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.
- It’s impossible to discuss life insurance without being reminded of the uncomfortable reality that you are going to die and that is a buzz kill.
- Buying life insurance means you’ll have less money to spend each month and you will never directly see the benefits (refer to point 1).
- It’s boring.
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.
Why life insurance is important
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.
How much life insurance do I need?
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.
- Are you the breadwinner of your household?
- Are you the only income earner in your household?
- How many years worth of living expenses do you want to be paid to your family?
- Do you have debt?
- How many other assets do you have?
- How many financial dependents do you have?
- Do you want your life insurance to cover the cost of education for your children?
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.
Do not let your insurance agent sell you whole life insurance
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.
- As your children grow older, they are less financially dependent upon you.
- The older you are the more wealth you are likely to accumulate.
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.
Be wary of life insurance agents who recommend whole life 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.
Bringing it all together
- The best thing you can do is get the amount of insurance you need at the cheapest cost possible, which usually means term life insurance.
- If you want an investment put your money in the stock market or in real estate, not an insurance policy.
- If you have concerns about qualifying for insurance in the long term, you may want to consider whole life coverage, but do your homework before you sign anything.
- Find an objective insurance agent or a fee-only financial planner to review your insurance needs and find out how much coverage you need.