This is a guest post from my friend and life insurance expert Gary Dek. Enjoy!
Is life insurance necessary? Almost every American has asked themselves that question, perhaps multiple times during their adult lives. When do you start needing life insurance and, if you’ve decided you do, what type of policy and how much of a death benefit should you buy. Even if you plan on discussing your financial plan with an advisor, it is important to answer these questions for yourself.
Why Buy Life Insurance?
For the right consumers, life insurance coverage is essential because it can keep their loved ones from financial hardship if they pass away prematurely and can’t help support them. Life insurance is primarily a form of income replacement – if others are financially dependent on your contributions to the household, you most likely need to buy protection.
If you are anything less than wealthy, life insurance should be a part of your estate planning. It is almost unforgiveable to put your loved ones into monetary straits because of a lack of planning, procrastination or ignorance.
On the other hand, if you are a 25 year-old, single man with no children or outstanding loans, you obviously do not need life insurance unless you want to cover your own final expenses, such as burial and funeral costs.
What About The Government?
Frequently, people make the mistake of assuming Uncle Sam will provide enough money in the event of their deaths. Social Security and military benefit recipients do receive a death payout, but it is very small, normally no more than a few hundred or thousand dollars at most. The starting cost for a basic funeral is currently around $10,000. Social security and military payouts will not even come close to covering all the expenses associated with even the simplest final arrangements. And don’t forget – student loan debt is not forgiven, especially when your parents have co-signed your loan.
Life Insurance Protects What You Leave Behind
When someone passes away, they leave an emotional void in the lives of their families, but more tangible is the economic void. Unless you have substantial assets or a comprehensive retirement/pension plan, a life insurance policy would be a life-saver for all the expenses that would pile up: mortgage payments, auto loans, credit card bills, medical and funeral costs, education/tuition payments, loss of benefits such as health insurance, and other miscellaneous living expenses.
All of these would be your spouse’s or other family member’s responsibility, even if they’re not in a financial position for that burden. Think about your children’s educational future – college is expensive and buying life insurance can put your kids through school.
Get Life Insurance
Surprisingly, the people who actually need life insurance the least are often the ones who buy it the most. Those who are financially well-off buy life insurance as a matter of course, but not because they necessarily need it. “Rich” people understand that life insurance is not just an insurance policy: it is also an investment vehicle to cover estate taxes when the right kind of policy is purchased. Others have coverage through their jobs as a benefit, while some are required to have it because of their occupations.
Types of Life Insurance
There are many types of life insurance policies to meet the needs of different individuals at every stage of their lives. Each type has its own advantages and disadvantages and every family must decide which policy will provide the best protection to help them meet their goals.
Term Life Insurance
Term life insurance is called pure life insurance and doesn’t offer savings or investment potential. It has the lowest, most affordable premiums of any type, but it is purchased for a specific term of 5, 10, 20, 25 or 30 years. At the end of the term, the policy expires unless renewed and the premiums will increase based on your age and health. Since rates are heavily dependent on age, current health, and medical history, premiums will be significantly higher. Term life insurance may be the best type of insurance for most families, especially since there are many different riders to customize your policy to your needs.
Whole Life Insurance
Whole life insurance is a form of permanent protection and initially costs more than term life, but offers the advantages of a savings feature and fixed premiums for life. Limited whole life policies are usually paid for a specific term after which no further premiums are due and the policy remains in effect.
A whole life insurance policy builds cash value over time, which can be redeemed or used as collateral for a low-interest loan, down payment for a home, or college tuition. The cash value account is built when a portion of your paid premiums is redirected to the savings feature and the company guarantees a fixed rate of return, around 4%. As a component of estate planning, whole life insurance can add value, but the premiums can be prohibitive. Many financial advisors recommend buying a term life policy, pocketing the difference in premiums between term and whole life, and using the extra cash to invest in index funds.
Editor’s note: I have my own thoughts on using life insurance as an investment vehicle, which are in line with the advice above to buy term and put the premium difference into other investments. You can read more detail here: Why Whole Life Insurance is a Bad Investment. The same thoughts there generally apply to variable life insurance as well.
Variable Life Insurance
Variable life insurance is similar to whole coverage, but offers an investment feature rather than a savings component. With some types of variable life insurance, the insured may choose how the money is invested among stocks, bonds, and mutual funds. The death benefit is tied to the success of the investments and the premiums are flexible between a minimum and maximum premium payment, making it the best coverage for those whose income is subject to fluctuations.
There is also greater growth potential for the cash value, however, the risk of loss is greater, too. Finding the best company for a variable life policy is essential to the success of your policy and investment.
Within these categories, other sub-types are also available, each with specific features aimed at addressing a policyholder’s needs. Doing some basic research, evaluating coverage options, and comparing companies and rates is important to finding the right contract for you.
Final Word
Age and budget will largely determine which policy is right for you. If you are relatively young and are looking for cheap premiums, a term policy would be your best choice. On the other hand, someone who wants to build cash value and doesn’t trust themselves to build a nest egg voluntarily should consider whole life insurance.
Just remember that life insurance is a financial product. If you do not understand the details, terms and conditions, it always wise to consult a professional for expert advice.
Gary Dek writes about life insurance policies, rates, and insurance companies at MyLifeInsuranceQuotes123.com. By providing the best, unbiased life insurance information on the internet, I want to help you make the right financial decisions for your family. Gary has a degree in financial analysis and valuation, and was previously an investment banker and private equity analyst.
Image courtesy of cooldesign / FreeDigitalPhotos.net
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