Life Insurance 101
Many an eyebrow would rise if every family were aware of the scary statistics reported by LIMRA (Life Insurance and Market Research Association), the most respected source of life insurance in the world. Twenty four million US households alone have either no life insurance protection or are incredibly underinsured. The story gets grimmer in other parts of the world.
From a page in the family accountability rule book: if there is at least one person who is financially dependent on you, you need to buy life insurance-period. Regardless of where you live in the world, we are all guaranteed to die. Although when and how is unknown, we can control how our passing will financially impact the loved ones we leave behind. The family will otherwise wish they played a role in your death if you don’t heed this advice! The key questions you should ask yourself are: what kind of life insurance do I need and how much coverage is enough for my family?
Granted, it is not as sexy a topic as discussing a lucrative equities investment over cocktails, but life insurance should be the top priority in order to protect our family and their standard of living after a loss.
The first order of business is to determine how much insurance is needed. The primary income earner in the family should purchase coverage which is at least ten times the amount of their annual income. Stay at home parents must also have policies to cover the child care costs which the working parent would otherwise need to pay, had the caretaker not bought coverage. Other expenses which should be factored into your coverage calculations are mortgages, credit cards and other debt which could leave a bag of financial burden behind.
Once identifying the coverage amount, the next step is choosing the right plan for your family. Quick tip: There is no such thing as the “right” kind of life insurance to buy. Should you meet an advisor who recommends one, be sure to quickly run the other way.
Although life insurance comes in several flavors suited for different budgets, it can be narrowed down to two types: permanent and temporary. As the names imply, permanent life insurance is meant for life’s long-haul and will remain active as long as you keep paying the premium. This is more expensive than a temporary policy as it remains in effect indefinitely. Temporary life insurance also referred to as Term Life, will expire after an elected number of years.
Within the permanent insurance category there are Whole Life, Variable Universal Life and Universal Life policies. Whole Life while more costly, will provide you with a guaranteed interest rate and non-guaranteed dividends. These are scheduled dividends paid out by the insurance company and can be substantial enough for the premiums to pay for themselves in the future. Variable Universal Life takes a portion of your premiums and invests in mutual funds of your choice that will grow based on the performance of the given market. Finally, Universal Life will offer a determined interest rate that fluctuates based on the current market.
Term insurance offers coverage that can expire in 5, 10 or more years with premiums that will remain fixed for the specified period you elect.
A simple illustration to compare both categories: a healthy 35 year old male, non-smoker (smokers will almost always pay a hefty premium!) will pay $32 per month for $500,000 worth of coverage over a 20 year term policy. However, the premium for the same coverage on a permanent Whole Life policy will cost $510 per month!
A final word of advice: don’t rely on your company’s coverage. A common risk people take is neglecting the purchase of individual coverage because their employer offers free or low cost group life insurance. If you change jobs, this insurance will not travel with you and coverage will stop immediately upon termination. The same policy you could have purchased earlier will now cost more because aging health factors will play a key role before insurance companies will cover your older self. You also may not be covered at all should you find yourself out of work!