When you are young and starting in the work place, life insurance is probably not something you even want to consider and you certainly don’t want to add another monthly expense to your long list. However, there are certain life milestone that should make you want to review the need for life insurance as it can play an important role in family finances.
Below are life events that should make you consider the need for life insurance.
When To Consider Life Insurance – Life Events
You Got Married
Your need for life insurance can simply be to prevent your spouse from incurring any undesirable cost upon your death. Before you get life insurance, make sure you check if your employer provides you with life insurance as many do – in my case it’s two times my annual salary. If you are not covered by your employer, consider getting some just to cover what your spouse would need to get back on his/her feet. It can be as simple as getting $25,000 in insurance.
You Got a Mortgage
You just made your largest purchase ever. The banks or other mortgage lenders are trying to sell you mortgage insurance to cover you and your spouse in case you can’t pay the mortgage anymore. The need to be covered is very real but the products offered from the financial institutions have limitations based on your mortgage loan. Read the details of their offers because your are usually covered for the remaining loan. If you started with a $300,000 mortgage and 5 years later your mortgage loan is $260,000, your life insurance covers you for $260,000 and not $300,000. In most cases, the cost is the same as a general term life insurance which will alway cover you for the amount you took the policy for. In this example, for $300, 000. You seriously don’t want to take a mortgage life insurance.
You Got Kids
Another major steps in your family finance You are now feeding at least one more person and your responsibilities have grown. We all want the best for our family and planning for the worst case might just be to have life insurance that could help cover what you would have provided. Depending on your children’s age, the amount you should have will differ. A newborn requires a lot more than a university student.
You Are Retirering
Life insurance in retirement is really about family finances, tax minimization and wealth preservation. In fact, there are life insurance policies that apply to both spouses and it will only pay in the event that both spouses have passed away. Depending on your estate size, you might be better of having a life insurance that will cover the taxes to pay. It makes more sense for the overall portfolio performance (even if you won’t be the beneficiary).
Life Insurance Options
I won’t go into the knitty gritty details of each but you should know there are different kind of life insurances out there with different costs structure and therefore different goals. My recommendation is to stick to term life insurance as it does exactly what is intended.
Term Life Insurance
Term life insurance is the simplest. You get insurance for 10 years, usually but the terms could differ, and you pay a monthly fee for the insurance. I heard that it’s cheaper to get a new term insurance than renewing with the same carrier. After your term is complete, you will have to go through exams again to assess the risks for the insurer. As you get older, the premiums tend to increase. On the other end, you may not need more insurance so you can decrease the amount you need to offset the increase in premiums. For example, you could insure yourself for $800,000 and pay $45 per month for 10 years.
See term life insurance on Wikipedia for more details.
Universal Life Insurance
Universal life insurance is a life long commitment where you pay the same monthly payment and you are insured for life. It’s more expensive and you are covered for less. One benefit reported is that you can add extra money to your payments and it is invested tax free. I would seriously not recommend that as an investment vehicle – see a tax accountant to really understand if it fits your needs. The cost can add up to be guaranteed to have insurance when you grow old. For example, a $200,000 premium can cost you $110 per month. That’s quite a difference with the term life insurance. Considering we need insurance when we have the most expenses, I would recommend you stil to term life insurance. Interestingly enough, State Farm has a one time payment of $17,239 for an insurance of $100,000. Based on your age, it may be a good ROI
See universal life insurance on Wikipedia for more details.
Whole Life Insurance
Whole life insurance is also a permanent insurance just like universal insurance. It differs in the way that it manages the cash amount of your premiums during your payments and on how you are able to borrow against it at a later time and surrender the life insurance. Again, I would contact a tax accountant to really understand how you can benefit from it.
See whole life insurance on Wikipedia for more details.
Insurance Companies and Retailers
The market can have a lot to offer when it comes to life insurance policies and it’s very important that you shop and learn what you are being offered. Different countries will have different regulations and you should study the rules and guidelines. It’s also important to understand that many can sell life insurance policies with a specific insurer and you don’t have to buy the policy through the insurer directly.
My Life Insurance Road Map
I have life insurance. In fact, I fell for the universal life insurance sales pitch but I have since rectified my policies and I only have term life insurance. I take a 10 year term and I don’t renew at the end but I shop for a new policy. It’s important to understand the difference as renewing can be more expensive. I have a total of $800,000 in life insurance for the cost of $45 per month. As my children grow, I will reduce the amount I have since I won’t need to have enough to cover our mortgage and their education.
Readers: Do you have life insurance? What life event made you take life insurance? Enough to cover all loans (including your mortgage)?