Who Needs Life Insurance?
Life insurance policies can serve many purposes, but the most basic reason to buy life insurance is to replace your income if someone else is depending on it. If you have young children, in most cases you should have a life insurance policy. If you have a spouse who depends on your income, in most cases you should have a life insurance policy. If your parents have co-signed a large student loan for you, in most cases you should have a life insurance policy.
There are only two types of people who probably do not need life insurance: 1) single people that have no children and no adult dependents and 2) very high net worth individuals that have no debt.
Whole life vs. term – what is the difference?
There are two basic types of life insurance, whole life insurance and term life insurance.
Whole life insurance, as the name implies, is a policy guaranteed for your whole life. Some of the money paid into your whole life policy accumulates “cash value” in the form of a tax-sheltered investment account that the policyholder can borrow against.
Term life insurance works just like your automobile insurance policy: you pay a premium each month or year for a certain amount of coverage, and that premium is guaranteed for the term of your policy. Typical terms are 10, 15, 20 or 30 years. If you continue paying the premium and die during the term, the policy will pay your beneficiary the face amount of the policy.
Term policies are generally very affordable. For example, a $1,000,000 twenty-year term policy for a thirty-five year old male nonsmoker, would cost approximately $400 per year. So, for only $400 a year, our hypothetical man’s family would receive $1,000,000 if he were to die during that 20 year term.
Which is better for you, whole life or term?
Insurance companies tout whole life policies as a way to leave a financial legacy to your heirs and as a good investment tool, but, because whole life premiums are significantly more expensive and rates of return are so small, you are almost always better off buying a term policy and investing the difference yourself.
However, some people, due to health or age, are unable to qualify for term policies, which usually require a basic physical, so whole life may be the only option.
How much term life insurance do you need?
How much life insurance you need is both somewhat subjective and a moving target. Your life insurance needs may be quite different in five years. Put simply, in the event you die, you want life insurance payouts to allow your spouse and children to continue their lifestyles without worrying about money.
You may also want to provide for future expenses like your children’s education or a wedding. You may want your parents to be able to pay off the student loan or mortgage they co-signed for you. If you have investments or other assets, however, you may only need enough life insurance to make up the difference between your assets and your family’s potential needs. The chart on the right is a good tool to figure out a ballpark for your life insurance needs.
When calculating how much life insurance coverage a family should purchase for a stay at home spouse, look at how much it would cost to pay others to perform functions currently handled by them. Salary.com published a recent study that estimates that stay at home moms work on average 94 hours a week and are worth an equivalent salary of $113,000. You also many want to take into account paying off the home mortgage to free up that monthly cash flow that could go toward taking care of our kids.
Where can I shop for life insurance?
I recommend the website https://www.term4sale.com/ for comparing term life insurance quotes (I have no affiliation with this website, nor do I receive any compensation for recommending it; I just think they do a good job comparing policies).
How can I learn more?