouse? children? grandchildren?), then life insurance isn’t really about YOU, it’s about protecting THEM in case something happens to you. The beneficiary from your life insurance policy would collect a financial benefit upon your death and use the money to pay for things like funeral costs, house payments, medical bills, and everyday household expenses. You might also want to consider your child’s college tuition and other debts you have already or could potentially accumulate.
Life insurance can be confusing, so here’s a rundown of the basics.
Types of Life Insurance
Term: This is the simplest and generally the cheapest form. You buy coverage for a specific period of time. It can usually be renewed, but premiums will increase based on age and health factors. There is no cash value.
All other types of life insurance are permanent, but there are several varieties. They all include a savings element that builds cash value, in addition to the death benefit. Once that cash value accumulates, it is accessible to the policyholder tax-free. The following are some of the common types of permanent life insurance.
Whole Life: You purchase this policy to cover your entire life, as long as you keep paying premiums. Premiums remain constant throughout the policy, and the company invests a portion of your premium that becomes the cash value. These are more expensive than term policies in the early years, but they even out because the premium does not increase.
Universal Life: This policy is similar to whole life, but has the potential for higher earnings on the savings component. It is more flexible in terms of changing premiums and face value throughout the policy. There is usually a guaranteed return on the cash value. Disadvantages include higher fees and the possibility of increasing premiums.
Variable Life: A variable life policy generally has fixed premiums, and you have control over the investment decisions for the cash value portion. However, this is riskier because there is not guarantee for the cash value.
How Much to Buy?
Many people decide based on an income replacement calculation, between 5 and 10 times the amount of your current income. To get an accurate estimate, you need to think about your final expenses (uncovered medical bills, funeral and estate-settling costs, outstanding debts, mortgage balance) as well as future expenses (your family’s ongoing financial needs – the amount needed to replace your current income).
Think about your personal circumstances: Is yours the sole income in your household? Are there other expenses, such as college tuition, that may arise in the future? Don’t forget to include potential medical and funeral costs. Above everything, you want to be sure your family does not get stuck with bills, debts or expenses that they cannot afford.
LifeHappens.org has a great calculator you can use to estimate your life insurance needs here.
Why Purchase Now?
Buying life insurance may seem unmanageable right now, but it could be a smart decision. Your income is your most important asset, and protecting it will help protect your family. Waiting until you can “afford” it, or until you think you really need it, could be too late.