Life Insurance - Protecting Your Family's Most Valuable Asset

Why do you need life insurance and how much do you need?
Life insurance is to provide your family with income in the event that you are no longer around to provide it. Generally, a person’s life insurance needs are low when they are just starting out with no dependents, increase as they become responsible for a family, and then later decrease again as children become adults and begin taking care of themselves.

A single adult doesn’t need much life insurance if his or her income is not required to take care of anybody else. Buying a big life insurance policy when you don’t have any dependents is probably a waste of money. You might want a small policy that’s just enough to cover your debts and funeral arrangements if you don’t have enough in savings to cover those last expenses. If you are responsible for elderly parents’ care, consider having enough insurance to provide for them if you were gone.

If you have children or a spouse who is dependent upon you for your income, carry enough insurance to cover your funeral, your debts, their living expenses, and children’s educations. The amount of insurance you would need depends on the age of your children and how many years before they are adults, and whether your spouse has any income of their own. But even if your spouse has income, you probably want to ensure they could maintain the standard of living the family is used to.

A spouse who has no income and stays at home to take care of the family might not realize what a financial asset they are. Even if you don’t bring income to the family, you provide a valuable service. If something were to happen to you, would your spouse have to hire childcare, or possibly someone to help with household chores? You might consider a policy to cover those added expenses in the case you weren’t around to care for them.

Children do not need life insurance. As heartbreaking as it would be if they were gone, they don’t provide income for their families, so it is not necessary to cover lost income with life insurance. You’d be better off saving or investing that money for their future educations.

The general guideline on how much insurance to buy is five to ten times your annual salary, but that amount should be based on how many dependents you have and their ages, your debts, and your family’s lifestyle. Would you like your family to be able to pay off the mortgage? Would you want your children to be able to go to the best schools? Would you want to pay Mom and Dad back for your college education?

What type of policy?
When applying for insurance, be sure to shop around for the best deal. Premiums are based on health and age, and risky activities you might be involved in, like flying or smoking. Be sure that you answer all their health and habit questions honestly; you don’t want them to deny the benefits to your family because they found out you lied to get a lower premium. There are two main types of life insurance policies, term life and whole life.

Term life insurance is the affordable, no-frills insurance. You buy it by the term, say one, five, or ten years, based on your projected needs. It doesn’t build up a cash value; it is simply there to provide for your family if you die within the term covered. You will pay a lower premium as a young person, and the premium will gradually increase as you age. This is the cheapest way to guarantee a specific amount of coverage at a fairly low price. Medical concerns or aging may make it difficult to obtain term life insurance, you may be denied coverage if you are in poor health or are close to age 65.

Whole life insurance, including universal life and variable life, is part insurance and part investment. Premiums don’t rise as you age, they’ll stay the same. Your life insurance policy will grow to have a cash value that can be borrowed against or cashed in, but it will take a number of years before it will amount to much. This type of insurance should be for people who plan to keep their policy in effect for twenty or more years, since the administrative fees and sales commissions take a big cut out of your premiums in the early years. If you cash it in before about ten years, you probably have lost all your investment.

For most people, it’s often advised to buy a term life policy and invest your money yourself. You can invest the money you save by going with the term policy, and watch your investments grow without the hefty administrative fees and commissions charged by the insurance company. You will usually come out ahead by keeping insurance and investments separate, and one day your keen investments will pay off, reducing your need for life insurance.

Children will grow up and debts will be paid off, and you can then reduce or possibly even cancel your term life policy. On the other hand, if you cannot get a term policy due to age or health, you might not have any other choice than a whole life policy.

Or, if you know that you don’t have the discipline to regularly invest money on your own, then a whole life policy can force you to save for your future. It’s not the most profitable way to invest, but it can ensure you some retirement income even if you make no other investments.