Like all insurance, life insurance is a form of protection from unforeseen events. In the case of life insurance, it’s usually an untimely death. A life insurance policy will provide financial support to your family for your final expenses and has the potential to provide them with ongoing support depending on what policy you purchase. If you are the source of your family’s financial backing, it would be wise to consider adding a life insurance policy so they aren’t stuck with the financial burden of laying you to rest, along with their grief.
According to Trusted Choice, 40% of American adults do not have life insurance, over 50% of U.S. households don’t have adequate coverage, and about 40% of people surveyed say they would have immediate financial trouble if the primary wage earner in their household died.
When Should I Buy Life Insurance?
It’s never too soon to buy life insurance (listen: Why Buy Life Insurance?). An important thing to remember is that life insurance premiums will be their most inexpensive the younger and healthier you are because you are at a lower risk of dying. The older you get, the more expensive the policies become.
One benefit of buying a short term policy at a young age is that you can lock in a preferred rate for 15 or 20 years. In this scenario, if you pull the trigger on a 20 year policy at the age of 30 and your health has decreased substantially by the time you’re 45 and you’re deemed a greater risk, you’ll still be paying the rate of your 30 year old and healthier self. We’ll discuss term life insurance in more detail later in this post.
Another thing to consider when weighing whether or not to purchase a life insurance policy while you are young is your outstanding debts. A life insurance policy could pay your student loans or other large debts, as well as funeral expense if the unthinkable happens. This illustrates again how life insurance protects the people you leave behind so they aren’t stuck with the burden of tying up your affairs.
How Much Life Insurance Do I Need?
Unfortunately there is no hard and fast rule about how much life insurance one needs because everyone’s circumstance is different. However, as an independent agency, we’re able to tailor policies that fit your specific needs through the relationships we have with our various underwriters.
Having said that, there is some math that can be done to get an idea of what you might be able to use. Take a look at an example from Trusted Choice below.
For the following simple example, we will pretend there is no interest or tax. But in reality those factors will affect the amount of benefit your beneficiaries receive.
• You purchase a $500,000 life insurance policy.
• Upon your passing, your family spends $10,000 for your final expenses, leaving $490,000 to be divided up over the payout period for your designated beneficiaries.
• If the payout period is 20 years, the payments would be about $24,500 per year, or about $2,040 per month.
Again, interest and tax are not figured into this simplified example. What makes life insurance so confusing is that there are several different types of coverage, including term life and whole life or permanent life insurance. Additionally, the details of the policy you choose will be unique to your personal situation.
Hopefully the above example provides some idea of what things you should considering when weighing how much life insurance to buy. We’ve been providing life insurance for families in Missouri, Kansas and Illinois for years and have the experience to guide you in your consideration should you feel compelled to reach out for a conversation on the matter.
Terms and Types of Life Insurance
Again, from Trusted Choice:
It can be difficult to make sense of life insurance terminology. Here is a brief overview of the most common terms:
• Accidental death insurance: Also known as accidental death and dismemberment insurance, or AD&D, this coverage pays you or a beneficiary a benefit if you are in an accident that results in your being killed or dismembered.
• Annuities: An annuity is a type of insurance that either pays income after your initial investment (immediate annuity) or accumulates income (deferred annuity). Either of these types of annuities can be fixed (guaranteed) or assigned a variable rate that pays out based on the policy’s associated investments. Life insurance companies typically offer annuities to help people obtain a stable income during retirement.
• Critical Illness Insurance: While not a life insurance policy, critical illness insurance is often available through life insurance companies. You might buy critical illness insurance (or CI) if you have a family history of heart disease or cancer in order to ensure that you have the financial resources to pay for your care if you are diagnosed with a severe illness.
• No exam life insurance: This is life insurance coverage that some companies offer without requiring a medical exam first. Typically, this option will be more expensive because without submitting the results of a medical exam to the insurance company, you are an unknown and potentially greater risk.
• Term life insurance: This is a life insurance policy that provides a death benefit only. Your annual premiums are locked in for a set term, such as 10 or 20 years. In the event that you pass away during this period, a death benefit is paid to your beneficiaries.
• Permanent life insurance: This is a long-term policy, such as universal life insurance or whole life insurance, that includes an investment component and can cover retirement expenses in addition to providing a death benefit.
• Universal life insurance: A permanent life insurance policy with a “liquid” account that accrues cash value, as well as interest, with each premium you pay. You can take out loans as needed for unexpected expenses or opportunities, such as a home purchase. You also can pay more than the scheduled premium, or take breaks from paying premiums.
• Whole life insurance: Whole life is a permanent policy with an investment component that provides for your financial needs similarly to universal life insurance, but without the liquidity of the funds. This life insurance policy accrues a cash value and pays out at the end of the policy, if it is kept current.
Life insurance can be one of the more tricky and frustrating things to purchase because there are a few varieties and terms you need to remember. The importance of ensuring your family’s peace of mind and reducing their financial burden if the unthinkable happens cannot be understated. This may not be the right time for you to purchase a policy or you may find that you’re priorities have changed and you are ready to move forward. No matter where you are in the process of determining whether or not life insurance is right for you, we’re more than happy to have a conversation and lend our expertise so that you and your family can avoid this unnecessary risk.