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Contributor, Benzinga
April 25, 2019
Contemplating what will happen after your own death may seem morbid, but consider what it can do for your loved ones. Have prepared for their financial security when you pass? It’s doubly important if you have young children and/or family members (such as a spouse or aging parents) who financially depend on you.
Life insurance could be the answer. But like all other financial decisions, you need to understand whether you need it, what you’re buying and assess whether it makes sense for your specific situation.
Consider the Type of Coverage You May Need
You’ll need to buy a life insurance policy that meets your needs. Before you do that, understand the types of coverage offered by life insurance companies. Coverage needs and the types of insurance products to meet those needs might differ for individuals, depending on several factors:
At a very high level, there are two types of life insurance. There’s term life coverage, in which you pay premiums to an insurer for a set (5-, 15- or 20-year) term, which comes with a death benefit. If you die during the term, the insurer pays the death benefit to your beneficiaries. Term life comes with no surrender value or payouts when you’re still alive. Outliving the term or canceling the policy during the term yields you no benefits or refunds.
Permanent life coverage does have the ability to pay the policyholder during his or her lifetime. Different types of permanent life policies offer varying degrees of coverage, which include whole life, variable life, universal life, and variable universal life coverage.
These types of policies usually have what’s called cash value, or a component of the premiums paid by you that are set aside (and invested) by the insurance company.
Once the policyholder dies, beneficiaries receive the death benefit. These policies may also offer other options, such as the ability to borrow money against the cash value, using the cash value to pay premiums or withdrawing the accumulated cash value entirely by surrendering the policy.
A general rule of thumb to determine the amount of coverage you need is to assume 5 to 10 times your annual income.
How to estimate your life insurance coverage.
Figure out what your beneficiaries need annually to meet their financial needs. From that amount, subtract other financial resources they’ll have available to them upon your passing. The result is the income shortfall you’ll need to plug through life insurance.
Use 5 to 10 times that amount to determine your coverage needs. Consider the type of coverage you’ll receive and other features of the policy that might fit your needs.
Life insurance policies come with a cost, measured in the form of monthly or annual premiums that you pay for the coverage you receive. Before you buy a policy, ensure that you can afford to make those regular premium payments.
A good first step in budgeting for life insurance is to take stock of your current stage in life and assess:
You could also use commercially available insurance needs estimators to help you address some of these questions. It may also help to learn more about policy payouts at different ages.
Based on those findings, you can plan for the specific type of insurance policy you can afford and how to pay for it.
Term life vs. whole life monthly policy estimates.
Some of the best life insurance companies offer products with different cost structures. As indicated by the sample quotes here, whole life policies are typically more expensive — sometimes by a factor of 15 or 20 times — compared to equivalent coverage-providing term life policies of the same duration. Permanent life policies could potentially offer periodic dividends which may offset some of the budgeted costs of your premiums.
Consider what you might do with your policy if you lose your job or are temporarily unable to earn an income. Can you continue to pay your premiums or is that money better spent addressing household needs instead?
Do the math and set aside the required monthly premiums when planning your household budget, just as you would for your mortgage, rent or groceries.
To get an estimate of monthly premiums, you can get a quote here.
Life insurance does offer certain benefits but it might not necessarily be worth the cost in your particular situation.
You may want to buy life insurance if:
Life insurance could also be a way for high-net-worth individuals to strategically plan to leave a tax-free legacy to their beneficiaries. It can also be a great succession plan or estate transfer mechanism for business owners and entrepreneurs.
Some permanent life insurance policies can also help pay for medical expenses if you opt for specific policy riders. This type of coverage might be worth exploring if you believe your spouse’s long-term care or chronic illness-related medical bills will be insurmountable in the future.
When It’s Not Worth It
Some circumstances where life insurance may not be worth it include:
A life insurance policy could cost you way more in premiums than the income you plan to replace by purchasing it, so it might also not be worth acquiring.
Some people believe that it is a good idea to buy life insurance for a child or a parent. That might not be such a great idea if income replacement and/or the welfare of those left behind is a primary motivation for buying life insurance. Young children and aging parents are not likely to earn the income to justify the cost of the premiums. Anyone insured at that stage in life is unlikely to have beneficiaries who financially depend on them.
Finding the right life insurance product for you and/or your family really depends on your needs. A term life policy is a great option if you expect significant life events to occur within the course of the term.
In some situations, the best coverage strategy might be to purchase multiple term life products of varying terms. You then allow each policy to lapse when they’re no longer needed.
Buying permanent life insurance might be the right fit due to the investment component attached to the policy. Universal life, whole life, and variable life insurance policies are good examples. Insurance companies invest a component of the premiums paid, which then grows until payout. If emergency access to funds is a priority, these policies sometimes also allow policyholders to tap into the accumulated balance of the invested component.
Look for other features offered by various types of coverage before deciding what’s right for you. Some term life policies are convertible to whole life policies, which could be attractive.
Life insurance can deliver much more than death benefits to your beneficiaries. It can serve as an invaluable component of an overall financial plan. Life insurance delivers peace of mind, but also consider that your needs change with time. Ensure you always have the right coverage by reassessing your life insurance needs periodically.
