When people talk about life insurance, doesn’t it seem like it’s always in reference to some woman offing her rich husband for his million-dollar policy on an episode of Law and Order? Yet life insurance is a critical concern deserving of your limited time. Given an unfortunate circumstance, missing just this one element of an otherwise solid financial plan can add financial ruin to the lives of your survivors.
What appear to be the natural complexities of life insurance prevent many of us from making a wise choice to purchase an appropriate type and amount of life insurance. But when you get down to it, life insurance can be boiled down into answering four relatively straightforward questions. Take one at a time and before long, you’ll be checking life insurance off of your “to-do” list.
Question # 1: Do you need life insurance?
It’s completely possible to answer “no” to this question. Think about who will be harmed financially by your untimely demise. If it’s only your stylist, you don’t need life insurance. Don’t worry about Bruce; he’ll find other clients. But if you’ve got children, or have a significant other or parent who depends on your income, life insurance is critical.
It is not only those making an income who need to be insured. Even if you work full-time in the home and receive no salary, there is a tremendous financial cost to the survivors resulting from your early death. As you told your husband during your last argument, it would cost big bucks to replace the childcare, cleaning, and personal chef responsibilities—in addition to everything else you do.
How would your surviving husband be able to keep his job and perform all your responsibilities if you were gone? Quite likely, it would be impossible. It is life insurance on the homemaker spouse that would enable the surviving spouse to keep the job he has and afford to hire others to help with the tasks you formerly performed.
Question # 2: How much life insurance do you need?
The basic goal is to satisfy your family’s needs for a specific period of time after you are gone. For example, you might purchase enough insurance so that your husband would not have to work for the rest of the time your children were expected to live in the home. You might further choose to purchase enough to pay for your children’s expected college expenses. If you purchase enough insurance so that your spouse would never have to work again and could afford to purchase the Yankees, you’ve probably purchased too much insurance. Take advantage of the tools available to assist you in estimating an appropriate amount of insurance to purchase at various Web sites, including Total Candor.
Question # 3: What kind of life insurance should you buy?
Although I can’t tell you exactly what to do, I can provide you key considerations and inform you what to be most cautious of. With that information, you will probably know what makes the most sense for your situation.
Broadly speaking, there are two types of life insurance: whole life insurance and term life insurance. Whole life insurance is further divided into other types of policies with buzzwords such as universal, variable, and single premium. Whole life insurance features an investment component that salespeople love to talk about. It also pays a much higher sales commission, which is less likely to come up in conversation. While there are, of course, circumstances where whole life insurance policies make sense, most young families with limited budgets need to maximize their protection per dollar spent and a whole life insurance policy is typically not the best way to do so.
On the other hand, term insurance is the purest kind of insurance. You pay premiums for the specific length of time (the term) the policy covers. If you pay your premiums and you die during the term of the policy, your beneficiary receives the life insurance proceeds. If you do not die during the term of the policy, you get nothing. It’s quite simple.
