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Life insurance seems to be one of those things people approach with the stance of, “I’ll get to it when I get to it.” But what if you don’t get to it and now your family is left with your debts? Life insurance isn’t about life after all; it’s about death. Life Insurance Awareness Month was created by The Life and Health Insurance Foundation (LIFE) in 2004 in response to the large number of American’s who don’t have life insurance. 30 percent of U.S. households have no life insurance and only 44 percent have individual life insurance. While U.S. households recognize the need for more life insurance -58 million in fact- things like everyday expenses are keeping them from actually taking out a policy. Even more alarming, only eight percent of uninsured consumers consider themselves very/extremely likely to purchase life insurance over the next year (S1).
Let’s take a look at some typical questions about the basics of life insurance.
What is Life Insurance?
Life insurance is a contract with an insurance company designed to provide financial protection for a specific period of time. It works by the insured paying a premium to the insurer, over a period of time or in one lump-sum. The insurance company then provides a lump-sum payment, a death benefit, to the beneficiaries upon death of the insured. Life insurance can pre-fund a child’s education, provide a clean-slate for your family members, provide a continued stream of income for your family, and even keep a family business in the family. Check with your employer to see if they offer life insurance, and if not, compare the pros and cons of coverage by different companies.
Who Needs Life Insurance?
Now is the time to consider a life insurance policy, especially if you are married, have children, debts, etc. If you are single with no dependents, retired, or extremely wealthy, you may not necessarily need life insurance. On the other hand, those that especially need life-insurance are the following:
- People with dependents
- Those who are married to a non-working spouse or a spouse that makes minimum wage
- Those who have a special needs child, sibling, or other that you support
- Those with a very high mortgage still in effect
Those that fit into the above category need coverage to protect those loved ones. It’s common sense, but still people go through life uninsured. Some people don’t understand why a stay-at-home-spouse needs coverage since he/she doesn’t have a source of income. They instead provide resources, which are highly valuable, like tending to the needs of the home and children.
How Much Life Insurance do I Need?
Unlike necklaces and Snuggie’s, life insurance isn’t a one-size-fits-all. The ideal amount you get should allow the beneficiary (-ies ) to invest the insurance payout and draw down the account over time while still maintaining the same standard of living prior to death. There are three ways people determine how much life insurance they need:
- General Rule of Thumb Method- With this method, you would take out a policy that’s 5-10 times your annual income, after taxes. Life insurance is not taxed so you shouldn’t calculate that in here. Those who are interested in getting life insurance quickly, with minimal effort, can use this approach.
- Income Replacement Method- With this method, you replace some level of income over a certain number of years. It can range from one-year’s pay to your entire salary. Those with many assets and no special needs can use this approach.
- Financial Need Method-With this method, you take into consideration all the possible expenses that may pop up in the future- think emergency fund, mortgage payoff, and a child’s tuition. This is the most in-depth approach in determining how much life insurance you need.
The amount of Life insurance you have should be re-evaluated every few years, or after a major life event, such as the birth of a new child or marriage (S3).
Which One is Right for Me?
Determining what kind of life insurance you need boils down to the death benefits. The lump-sum received by the beneficiary is the obvious variable here, but there are other variables involved, too, mainly in relation to growth. Below is a brief apples-to-apples comparison of the two types of life insurance:
- Term Insurance- This type of insurance covers only a specific period of time, or “term,” designed for temporary circumstances. Typical time periods are 10,20 or 30 years. Premiums are lower than permanent life insurance, there’s no cash value, and usually offers the highest death benefit at the lowest cost.
- Permanent Insurance- As the name implies, this kind of insurance offers lifelong protection. Coverage is meant to last 100 years or longer and the premiums are higher than term insurance premiums. They have a cash value that accumulates over time on a tax-deferred basis and they offer tax-deferred savings (S2).
We will be expanding upon this subject through the week, so stay tuned for more in-depth articles. Football great Boomer Esiason is hoping to build awareness as this years’ National Spokesperson for Life Insurance Awareness Month.
- The Wall Street Journal: Complete Personal Finance Guidebook, by Jeff D. Opdyke