Written by: Andrew Newhouse
Life insurance is one of those topics that everyone seems to know a little bit about. I have never brought up life insurance in a meeting and had the client responded with “what’s that?”. It’s great that this insurance is so well known, but most people still have a lot of questions about life insurance. If you have been subscribed to this blog since the beginning, you may know more about life insurance than most people. If this is a fairly new topic for you, you may be wondering the following questions: How does life insurance work? Why is life insurance important? How much life insurance should you have? Do I need life insurance? How much does life insurance cost?
How Life Insurance Works
There are a few different types of life insurance. For simplicity, we will focus on term life insurance today. Term life insurance is the most basic form of life insurance.
Let’s say you have a 20 year term policy with a one million dollar death benefit and it costs $40 a month…just making this up. All that means, is that you pay $40 a month, each month, for twenty years (or until you cancel the policy). If you die at any point during that time, a million dollars goes to your beneficiary.
After that twenty year period…poof, its gone. Technically the policy doesn’t cancel itself, but the premium skyrockets after the “level premium term period,” so you’ll likely end up cancelling the policy because the new cost is exorbitant.
Term insurance is the least expensive form of life insurance due to the minimal risk to the insurance company that you will pass away during that time period.
If you are interest in learning more about the different types of life insurance, here is a link to a previous blog post about term vs permanent life insurance.
Why is Life Insurance Important?
There are many reasons why life insurance is important and why someone would want to secure a life insurance policy.
The most common reason for life insurance is to protect their family. In the event that you were to pass away, the death benefit could go to your spouse. If you were the primary income earner, this death benefit could help the family maintain the same style of living that they had grown accustomed to.
The death benefit from life insurance can help pay off the mortgage, put children though school, fund retirement for a surviving spouse, and protect the overall financial plan. If you have adequate coverage, the surviving spouse or family members should be able to maintain the same style of living.
Another reason for life insurance is to replace lost income. If there are two incomes currently in the picture, the budget may be stretched a little if there was suddenly just one income. A death benefit from life insurance policy can help replace years of income that would have been in the picture.
Life insurance can also be used to pay off any existing debts. If you pass away, your surviving spouse or family members could be responsible for debts that you left behind. Life insurance can provide a benefit to your spouse or surviving family members and be used to pay of any financial obligations that were left behind. One example could be a mortgage. If you and your spouse purchased a home, you are still expected to make the monthly mortgage payment. The death benefit could be used to pay the monthly mortgage payment, or pay it off in one lump sum.
One of the most basic reasons to have life insurance would be to covering end of life expenses. Maybe there isn’t a mortgage, or a spouse and children in the picture. If there isn’t anyone financially dependent on you, you may be thinking do I need life insurance? End of life expenses can be expensive depending on your wishes. You can secure an inexpensive term policy to cover the cost of any funeral or burial service, so the expense doesn’t fall on any surviving family members.
Lastly, having a life insurance policy can provide you with piece of mind. Knowing that you have protection in place in case something was to happen can give you comfort.
Do I Need Life Insurance?
Now that you know why life insurance is important and some of the reasons why people look into securing coverage, I am sure that you are wondering do I need life insurance? In most situations, the answer is yes.
If you are financially independent, you may be okay if you don’t have a life insurance policy in place. If you are not yet financially independent, life insurance may be an important part of your financial plan.
Even if you are single with no children, there could be an argument made for securing life insurance. The ability to qualify for life insurance is contingent on health. And the cost is based on age and health. Therefore, if you plan on having a spouse & children in the future (or maybe financially supporting elderly parents or other family members), then it could be smart to look into it now.
How Much Life Insurance Do I Need?
Now that we know life insurance is important to secure, how much life insurance do you need? If I had to simplify how much life insurance to secure, the general rule of thumb is roughly 10-15x your annual salary.
You might be thinking that that would provide 10-15 years of income, but it actually could be a little more than that. There are a few exceptions, but most life insurance death benefits are not taxable.
Every situation is different, so you may need more or less life insurance depending on your current financial situation. Here is a blog post on how much life insurance do I need.
How Much Does a Life Insurance Policy Cost?
Throughout this blog post, we have determined how life insurance works, why life insurance is important, how much you need, but we haven’t mentioned anything about the cost of life insurance.
The cost for life insurance really depends on a few different factors. Life insurance is based on your age and your health. The younger and healthier you are, the cheaper the cost of coverage will be. All else being equal, rate for women are a little less expensive than rates for men (statistically women live longer).
For example, if you’re a healthy female in her 20’s, you could get $1 million of term life insurance that lasts for 30 years for under $40/month. The same policy for a male could be under $50/month.
The exact same policy for a man of average health (not in the best physical condition, but nothing overly concerning), could cost around $150/month. If there are health issues that are a little more serious, it could be more expensive than that (a lot more for some individuals).
If you need coverage, or know you will in the future, it can behoove you to lock in a policy as soon as possible, while your health is still good.
There are many reasons why life insurance is important. Odds are there are multiple reasons why it would be appropriate for you. If you already have a life insurance policy, great! Hopefully, this blog post has made you want to revisit your current coverage to ensure that your policy is appropriate for your situation.
If you don’t have life insurance, hopefully this blog post was insightful and helped answer a few questions that you may have had. If you want to explore the options out there or need guidance on where to look, how much to get, what type of policy is appropriate for you, what companies to look at, or anything else, feel free to contact us and one of our advisors can help you out.