Many people don’t think about buying life insurance until they have children. But far too many people — having a child or not — put off the purchase entirely. Many consumers overestimate the cost of having and paying for life insurance.
Why do I need life insurance?
Life events and milestones sometimes impact the decision to consider life insurance coverage. It is a good practice to consistently review coverages when these occur. This assures that coverages are current and are opportunities to verify or update beneficiaries. People typically make decisions and changes on life insurance after life events such as a marriage, the birth of a child, adoption, divorce, remarriage or death. A few other times are described below.
- Your children are in elementary school. A good time to consider life insurance is when children are brought into your family. Another good time to evaluate life insurance coverage is when children enter elementary school. College costs and other milestones should be considered as well.
- You got married and have joint debt. Many people use marriage as a prompt to obtain life insurance. And they benefit from generally lower premiums for younger people. However, it may be critical to either add or increase life insurance coverage based on how much joint credit debt, including mortgage and credit card, you have. According to Experian as of the first quarter of 2019, the average mortgage per borrower was $202,284 in the U.S. This certainly would be a large responsibility for a newly widowed spouse, so having life insurance coverage helps tremendously.
- Someone co-signs a loan for you or you co-sign a loan for someone else. If your death would cause financial consequences for anyone, you should consider covering yourself. For example, if your parents co-signed your car loan and you die without life insurance, they may be responsible for paying back your debt. If you co-signed a loan for someone else and are helping them pay it back, they may not have the resources to cover the payment.
- You switch jobs. Some people think they don’t need to buy life insurance because they already have coverage through their employer. According to Investopedia, typical amounts are only $20,000, $50,000 or one or two times the employee’s annual salary. Coverage usually stops if an organization opts to terminate group life insurance or a person decides to switch jobs. With that said, it is recommended that supplementing coverage with a separate individual policy to ensure sufficient, substantial and stable coverage. Some people aim for life insurance coverage equal to ten times their annual income. Others tabulate their total financial obligations from now until their children reach adulthood (including mortgage payments and college tuitions) and aim to cover that full amount. If your current policies do not meet these amounts, adding or increasing coverage may be best.
- You’re completing an estate plan. Many adults with older children consider letting their life insurance policies lapse since they don’t need to provide day-to-day income coverage anymore. Life insurance, when used properly, can be a great way to leave a legacy for beneficiaries while avoiding probate and retaining privacy.
- You are going through a divorce. If you’re going through a divorce, there are insurance factors to consider, especially if you have children. When a marriage ends, the topic of life insurance after divorce is too often overlooked.
What's your financial plan?
Because life insurance can have a big impact on both your loved ones and your finances, the topic can be intimidating. One size does not fit all but here are a few things to consider.
Who do you want to protect?
Life insurance is often thought of as a way to protect loved ones by providing for final expenses, estate taxes, etc. But let's think beyond that. Who else depends on you and your income?
- Do you have young children at home? Life insurance can help provide the money for day care now and an education for the future. If your kids are older, your insurance can help cover tuition payments.
- Are you responsible for your parents? If you're contributing to the care of an elderly relative, you should consider how those healthcare bills will be paid if you or your partner passes away suddenly.
What do you want to protect?
- Do you have a mortgage? If you have a mortgage, adequate life insurance can help your family stay in the home and maintain their standard of living.
Even if you don't have a mortgage, there are probably other assets that you want to protect. Life insurance can help your family keep up with car payments or protect your spouse from having to dip into retirement funds earlier than anticipated.
- Are you a business owner? Life insurance can help the company you built continue after you're gone.
Do you want to leave something behind?
Perhaps you would like your legacy to help the next generation live more comfortably. Life insurance can help you do that. Life insurance can continue your contributions to your favorite charity, because some policies allow you to name an organization as your beneficiary.
Types of life insurance
- Term insurance is the simplest type of insurance. You pay your premiums as scheduled and in return your insurer agrees to pay a death benefit should you die within that term. The policy is temporary and is designed to last for a specific amount of time (term). After the term period is over, many policies are guaranteed to renew on an annual basis at a higher premium.
- Whole life insurance offers level premiums and life insurance protection for as long as you live, provided premiums are paid as required to keep the policy in force. Whole life policies build value over time and provides for the accumulation of guaranteed cash value, which grows on a tax deferred basis. This may come in handy for unexpected expenses, college expenses or help supplement your retirement income. Keep in mind that any unpaid policy loans and withdrawals will reduce the death benefit and policy cash value. Policy loans also accrue interest.
- Universal life insurance is a permanent policy with flexible premium payments and death benefits that can help protect your loved ones while building tax-deferred cash value. Like whole life insurance, this type of life insurance can help provide for loss of income, mortgage costs, education costs or unexpected expenses by allowing access to the cash value.