Life Insurance 101
Oh, life insurance… No one likes to talk about it, and who can blame them. It’s not exactly a “sexy” topic. That being said, it’s definitely something worth talking about. Here are the basics you should know if you’re considering buying life insurance.
Who Needs Life Insurance?
Whether you need life insurance or not is really a personal choice that comes back to your debt and family situation. While an estate planner should be sought to help you determine exactly what your family would be on the hook for in your state should you die, in general your debt is your own and dies with you. The exceptions to this that should make you think twice is if your property is jointly owned with your spouse. In that case the debt will not be extinguished upon your death, and your spouse will still be on the hook for that debt.
When deciding if you need life insurance for your family and how much you may need, think about any debt that will survive you, any income you may need to replace to allow your family to maintain their standard of living and a few thousand dollars to cover burial costs. The most common debt that you should consider covering is the mortgage on your home. If you own a house, and intend for your family to continue living in that home, you will need at least enough coverage for your loved ones to pay off the mortgage.
Term Life Insurance
There are two common forms of life insurance that you’ll often hear about. Term life insurance is by far the best known and most prevalent. It’s also the cheapest. With term life insurance policies, you can choose the period of time (typically 10, 20, or 30 years) you’d like to for the plan to be in place and if you dies during that period, the insurance company will payout the amount of the policy to your chosen beneficiary. This is a great option for a lot of families that primarily need to cover debt expenses or insure that their children will have enough money to live on should something happen to them.
Many employers offer term life insurance policies for very low premiums. The amount of the coverage is usually based off of your annual salary, and will allow you to pay for additional coverage should you need it. It’s important to at least consider this option, but also remember to consider plans outside of those offered by your employer. They may be more appropriate for what you need and they have the added benefit of continuing even if you lose your job or have to leave your job as a result of an illness. When choosing a public policy, look for a stable company that will likely be around in 30 years like State Farm, Fidelity, or AAA.
Whole Life Insurance
The other major type of life insurance is whole life insurance (also known as permanent insurance). Like the name suggests, there is no “term”, so this plan will payout at some point when you die, whether that be in five years or fifty years. The best thing about whole life plans is that they build real cash value. This means that you can take money from your plan while you are still living, though it will decrease the overall value of your plan payout at the time of your death if you don’t pay it back. Additionally, you could surrender your policy for cash at any time. This is an option that is not available on a term life insurance policy.
This can be a good option if you plan on using your life insurance plan to as a way to build wealth since the growth on your investment is tax free. Of course, that investment will be designated for your beneficiaries and not necessarily you, so this really becomes a good option if you are looking to spend your retirement savings and still leave an inheritance to your loved ones. Otherwise, term life insurance will normally be sufficient for most families. Some insurance companies that offer both term and whole life insurance policies may even allow you to convert your term policy to a whole life policy if you so desire.
How Much Coverage You Need and for How Long
How much coverage you need really depends on your family and financial situation. Things you should consider coverage for should include lost wages, debt (including mortgages and car payments), college expenses for children, and funeral costs. If you are a stay-at-home parent, remember that you may need coverage too. If anything were to happen to you, what would be the cost required to replace what you do for your family? Often the cost of paying for childcare can add up quickly, so be sure to research these costs for your area and factor them into your desired coverage amount.
If you choose term life insurance coverage, you can also factor the term around your family situation. For instance, if you have a one year old child now, a 30 year term life insurance policy may make sense because it will allow your child to be financially supported until he or she is able to support him or herself. At that point you may no longer need life insurance as you would hopefully have most or all of your debt paid off and enough saved to cover any funeral costs.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.