What kind of life insurance and how much?
Protection for the value of your life.
If you’re reading this, you’ve probably started researching your need for life insurance and the different types available for purchase. Good for you! It’s one of the best investments you can make for your family’s future. There’s a lot of information about life insurance out there, sprinkled with terms like premium, benefit and cash value…it can be confusing, to say the least.
Here’s some good news — by picking up this article, you’re one step closer to understanding life insurance and making the best, most informed decision you can. We’ll cover the basics of life insurance, dive into the two most common types, and figure out how much insurance you need to guarantee your family’s financial future. Let’s go!
- What is life insurance?
- What kind of life insurance do I need?
- How much life insurance should I buy?
What is life insurance?
Good question. Life insurance, put simply, is protection for the value of your life. Not your life’s actual value, of course — that’s immeasurable. Instead, it’s a replacement for the financial support you provide your family.
There are several different types of life insurance available for purchase; the most common are term life insurance and whole life insurance (also known as permanent life insurance). Although there are other variations out there, for the purposes of an introduction we’ll focus on these two types of insurance.
First off, all types of life insurance have a few things in common. They all provide a guaranteed death benefit, which is the payment to your beneficiary after you die. It won’t change from the amount specified on your policy, so you can rest assured the policy will be there for your loved ones whenever they need it.
Additionally, both term and whole life give you the option to lock in your premiums (premiums are usually monthly payments you make for insurance). In other words, your payments stay the same as they were the day you got your policy. No matter what, the rate you pay for life insurance won’t go up — making it more affordable the earlier you purchase it.
To summarize, life insurance is an investment in your family’s future. It’s a promise that your income will be there for them even when you’re not — and it’s surprisingly affordable if purchased at the right time. Think you understand the basics of life insurance? Let’s take a closer look at two of the most common types, term and whole life insurance.
What kind of life insurance do I need?
Okay — there’s a lot to dig into here, so we’ll keep it simple. You shouldn’t need a finance degree to understand the major differences between types of life insurance, but you should know the benefits of each type and which would be best for you.
Whole Life Insurance
When most people think of life insurance, this is what comes to mind — it’s the coverage your parents had, and their parents had before them. It’s still around, though, and for good reason: it’s an all-around solid type of insurance.
Whole life insurance, or permanent life insurance, provides coverage for life — from the moment your policy is approved to the moment you die, you’re covered with a whole life policy. The constant peace of mind that whole life insurance provides is one reason why people opt for this type of policy.
That’s far from the only reason to invest in a whole life policy. Unlike term life, a whole life policy builds cash value over its lifetime — think of it as a savings account that grows after several years. It can be paid to the beneficiary as an addition to your policy’s face value benefit, or you can withdraw it earlier in your life as cash. You can even take out a loan against your policy’s value, and unlike a bank loan it won’t affect your credit and will typically offer lower interest rates. Whole life insurance builds cash value on a tax-deferred basis and gives you the option to withdraw or borrow cash.
On top of accruing cash value over the policy’s lifespan, a whole life policy may also give you policy dividends — that is, annual payments to you if your insurance carrier does well. Note that this may only apply to certain types of insurance carriers, for instance a mutual company like Assurity.
If you’re looking for stable insurance that might offer a higher benefit than the policy’s face value, a whole life insurance policy may be right for you.
Term Life Insurance
Term life insurance is one of the most affordable types of protection. If you’ve ever had life insurance coverage through an employer, this is probably what it was.
Term life works by protecting you for a certain period of time — or a term. That term can be 10, 20 or 30 years, or even as short as a single day or week for some specific plans. During that time, you’re protected so long as you continue to pay premiums. If you die during the term that your insurance is active, your beneficiary receives payment.
But why would you want insurance on a timer? Well, lots of reasons — for instance, you might only need insurance coverage until your kids are finished with college or until you retire. For super short-term insurance, you might only need protection for a single day while you’re traveling – but keep in mind that isn’t the main use of term life insurance. It generally lasts for decades, but allows you to tailor the duration of coverage for a more customizable experience.
If term life insurance is appropriate for you now, but you think you could want whole life insurance later, there’s even a solution for that. Term life insurance is convertible, meaning you can transfer your term insurance to an equal amount of permanent (whole life) coverage.
The last benefit of term life is that it’s the least expensive type of life insurance. Because it doesn’t build cash value and isn’t in force for the entire duration of your life, term coverage is far more affordable than other types of life insurance.
Term life insurance is appropriate for families and individuals who only need coverage for a limited amount of time, or are looking to insure themselves for a smaller amount of money.
How much life insurance do I need?
That’s the big question. If you don’t buy enough insurance your family could struggle financially after your death, but if you buy too much you could end up paying more than you need in monthly premiums.
Keep in mind that whole life insurance will be more expensive than term life insurance, but you should choose whichever type of policy works best for your family and unique circumstances. Some general factors to consider are:
- Your immediate needs (income replacement, final expenses)
- Your ongoing expenses (mortgage, utilities, childcare, credit card debt)
- Your future expenses (education, retirement)
- Any existing insurance (individually owned or through work)
- Other expenses your family is expected to face
Speaking broadly, a safe estimate for life insurance coverage is 7 – 10 times your annual income. Since everybody’s life is different, it might be wise to use an insurance calculator for a more precise estimate of your needs. LifeHappens, a nonprofit dedicated to insurance awareness, has a calculator on their site that can be as in-depth as you’d like.
An insurance professional is also a key resource to help you assess your needs, and now that you’re at this point you may be ready to speak to your local agent. Now that you have an idea of what type of life insurance is right for you, and how much you need, you’ll be better prepared to have this important conversation and secure your future.
For more information before you visit with your insurance professional, take a look at Assurity’s life insurance products.