Life insurance is one of those things that most of us know we need, but we don’t really know what kind to get, how much we should get, when we should get it, or how long we should keep it. Fortunately, it’s not really that complicated. If you understand the options, many times the solution presents itself.
There are two principal types of life insurance:
1. Term life insurance provides a death benefit for a predetermined number of years. The term varies but is usually between 5 and 30 years. The premiums are fixed over the lifetime of the agreement. The premiums are calculated based on a variety of factors, but age and current health have the biggest influence. It all comes down to life expectancy.
- Obviously, a 10-year term policy for a 70-year old will be more expensive than the same policy for a 30-year old, all other things being equal. Similarly, two people of the same age and gender will pay different rates if one is obese and smokes.
- Term life insurance is the least expensive type of life insurance.
2. Whole (permanent) life insurance has a death benefit and combines it with an investment or savings account. But this policy covers you until your death; there is no set expiration date. The premiums are fixed or can vary, depending on the details of the policy.
- The premiums are dependent on your age, gender, health, medical history, and more, similar to a term policy.
- Whole life isn’t the optimum choice for most folks. While it does accumulate a cash value through the investing/savings aspect, the premiums are several times more expensive that comparable term life insurance coverage. It isn’t the best tool for saving.
- Whole life insurance does allow the policyholder to borrow against the current cash value. But this diminishes the value of the policy until the money is paid back. Most financial experts consider whole life insurance to be a poor choice.
In between term and whole life insurance, there are several different styles, including universal life insurance, last-to-die and first-to-die policies that cover both spouses, and more. However, if you understand the concepts of term and whole life insurance, it will be easy to understand any other type of life insurance your insurance professional might recommend.
Consider your life circumstances:
- Single and no dependents. Most people in this category do not need life insurance. One of the few exceptions might be if you’re parents are not financially well off; you might want to get a small policy to pay for your funeral / burial costs.
- Recently married. Consider how your spouse would fare without you. If you don’t have children, you probably don’t need life insurance, yet. However, if your spouse is not well employed and likely to struggle long-term without your salary, it is worth considering.
- Expecting a baby. Now is the time most responsible future parents will purchase life insurance if they are able to do so. Consider how much coverage it will take to cover your take home pay until your children are at least 18. You might want to consider the cost of college as well.
- Remember that life insurance payouts are not normally taxed. You don’t necessarily need to cover your entire salary, just the take home portion. This will allow your family to maintain the same standard of living. If you already have life insurance, you should revisit your amount of coverage anytime a new child is on the way.
4. Retired. Your term insurance has probably run out by now. Ideally, you would also have a healthy nest egg, your house paid off, and all your kids out of your hair, reducing your need for life insurance. Life insurance premiums at retirement age get very expensive, too.
- If you do decide to get permanent insurance, now might be the time to cancel it and get the cash value out of the policy. You probably don’t need the policy any longer anyway.
For financial security, you’ll most likely need some life insurance at some point in your life; however, very few people need it throughout their adulthood.
The easiest way to determine if you need it is to consider the financial impact your family would have endure if you were gone. You want to be able to eliminate that impact to the best of your ability.