What You Need, When You Need It: Four Tips On Buying Life Insurance
Guest post by Susan Doktor
No one relishes thinking about death—especially his or her own. We prefer to think of death as being thousands of miles in the distance—so far away that we can’t even fully picture it. But picture it we must, especially when we consider making life insurance a line item in our budgets.
In some ways, life insurance is about the future. It’s a way of taking care of the people we love when we’re no longer around to do it ourselves. But it’s also very much about the present. Who’s depending on me right now? Do I share that responsibility? What kind of support do my dependents need? Am I as financially secure as I want to be or should I commit to a program of saving and investing? Your answers to these questions and more can help you determine what type of life insurance you need and how much.
Tip Number One: Parenthood Changes Everything
One thing is for sure. Unless your last name is Windsor (as in the Royal Family) or you’re among the ultra-wealthy, if you’re a parent of minor children you need life insurance—if for no other reason but your own peace of mind. Raising kids is expensive and it’s likely to get even more costly. You want your kids to have at least the basics and maybe a lot more. Who’s going to pay for health insurance, day care, and piano lessons when you’re not bringing home a paycheck? For single parents, life insurance is an even greater imperative, but even dual-income families aren’t always able to manage when one spouse is no longer there to pitch in. How much life insurance you purchase may depend on the kind of life you imagine for your kids. But the best kind of life insurance to buy may depend on how old you and your children are.
Tip Number Two: Youth is on Your Side with Term Life Insurance
For parents of minor children who are focused more on the immediate needs of their kids or for sons and daughters whose parents depend on them for financial support, term life insurance may be the ideal type of protection. Term life insurance is pretty simple. You pay a monthly premium for a pre-determined length of time—that’s the meaning of the word term in this context—and if you die, your beneficiaries get a lump sum of money. That sum is called a death benefit. Pay your premiums, get a death benefit. It’s as simple as that. Term life insurance has no value if you stop paying your premiums and no value until you die. But particularly for people in their 20s and 30s, term life insurance is inexpensive. A non-smoking 30-year old woman in good health can purchase a million dollars 20-year term life insurance for just over $30 per month. So for under $8000, you can protect your kid with a million dollars’ worth of insurance until he or she is 20 years old. That’s a pretty good deal. But it’s not the only deal.
Tip Number Three: Whole Life Insurance Helps with Life, Not Just Death
There are several kinds of insurance that are categorized as whole life policies. Like term life insurance, whole life pays a benefit when you die. But unlike term life, it builds cash value as you pay your premiums. Whole life premiums get divided up—some of the money you pay goes to your death benefit, some to insurance company operating costs and profits, and some towards your policy’s cash value. That’s why carrying whole life is sometimes viewed as a saving or investing strategy. Some insurance companies invest the cash value portion of your premium payments for you so your money may grow faster.
The cash you accumulate in a whole life policy can—and should—be used by the living. That’s because once you die, under most policies, the cash value of your policy goes away and your beneficiaries receive a death benefit only.
You can borrow from your own policy to pay your premiums or increase your death benefit. But in most cases, whatever you take out of your policy will be subtracted from the death benefit paid to your beneficiaries. When your kids reach adulthood, you may not even feel it’s necessary to carry life insurance anymore. Before you cancel your policy, you can enjoy the money you’ve accumulated in it.
What’s the catch? Whole life insurance is relatively expensive. Make sure you budget well for this payment moving forward. Premiums are usually several times higher than term life premiums. If you own your own business, the premiums you pay on your policy may be tax-deductible as a business expense, which may reduce your insurance costs overall.
Tip Number Four: Get the Guidance You Need
Let’s set aside, for the moment, that it’s uncomfortable to talk about life insurance. It’s also a complicated business. Buying life insurance should be one component of a long-term financial plan and taken into account in your monthly budget. And while it’s easy nowadays to compare life insurance quotes and even buy a policy online, the devil is in the details. So if you’re new to the business, be sure to speak with your financial advisor (if you have one) before deciding on a life insurance strategy. Or rely on a licensed agent to guide you. Find a company whose agents don’t earn commissions if you can to get the most objective advice available.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of topics, including personal finance, parenting, and government affairs. Follow her on Twitter @branddoktor.