Not everyone needs life insurance. However, it’s highly recommended for anyone with a family to support, as in the case of my family member. People with sizeable loans should also consider purchasing coverage. For example, a single colleague of mine got life insurance when he financed a new home. He didn’t want his extended family to worry about making mortgage payments or selling the house. It’s all about emotional security.
One of the upsides of today’s insurance market is that it’s relatively easy to get a policy. Waiting periods and medical exams aren’t as common as they once were. There are also a variety of options that can be tailored to your specific needs.
What type of insurance should you get?
There are two basic types of life insurance: whole and term. Whole life, or permanent insurance, is a policy that provides insurance coverage as well as an investment component—a portion of your payment creates cash value that grows over time and can be borrowed against or used as an investment tool. This additional aspect means whole life has a higher cost than term life insurance, which makes whole life less popular. The trade-off for higher prices is a longer duration. There is no end date as long as you make your payments.
The more popular coverage option is term life insurance. It’s simpler and easier to understand since it’s purely insurance. With term life insurance, you receive coverage for a set number of years—typically, 10, 20 or 30 years. There isn’t an investment component, so your payments are lower than they would be with whole life. The policy can be renewed at the end of the term, with the caveat that payments increase as you age. If you choose term life insurance, I recommend setting up an alternative retirement income source since you’ll miss out on the investment component of whole life insurance.
How much coverage do you need?
Think of life insurance in needs-based terms. Get enough coverage to replace your current lifestyle, not to enhance it. When purchasing a policy, consider your financial obligations, your dependents’ needs and the amount of time you need coverage. Borrowers should have enough coverage to pay off their debt, while wage earners should have income replacement of 10 times to 12 times their current annual salary.
Easy enough, but how do you calculate coverage for a stay-at-home parent? My wife and I had this conversation not long ago. One evening, we were discussing the future and my wife asked if she should have life insurance. “Of course,” I answered, and within a few days I’d secured a policy. This led to her next question, “How did you determine the amount?” I explained that I calculated the cost of child care and the value of her other family contributions for the next five years. For us, five years would put us beyond needing child care. Your calculation may differ, but the idea is to have sufficient coverage to maintain your lifestyle.
When should you cancel your policy?
If you have whole life insurance, you never need to cancel your policy. It was designed to be lifelong. Term life, as indicated by the name, will expire at the end of the selected term. You’re welcome to renew the policy annually. However, be aware the price goes up as you age. Eventually, it may become too expensive to keep, at which time you should consider cancelling the policy. Just make sure you have sufficient retirement savings in place before you do so.
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