Life Insurance Basics $ How Much Is Your Life Worth?
Life insurance can be a tough topic to discuss. Nobody wants to think about kicking the bucket, especially earlier than expected. However, your family depends on you to be responsible when it comes to life insurance and to plan for their life without you. Sad, I know…
The reality is, life insurance is a critical piece of any financial plan (even if you don’t need it) and now is the time to learn more about your options. There is a lot of info out there! Bite the bullet, do your research, have a discussion with your spouse and decide what’s best for your situation. Don’t leave your family high and dry!
Who Needs Life Insurance?
If you die, life insurance is intended to help your family maintain their current lifestyle and adjust to new financial circumstances.
The life insurance discussion is especially important for families with one source of income. If you are the sole source of income and you die, how does your family pay the mortgage, buy food, keep the lights on, buy diapers, etc.?
For me, life insurance is about to be much more important. Ever since we found out we have a baby on the way, I’ve been thinking more and more about whether my current life insurance is adequate. If something happens to me, will my family be financially secure?
It’s not too complicated to figure out whether you’ll need some sort of life insurance.
Side note: You may not need life insurance at all! If your financial plan is setup in such a way that your family can maintain their current lifestyle with you gone, why pay monthly for a policy you don’t need?
Will your family be able to cover their expenses without your income and contributions (ie. childcare) to the family?
Some factors to help you decide:
- Dependents – If you have a spouse and/or kids, you likely need some sort of life insurance.
- Monthly Income – Take into consideration the total monthly income your family has, and what it would be if you aren’t around. You can do the same if you are planning for a spouse.
- Monthly Expenses – Total monthly expenses (without you in the picture) – mortgage, rent, car payment, retirement savings, education savings, other monthly bills, etc. Keep in mind, there may be *additional* monthly expenses. For example, if you are a stay at home mom/dad, and you die, your spouse may need to pay for childcare, which can be extremely expensive.
- Funeral Costs – Can be as high as $10,000!
Does your family have access to $10,000 to cover a funeral? Based on the factors above (Income – Expenses), will your family be able to maintain their current lifestyle without your income/contributions?
Another factor you should consider is the emotional trauma caused by an unexpected death. Even if your spouse works now, they may have to take time off work to adjust and mourn. Factors like these make it difficult to plan for exactly how much you need. H
However, you can get a good ballpark figure by doing some simple calculations and leveraging the great tools around the web.
If you’re like me, you’ll take the number the calculator spits out and add a little extra…just in case.
How Much Do I Need?
The amount of life insurance you need depends on your situation!
Based on your personal situation, you can easily calculate a ballpark number. There are a thousand different ways to come up with a number, so you’ll need to play around a bit to find out how much your life is worth! I know, you’re priceless… To estimate how much you’ll need, I like the easy calculator here.
For me, I like to consider what my wife would need to cover expenses, and then add a little padding so she can go on a shopping spree or buy something nice. While money could never REPLACE me, I like to think having a little extra around would make things easier. Maybe not, but we all want to leave something nice for people after we’re gone, right?
The more you need, the more your monthly premium will be. So, make sure your monthly budget will be able to cover the monthly payment. There are a variety of life insurance options to help you get the policy you need, for the right dollar amount and the appropriate amount of time.
Options, Lots of Options!
Term life Insurance covers you for a period of time and is by far the most straightforward option. You choose the timeframe and how much you think your life is worth, and the insurance company tells you your premium. If you die within the time period you select, your family will be paid the death benefit. If you die outside the term, your family will get nothing (other than great memories).
For example, you can choose $500,000 for 15 years. After 15 years, your policy expires and you will no longer leave a benefit to your beneficiary.
The higher the policy amount and the longer the timeframe, the higher your premium will be.
Whole life Insurance is a subset of Permanent Life Insurance. You choose the amount you want and the insurance company will tell you your premium. You’ll pay the same premium for the rest of your life.
Unlike term life, the benefit will be paid regardless of when you die. Since your beneficiary will get the death benefit regardless of when you die, the premiums for Whole Life Insurance are significantly higher than Term Life Insurance.
Whole Life Insurance also has a cash value aspect, which can get confusing… In short, a cash value builds from a portion of the monthly premium payments. From the cash value, you can take a loan, make a withdrawal (against the Face Value of the policy) or use to make your premium payments.
Universal Life Insurance is very similar to Whole Life Insurance. The death benefit will be paid regardless of when you die. However, there is some added flexibility with Universal. If you decide you want to change the amount of life insurance you have, you can make adjustments.
In most cases, Term Life Insurance is the way to go. It’s simple and straightforward. With that said, you should discuss all the options with your insurance provider to determine what’s best for your unique situation. Keep in mind, some insurance companies may try to sell you something that’s not necessarily the best option for you…. stay vigilant!
Where Do I Start?
There are a lot of good options out there. I currently have life insurance through the Military’s Service Member’s Group Life Insurance (SGLI) policy, which isn’t helpful for most of you, but there’s a YUUUUUGE list of options here.
I also mentioned Haven Life earlier (Term Life Insurance Only). Haven Life is backed by MassMutual and advertise a very simple sign up process, as well as online quotes. In some cases, you may be able to finalize coverage through Haven Life without even doing a medical exam!
No matter which route you choose, I recommend comparing rates from a few different insurance companies to make sure you are getting a good deal!
TWH Bottom Line
Life Insurance can be an intimidating topic, but it can be a great tool to prepare for the unknown. Ideally, your family will never collect the benefit.
The benefit for you – You’ll be able to sleep easy knowing your family will be taken care of if something happens to you.
If you haven’t integrated life insurance into your financial plan, now is the time to have the discussion; you have the basic info and some great tools to get you started! Don’t leave your family high and dry!
What questions do you have about life insurance? Feel free to leave a question in the comments or shoot me an email.
Till Next Time!