While none of us like to think about insurance, especially life insurance, keeping a proper policy is one of the best ways to protect the things (and people) that matter most.
As with any type of insurance (car, medical, home or renters insurance), life insurance companies are there to help you cover the cost of a loss. Unfortunately, in this case, the loss is your life. And as gruesome as it is to think about, the reality is that we all face the same inevitable doom. There is no escaping it. But there is a way to help lessen the blow to the loved ones we leave behind. Payouts from your insurer provide relief from ever-growing burial and funeral costs and can even be used to keep your family in their home or sustain them financially if you contributed to the household income.
In the event of deep grief, no one should have to add on the loss of a home, college tuition or overall provision. That's where life insurance comes in.
Like most industries, life insurance comes with options; although you can pretty much narrow it down to two kinds of policies: term and whole life. We'll review some of the basics for both types of life insurance policies to help you find the right one for you. However, you will still want to discuss your situation with your insurance agent or financial advisor before making any major investment.
Let's start with term life policies.
What is Term Life Insurance?
Just like it sounds, term life insurance is a policy that is effective for a specific period of time. Many policies have 5-30 year term options, and these policies are pretty straight forward. If you were to die while your policy is in effect, your listed beneficiary would receive the payout.
The advantage of level term life policies is that you get locked into a price for the duration of your policy, so you won't have to worry about rising premiums. These are great options for new families who want some kind of protection for their family while their children are young but can't afford a steep monthly premium.
Another great benefit to term life insurance is that you can buy it for when you need it most. Some people get insurance to cover the period from when their kids are young up until they are finished with college. For others, it is for the life of their mortgage. You can buy coverage for a short time, say a 10-year term, and then renew the coverage for another term.
The downside to term coverage is that once your policy ends, you will have to actually start a new one. And life insurance premiums are greatly impacted by age. So now that some years have gone by, you can expect your insurance rate (and monthly premium) to be decently higher than the one established when you were younger.
Since there is no penalty for carrying multiple policies, a common practice is to stack term life policies on top of each other. That way, you never lose coverage, and you don't have to wait until your policy expires to get a new rate. You can also opt for a renewable term policy. While that won't keep yours from ending, it may help you skip the medical exam when it comes time to renew.
What is Whole Life Insurance?
Whole life insurance, sometimes called permanent life insurance, provides permanent coverage for your entire life, so long as you aren't behind on your payments. The biggest difference between term and whole life is that unlike term life insurance, which only covers you for a designated term before you need a new policy, your whole life policy provides coverage for your entire life.
Also, like term life insurance, you can expect for your monthly premiums to stay relatively consistent. However, because your insurance carrier knows they can't raise your rate, you should expect to have a steep monthly payment right off the back to offset the risk you carry as you get older.
Another unique feature of whole life policies is their inherent investment features. Whole life insurance acts somewhat like a financial investment in the sense that part of your monthly premium builds cash value. You can later borrow against this cash value, tax-free, should you need it.
While the life insurance feature of whole life policies is pretty desirable, the investment side of things leaves a lot to be desired. It can take a long time to build cash value, and the loans are subject to interest. These drawbacks might not be a cause for concern for all, but Dave Ramsey advises his followers to avoid whole life insurance due to the poor investment features.
I have Long-Term Care Coverage. Isn't that Enough?
In short, no. A lot of people lump long-term care coverage into the life insurance category. However, long-term care insurance is designed to provide coverage in your later years when you may need to fund a nursing home or assisted living. Many of us will need some kind of assistance as we get older. Long-term care coverage allows individuals to live a long life, no matter what kind of assistance is needed.
Unlike life insurance, long-term care coverage does not actually provide any death benefit to help with end-of-life costs. Similarly, it also cannot offer your family financial protection in the event that their primary income is lost. Therefore, while long-term insurance is valuable, it does not fulfill your need for a good life policy.
What do I Need to do to Get a Life Insurance Plan?
No matter what type of policy you choose, there are few foundational steps that you will need to get through before getting your life insurance quotes.
Since life insurance policies payout upon the policyholder's death, life insurance companies want to make sure you don't have terminal illnesses or other underlying conditions.
Most companies require a medical exam to make sure you are in good health. From there, underwriting will determine your insurability and your rates.
That's not to say that you can't get a life insurance policy if you aren't exactly in marathon-ready shape. And not every underlying condition is a deal-breaker; you may just get a higher premium.
How Much Life Insurance do I Need?
With any type of insurance, the goal is to replace whatever you lost. While nothing can bring our loved ones back to us after their passing, there is a way to replace the monetary value of what is lost with their passing.
To figure your life insurance needs, start by figuring out your goals. Are you just trying to cover the cost of college for your children if you pass? Are you trying to secure your home for your family? Or are you trying to replace income to keep your spouse from having to work? All these add up to significantly different numbers.
Once you have your goals established, it is time to start calculating for the amount of coverage you need. Some big-ticket items to pay attention to are your mortgage payments, tuition, car payments, child care, etc. Pro tip: you will want to account for inflation in your calculations to maintain your current buying power.
And to get you on the right track, this life insurance calculator from NerdWallet is a great place to start.
My Employer Provides Life Insurance Coverage- is That Enough Coverage?
If you have secured a job that provides a life insurance benefit–congratulations! That sounds like a pretty sweet place to work. But to answer this question, you will need to do some research. Likely, your employer may provide a supplementary life policy to complement your personal one. Very rarely will an employer-paid life benefit allow you to fulfill all of your financial goals.
Is there a situation where you wouldn't need life insurance?
Probably not. Even if you are single and don't have the weight of a mortgage on your shoulders, the average funeral and burial cost rings in at around $10,000. And someone is going to need to cover that when you are gone.
And if you struggle to find a beneficiary to list your policy, consider listing a charity or other nonprofit that aligns with your values. This is a great way to leave a lasting impression on the world and is actually quite common.
Life Insurance is one of those things that require multiple conversations and a bit of planning, so do yourself a favor and get in touch with a licensed agent or financial advisor to understand what term life insurance policy is right for you and your family. They will be able to offer more information, give you solid advice, and answer all the questions that are specific to your situation.
While none of us like to think about our mortal fate, your family will be very glad you took the time to set up a policy. A little planning and financial stewardship now could be what keeps your family from financial ruin in the event of your passing later. And with endless options to match your budget and needs, there is really no excuse to put it off any longer.
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