(Originally published June 5, 2019)
When I think of life insurance, I think of it as one of the most important aspects of my financial life. If something were to happen to me, I would want my children to be able to pick up the pieces and not have to worry about how they are going to pay my debts or final expenses. I would also want them to have a token of my love that they could use to solidify their own financial foundations.
I see so many GoFundMe accounts where people have died leaving their friends and family to scrape up funds to bury them. This puts an unnecessary strain on the family that could have been resolved by doing the responsible adult thing to do and purchasing a life insurance policy. Think about how those you love would be impacted by your death. It is not only the immediate impact of losing you and your income, but it is the devastating blow of realizing that they will never get to see you again in this lifetime.
There are tons of different types of life insurance designed to fit any budget and need. I am only going to discuss a few of the more common ones that I see people using:
- Whole Life– A permanent life insurance policy that builds cash value at a predetermined fixed rate. Premiums are level, do not go up, and are paid either until the insured dies or turns 100. If the insured lives to age 100, the face value of the policy is paid out to them. Since whole life policies build cash value, insureds are able to borrow against that amount. This is the most expensive type of insurance. Most people would be better off getting a term policy and investing the difference in premium.
Ex- Sue purchases a $100,000 whole life policy at age 48, pays her $425/mo premium until age 100. At age 100, Sue would get the $100,000, which is the policy’s face value. If Sue were to die prior to age 100, her beneficiaries would receive the death benefit less any outstanding loans and interest if any was borrowed from the cash value.
Ex 2- Gilda purchases a $250,000 whole life policy at age 25, pays her $300/mo premium until age 42 when she passes away from a rare cancer. Gilda’s beneficiaries would receive the death benefit, which is the $250,000 face value of her policy less any outstanding loans and interest from the cash value if she borrowed against it.
- Term Life– a temporary policy that is only in force during the “term” of the policy. The term can be anywhere from 1 to 30 years. This type of policy would pay the death benefit to the beneficiaries if the insured died anytime during the term. Unlike whole life, it is pure insurance and does not build any cash value. For this reason, it is significantly cheaper than a whole life policy. Also, a term policy would not pay anything if the insured died outside of the stated term.
Ex- Mike purchases a $500,000 20-year term life policy at age 32, pays his $60/mo premium until age 38 when he tragically dies in a car accident. Since he died within the 20-year term and his premiums were paid, his beneficiaries will receive the $500,000 face value of the policy.
Ex 2- Greg purchases a $1,000,000 10-year term life policy at age 53, pays his $100/mo premium until age 63 and has a stroke at age 64 and dies. The 10-yr term would have expired at age 63, so his beneficiaries would not receive anything from the insurance unless he had renewed the policy for another term.
- Group Life– group life insurance is generally through an employer or affinity group like the UAW, a fraternity, or something like that. You cannot form a group solely for the purpose of obtaining life insurance, so it is usually going to be a part of an employer’s benefit package and is usually at least a year’s worth of income if not more. The group policy is only in force while you are affiliated with that employer, fraternity, etc. Once your affiliation stops, the policy is canceled if you do not keep it in force by paying premiums on your own.
Ex- Sean works for ABC Co and makes $140,000/annually. Her employer insures her for up to 2x her annual income, so $280,000. She leaves ABC Co and starts her own firm. She is no longer covered under the group policy and nothing would be paid out to her beneficiaries on the policy if she passes away.
Ex 2- Kerry is a part of the Big Bad Boys Union and they offer group coverage to union members. He takes out a $300,000 policy under the Big Bad Boys Union group and pays his premium (which is much less than what he would pay if it were not under a group). He maintains his BBBU membership and group policy for many years and eventually dies of old age. His beneficiaries would receive the $300,000 face value of the policy.
Why is any of this important? Count up the cost for your family of paying off any debts that you owe, replacing your income (for the remainder of your life expectancy), and paying your final expenses. What if you have a mortgage, childcare expenses, college tuition, or if significant life adjustments would need to be made to replicate your household contributions? The number may be a lot higher than you think. A good rule of thumb on calculating how much life insurance you need is about 10-12x your annual income. You can use any of the various types of life insurance out there as long as you understand exactly how they work and what the numbers mean to your family.
Life insurance is a key foundational piece to any solid financial base. It gives your loved ones a leg to stand on in the event of an untimely death, and a way to pass on some wealth to the next generation even if you have not yet accumulated much in the way of assets. I personally have all three of the above mentioned types of policies to shield my family from at least the financial blow of my premature death. Talk to your financial professional today to see what is right for you and your family. If you haven’t already, secure your life insurance and begin one of the first steps to securing your legacy.
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