How Much Life Insurance Do I Need?
The Role Life Insurance Plays in Your Finances The purpose of life insurance is to...
Previous Article: How to Help Your Child Become a Millionaire (Tax-Free, Too!)
Next Article: Are poor budgeting habits making you miserable?
We want to be transparent about how we are compensated. Some links in articles are from our sponsors. Learn more about how we make money.
Life insurance may be one of the least sexy topics I can think of. Every time I bring up the subject of life insurance, I can see people’s minds actively trying to tune me out. People really don’t like talking about life insurance for three reasons.
Writing an article about life insurance is the opposite of click-bait, it’s almost like I am daring you to not read this article. But I am glad you are reading this because life insurance is important, and you need to know what you are paying for to make sure it meets you and your families needs. Making the wrong choice with your life insurance can cost you and your family dearly down the road. Stay with me and I’ll make this insurance talk quick and painless.
The purpose of life insurance is to ensure your family and loved ones are financially secure after you die. If you have a family and you don’t have a high net worth, life insurance is an absolute necessity. To start with dying is not cheap. The average cost for a funeral these days ranges from $10,000-$20,000.
Imagine this scenario. Your family will lose your income forever and be handed a $20,000 bill. Take a minute and really think about how life would change for them. That is why you need life insurance.
This is the only difficult question when it comes to life insurance. Honestly, it depends on your circumstances. Here are some questions you’ll need to answer to determine how much life insurance you need.
Nerd Wallet has developed an online calculator to help you determine how much life insurance coverage you need. If you want a comprehensive review of your coverage needs, talk with an insurance agent. But be warned.
There are two types of life insurance coverage; term and whole life.
Term life insurance is exactly what it sounds like. You select the number of years you want coverage for, how much insurance you want to buy and start paying premiums.
Let’s say you qualify for and buy a 20-year life insurance policy with a $500,000 death benefit. If you die within that 20-year window, your beneficiaries receive $500,000. At the end of the 10 years, you need to renew the policy if you wish to maintain coverage. The premium will increase because the longer you live, the more likely you are to die.
Many people opt for less life insurance coverage as they get older for two reasons.
A 30-year-old with little savings and 2 infant children has greater life insurance needs than a 55-year-old with a $600,000 net worth and two adult children in the workforce.
Term life insurance has the lowest premiums and can be customized to meet your needs as you progress through different stages of your life.
Whole life insurance, on the other hand, provides you coverage for life. You typically pay a fixed premium which provides you very little coverage in the beginning. As you continue to pay premiums over the years, your total coverage begins to increase.
If you need $500,000 of life insurance today most people would not be able to afford whole life insurance because the premiums would be huge.
The only reason it might make sense to buy whole life insurance is if you have a family history of chronic illness that might impact your ability to qualify for insurance in the future.
If you are not overly concerned about your ability to qualify for life insurance in the future, always buy term insurance.
Term life insurance is much cheaper and a better option for most people. However, A lot of insurance agents will try and sell you whole life insurance. They often try and sell whole life policies as an “investment” because you might have the option of cashing your policy out and access the funds in retirement.
In most cases, the real reason insurance agents push whole life policies is because they get a bigger commission payment on these policies. How do I know this? Because I used to sell life insurance and was coached to push whole life insurance on all of my clients. Whether it was right for the client was secondary, it was right for the companies bottom line. I hated pushing a product on people that I knew they didn’t need, so I left the financial services Industry.
Make sure you buy a policy that is best for your family, not your insurance agent.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.