Life INSURANCE: HOW IT WORKS, WHY YOU NEED IT, AND HOW TO MAKE THE BEST OF IT.

The final insurance tool we’ll discuss is life insurance. Life insurance is newly on my radar, but certainly one that now that I know about it, I would not do without. This one can feel a little morbid but stick with me.

Life insurance is vital (no pun intended) if you support another person. In my house, my husband is the primary breadwinner. If he were to pass away, we would no longer have a regular income. Life insurance provides me the assurance that if he were no longer with our family, we would not struggle financially. Now, while I don’t financially support our household in the way he does, if I were to die, he would become a single dad with all the responsibilities that we currently share. Very likely, he might want to, or need to, hire help to fulfill some of the duties I do.

Another consideration for life insurance, is simply to give yourself a grieving period. If my husband died, I would be devastated. If we didn’t have life insurance, I would very quickly have to get it together to earn an income to replace his, while raising a family, and while feeling very sad. This happens… a lot. Half of widows and widowers say that their deceased partner was underinsured. The average person only carries $162,000 of life insurance. This number is only for people who actually have life insurance.

If you don’t have anyone who depends on you for security, you likely don’t need life insurance. If you do have dependents who need you to have an income or be home maker, you need life insurance. Fortunately, life insurance is typically very affordable. And, because the need is only for the duration of someone depending on your income/home skills, it is not an expense you have to have forever.

Life Insurance – What is it?

 Life Insurance is a contract between the insured (you) and the life insurance company, whereby you pay a premium and at the time of death, the life insurance company pays a death benefit to your beneficiary.

There are two main types of life insurance: term life insurance and whole, or permanent, life insurance.

Term life insurance is a policy which stays in effect for a specific term – typically between 10 and 30 years.  Life insurance is intended to be used if you die while you are still supporting others. The time periods, therefore, can correspond to timeframes of caregiving (raising children, typically, or reaching retirement). Because term life insurance only lasts the duration it is in effect (the specific time period, or term), it is generally really affordable. Term life insurance is truly ensuring security while you work to build savings and investments. Once your savings and investments are sufficient, your income is not required, and your expenses are covered, you don’t need life insurance.

Whole, or permanent, life insurance is intended to last the duration of your life. It is often sold as an investment – the growth on the premiums you pay are tax deferred and are accessible to you as cash value. If you die, you get a set amount of money and the cash value. Whole life is actually quite expensive and typically a poor investment – the associated expenses are high and the returns are low. Whole life insurance is sold by agents as an investment, more than as insurance to protect your life (which begs the question…). The amount you pay for a whole life insurance policy compared to the death benefit will be high.

When thinking about whole life insurance, I ask this: Would I buy car insurance as an investment? Absolutely not. Car insurance, as we reviewed a couple of weeks ago, protects us in the event of an incident. Same for life insurance. It is for the terrible, life shattering, unfortunate event of death. There are way better investments.

So, if term life insurance is what you need, how much should you buy?

Term life insurance can be purchased in many variations. A quick math version is that you want to buy about 10x your income. So, if you earn $70,000 a year, you want to buy a policy that provides $700,000 of protection. If you and your spouse both work, you each want a policy reflecting your individual income x 10.

There are other ways to determine the amount you need. Ask these questions:

 How much would I need if my partner died? How much would my partner need if I died?

• How much income would need to be replaced?

• Would we want to be able to pay off a mortgage?

• Would we want to set aside some for children’s college?

• What (non-retirement) assets do we have that we could use?

Purchase as much insurance as you would need to answer the first three questions while subtracting for what you have. Be sure to purchase the amount for a long enough term to provide you and your family adequate security.

When thinking about how long of a term to choose, ensure that the term will cover your dependents while they need it. For example, we want a term that is in place until our children are grown and out of the house OR until our assets would cover everything we would need.

If your employer offers it, you still want an independent policy. The life insurance through your employer will only last while you are employed by that employer. If you switch jobs, your insurance does not go with you.

If you don’t yet have life insurance and you think you might need it, shop around for a term policy which provides security and peace of mind for you and your family. You may be pleasantly surprised at how affordable it is and how critical it is to your longer-term financial plans.