Life insurance can help your loved ones meet their expenses and maintain their standard of living in the event of your untimely death.
"Two-thirds of Americans recognize they need life insurance yet many do not have adequate coverage to protect their families." ~ James Scanlon, LIMRA Market Research
Words to Know
Beneficiaries: the person(s) who receive the death benefit when you die. These are individuals you choose — they can be a spouse, children, parents, business partner, etc. Premium: the cost of the policy. This can be paid monthly or yearly. The cost depends on a variety of factors, including your age, your health, the benefit amount, and the type and length of the policy. Death benefit: the amount paid to your beneficiaries when you die. You choose the amount when you purchase the life insurance policy. The death benefit is generally income tax free.
How Much Life Insurance Do You Need?
How much life insurance you need depends on your personal and financial circumstances as well as what you'd like to accomplish with the death benefit should you pass away prematurely. Many experts recommend aiming for 10 to 15 times your income. At a minimum, you should purchase at least enough coverage to pay your funeral expenses (an average cost of $7,000 to $10,000) and your debts. As your family grows and changes, you may need to reevaluate the amount of coverage you have. Here are a few things to consider as you determine the amount of insurance to purchase.
- How much money will your family need to cover the lack of your income? Are you close to retirement, or are you providing for a young family? The coverage you will need is tied to the amount of income you would need to replace in the event of a premature death.
- What debts do you have that your family will need to pay? These may include a mortgage, automobile loans, student loans, and credit cards.
- What specific expenses would you like to cover for your family in the future? General living expenses, college, weddings, etc.
- Will your family need to replace your annual income, or will your spouse's income be sufficient?
- Choose a policy with premiums you can afford long term. You are better off purchasing a smaller policy with lower premiums you can fit into your budget. If you purchase a policy with premiums beyond your capacity to pay, you risk letting the policy lapse due to missed payments.
For further guidance in determining how much life insurance you need, download our life insurance planning checklist.
Types of Life Insurance
There are two main types of life insurance: term and permanent.
Term Life Insurance
A term life policy is the simplest and usually the most affordable type of life insurance. A term policy offers protection only for a specified number of years. You choose the term (length of time you want the policy to last). Typical terms are 10, 15, 20, or 30 years. The policy expires at the end of the term and is no longer in effect. If you pass away while the policy is active, your beneficiaries will be paid the death benefit that is specified by the policy. Example: In 1998, John purchased a 30-year term life insurance policy for $500,000. He passed away 21 years later (in 2019). The policy was still active since it was within the 30-year time frame and John had not missed any monthly payments. His beneficiaries received a death benefit from the insurance company for $500,000. If you pass away after the policy has expired, your beneficiaries will not receive a death benefit since the policy is no longer in effect.
Permanent Life Insurance
The two main functions of permanent life insurance are to:
- Pay your beneficiaries in the event of your death.
- Serve as an investment account that has a cash value you can access or borrow against while you are living. The longer you have the policy, the more cash value it will have.
This type of insurance provides lifelong protection until maturity, usually until the insured is age 95 or older. Permanent life insurance policies can include whole life, universal life, or variable universal life. While permanent life insurance can be significantly more expensive than term, permanent insurance is a good choice if you want long-term coverage with a predictable premium and a way to accumulate cash funds for emergency needs or opportunities. Younger families often purchase term insurance and convert to permanent insurance later. Premiums may be higher with the renewed or converted policy.
Talk with Your Insurance Agent
Purchasing a life insurance policy can be intimidating. Your insurance advisor can help make the process easier by offering advice, performing a needs analysis, and explaining coverage options and costs. Contact us for further guidance on determining the amount and type of insurance that is right for you.