Life insurance is a product that is designed to pay out a benefit to your beneficiaries, typically your spouse and/or children when you die. It can be purchased with a variety of coverages depending on how much you want to leave behind. In this article we will look at some of the benefits of both as well as the downsides to both. What you decide to do with your money is completely up to you, but being informed will help you make the best financial decision for you and your family.
Why Should I have Life Insurance?
Dictionary.com defines insurance as, “the act, system, or business of insuring property, life, one’s person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved.”
Insurance is about transferring risk from you to someone else, which in the case of buying insurance means that the risk is transferred to the insurance company. When we buy life insurance the life insurance company is basically absorbing the risk of providing for your family when you die at a predetermined cost to the company. Simply put, if you have life insurance in place when you die, your beneficiaries, the people you have listed to receive the money when you die, will receive the face value of the life insurance policy.
Having life insurance in place means that your family will be taken care of when you die. Should you happen to die early on in life this will mean that your spouse and children, if you have them, are able to continue living as though you were still there to provide for them. The loss of a family member is never easy, especially if it happens early on in life, but if there is no life insurance in place then the loss is extrapolated due to now having to figure out how to replace the insured person’s income.
Who Should have Life Insurance
The question of who should have life insurance really depends on what your view on life insurance is. If life insurance is viewed simply from an inheritance standpoint then everyone should have life insurance so that someone else can get money when they die. For some this is their plan for leaving and inheritance when they die. This can be a very costly decision because as a person gets older the cost of insurance rises. On the other hand you could buy a whole life policy and pay a large amount of money for a set amount of time with the assurance that when you die you will be covered. We will talk more about whole life in a minute.
If you view life insurance from the stand point of replacing one’s income upon death then things will look a little different to you. It should be noted that just because someone is a stay-at-home mom/dad does not mean that they do not have an income value. If you have someone who is at home then truly sit down and calculate all that they do for your family and try to figure out how much it would cost if you had to pay someone to do what they do. Some of you may be surprised at how much it would cost to replace your spouse’s monetary contribution to the family in this situation.
When life insurance is viewed as a way to replace your income then the “who” question becomes much easier. No longer do children need to be insured because they are not providing for someone. Also, people who do not have a significant other to care for when they pass do not really need to have life insurance because no one is depending on their income to survive. Lastly, and this one is a little bit more fuzzy right now, we will clear it up in a minute, but if you are retired then you do not need life insurance when viewing life insurance solely from the stand point of replacing a loss in income.
Likely your view on life insurance at this point falls somewhere in between the two or encompasses both views. The reality is that every will die at some point and if you have people who are relying upon you then you should probably consider getting life insurance of some sort. Hopefully as you get older you will begin building wealth so that in twenty years or so you will no longer have much need for insurance. This option is the most financially viable option, especially if you are still relatively young. If there is not someone who is relying upon you to care for them then you may not need life insurance at all, but that is your decision.
Term or Whole
Once you have decided whether you want or need life insurance you will need to decide between a term life policy or a whole life policy to include other permanent life insurance options. To get more information on which is best for you please continue reading, but don’t just take my word on it, simply search term or whole life insurance and see what comes up. I do not recommend clicking on an insurance site to learn about the positives and negatives because they will make you feel like you need to buy a whole life policy simply by their wording. The reason behind this is simple. They make a whole lot more money on a whole life or universal life policy.
Term life insurance is life insurance that you buy for a term. It is generally available in terms of 10, 20, and 30 years, but can be found for other terms as well. What that means is that if you are twenty and you purchase a 20 year policy then it will expire when you are forty years old unless you get another policy at some point along the way. You will pay a much lower rate and be able to get a much larger policy to take care of your family with this option.
By simple cost analysis a term life insurance policy will be the best because it is only insurance. One insurance company quote I am looking at right now on a 30 year term life is quoting $20.23 a month for $250,000 worth of coverage versus paying $78.13 for a whole life policy valued at $100,000. That is a big difference in payments, but selecting a term life policy needs more thought than just cost savings.
When determining what kind of policy is best for you and your family you have to also consider what your life will look like or what you plan on your life looking like at the end of the term. If you plan to live in debt, to always have a mortgage, and to not save, then the more costly permanent or whole life policy might be best for you. However, if you plan to live on less than you make, to save for retirement, and plan on paying your house off early then you would probably be better off with a term life policy and investing the money that you would save by doing a term vs. a whole life policy.
There are some advantages to paying more for a permanent life insurance policy such as a whole life policy and that is that it builds up a cash value within the policy. Depending on what type of permanent policy you purchase you may be able to cash some of that value out if you wanted to, but not always. When shopping for a permanent policy it is important to ask what happens to your cash value if you die. The answer for most of these policies is that the insurance company keeps it. The cash value is separate from the face value of the insurance policy. So if you save up $100,000 in your $100,000 policy and you die your beneficiaries will receive $100,000 not $200,000.
If my cash value doesn’t pass on to my beneficiaries then what is it for? The cash value within the policy is used to pay your premiums as you get older. Typically when you sit down with your insurance provider you will look at life expectancies and if you want to expect your life to be longer than what they think then they will increase your premium in order to cover the difference so that you will not outlive your policy.
What that means is that you pay a higher premium on your policy, but as you get older, or at a certain age, depending on the specifics of the policy you can pay less or even stop paying all together as long as the cash value of your policy continues to pay the increased cost of insurance. This is especially valuable for people who want to make sure that they leave money behind to their heirs because it allows the insured to continue being insured throughout their lifetime.
Your cash value is also typically accessible to you to take out as a loan on a permanent policy as well. Depending on the type you may even be able to cash out a portion of your cash value without repaying, but you will pay a fee. In most cases you can take a loan out and pay it back so that it can pay your policy when you get older.
What is Best for me and my Family?
Determining whether a term or a permanent policy is best for you and your family completely depends on you and your family. If you want the security of knowing that you are covered no matter what and that your family will receive the benefit then the permanent option is likely the way you will go. If you determine that you would rather pay less for your insurance so that you have more to save or invest then a term policy will likely be what you choose.
Another thing to consider is your insurability. Rates are best when you are young because generally your health is better when you are young in comparison to when you get older. If there is a family history of disease, such as cancer, that could cause you to become uninsurable at a later date then you might consider a permanent policy to ensure you pass something on, but also to help offset the cost of any residual medical bills.
While I personally carry term life insurance on myself there are certainly upsides to a permanent policy. You would be wise to explore more of the differences between the two as you think about what is best for you and your family. The worst thing that you can do is to not prepare. We never know when we will be taken from this earth and if you do not have a policy in place when you die your family will be left with the consequences of that. If you’ve lived a frugal life and done well saving and investing then your family will probably be ok financially, but if you have not then the struggle will be even greater for your family.
Even if you decide that you would like a permanent policy, but do not think you can afford one right now then consider putting a term policy in place so that you are at least covered and then convert it to a permanent policy later on when you are able to afford the premiums. What you do or do not do will determine how your family lives in the future.