When You Need to Start Thinking About Buying Life Insurance
No one likes to think about their own death.
However, it’s important -- from time to time -- to consider what would happen if you passed away.
Life insurance is one very important aspect you need to consider as part of this process.
It isn’t something that everyone needs.
That said, the majority of people will likely need this type of insurance at some point in their lifetime.
Here’s what you need to know about life insurance and when you need to start thinking about buying it.
When Does It Make Sense to Consider Buying Life Insurance?
Life insurance essentially is when a person pays an insurance company premiums in exchange for a payment if the insured person dies while the policy is active.
Unfortunately, understanding life insurance and purchasing a policy can get confusing. There are many types of policies to choose from that range from simple to understand to complex.
While most people need life insurance, it isn’t essential for every person to have.
The easiest way to determine if you need life insurance is to ask yourself a simple question:
What would happen if I died today?
Here are a few scenarios to help you find the answer to your question.
Scenario: Single with no dependents
Bob is a single 25-year-old with $10,000 of student loan debt.
He isn’t dating anyone and no one relies on him for any financial or other support.
If Bob died today, no one would need to replace his income. His $10,000 of student loan debt does not have a co-signer, so no one else is responsible for paying it off if he dies.
Someone would have to pay for final expenses, which is a small expense in the big scheme of things. In this case, Bob may decide to buy a small term life insurance policy to cover his final expenses.
Alternatively, Bob may have enough in savings to cover these expenses and any outstanding debt. In this case, Bob wouldn’t need life insurance at all.
Scenario: Married with children
Jackie is a married 35-year-old mom of two children.
She’s the breadwinner and makes $100,000 per year. Her husband stays at home to raise the kids and run the household.
They have a $200,000 mortgage and a $20,000 car loan. They also have a six-month emergency fund and $100,000 invested for their retirement.
If Jackie died today, her family would be in a major financial bind. Their income would stop immediately. Her husband would need to find a way to replace a $100,000 income while dealing with the death of his spouse.
Their six-month emergency fund would help them in the immediate future. Sadly, their long-term financial future is in jeopardy.
This is a prime example of when having life insurance is necessary. Ideally, a policy would give her husband and kids plenty of time to recover.
The policy should replace Jackie’s income at least as long as it would take her husband to find a way to earn enough to support the family.
Scenario: Retired without dependents
Will and Diane are a retired couple in their late 60s.
They have no dependents that rely on them for income or financial support. They were super savers and amassed a $5,000,000 portfolio to retire on but only spend $75,000 per year.
There would be no major negative financial consequences if Will or Diane died tomorrow. Since they’re both retired, there will be no loss of income.
Additionally, their $5,000,000 portfolio should more than cover the surviving spouse’s expenses for the rest of their life. Neither Will or Diane would need life insurance in this situation.
Key questions to ask yourself
To figure out if you need life insurance, consider what would happen when you die.
Answering these questions can help you determine if you need life insurance and if you do, how much you need.
- Do you have dependents that rely on your income?
If so, how fast could your income be replaced? - Do you have debt payments your dependents would need to keep making so they could continue living in a home or using a car?
- Would your death result in any extra expenses that would need to be covered?
- Do you have enough assets to provide for those needs?
If not, how much extra money would you need to fulfill those needs?
In general:
The goal of life insurance should be to replace income, pay off debt and provide a reasonable standard of living for those you leave behind until they can get back on their feet.
For these reasons, it often makes the most sense to buy life insurance right before a major life change.
You should consider getting life insurance when:
- Someone cosigns a loan for you
- You get married
- You have children
- You get another large financial responsibility that must be taken care of even if you die
What Types of Life Insurance Are There?
In general, there are two major types of life insurance.
The first, term life insurance, is easy to understand.
The second category, permanent life insurance, can often get very complex.
Term life insurance
Term life insurance requires you to pay premiums in exchange for a payment when you die.
The policy will only pay out if you die during the term of the policy. Term life insurance usually has terms that range from one to 30 years from when you take out the policy.
If you don’t die during the policy, you get nothing.
Many people see this as unfair.
However:
It works like most other types of insurance. You only get a benefit if you make a claim.
You don’t hear people complaining about getting nothing after years of paying for other types of insurance without a claim.
In fact, if you went 30 years without making a single auto insurance claim you’d consider yourself lucky.
Permanent life insurance
Permanent life insurance can get complicated due to many types that exist.
Types of permanent life insurance include:
- Whole life insurance
- Variable life insurance
- Universal life insurance
- Variable universal life insurance
A permanent life insurance policy lasts your entire life as long as you keep paying the premiums.
It’s like an unlimited length term life insurance policy. The policy may also build value that you can cash out if you decide to cancel the policy early. This payment is called cash value.
Unfortunately:
The unlimited policy length and cash value features push premiums much higher than term life insurance.
Premiums are also higher because the policy will be guaranteed to pay out the death benefit as long as you make the premium payments.
To compensate for the higher cost to insure people as they get older, the premiums are spread out over a person’s life.
This prevents the premiums from becoming unreasonable as a person ages. If this happened, people may be forced to drop the policy when they need it most.
Whole life insurance is the most straightforward version of permanent life insurance.
That said, other types like variable life insurance and universal life insurance add even more complicated options to the permanent life insurance policy.
Things to Know When You’re Ready to Buy Life Insurance
There are a few things you should know when you’re ready to buy life insurance.
The common route
In general, term life insurance is the preferred option in the vast majority of cases.
However, there are rare instances where a permanent life insurance policy may make sense.
Find the right financial pro
When speaking to professionals about life insurance, make sure you don’t make any decisions only based on what a salesperson tells you.
Instead:
Consult with a fiduciary financial planner, a type of financial planner that must put your best interests before their own, before making any life insurance decisions.
Otherwise, non-fiduciary advisors may try to sell you products that result in higher commissions for themselves rather than the perfect product for you.
You should be aware permanent life insurance policies offer lucrative commissions to salespeople. On the other hand, term-life insurance policies pay out much smaller commissions.
Insurance pricing
Life insurance companies are using more information than ever to try to get a better idea of the chances that you’ll end up using the policy you buy.
Common factors used include:
- age
- gender
- health history
- occupation
- where you live
- the type of policy you buy
In general, the younger you are the lower your rates will be because you’ll have a smaller chance of dying during the term of your policy.
For that reason, it can sometimes make sense to buy life insurance earlier in life to secure a lower rate for the entire term of your policy.
Since women typically live longer than men, their rates will likely be lower than a male that’s the same age. Your health and your family’s health history plays a big role in your life insurance rates, too.
Life insurance companies also require you to submit to a medical exam to get the best rates. Insurers may draw blood, take a urine sample and take your height, weight, blood pressure and other measurements to determine your level of health.
If you or your family have a history of any major illnesses or diseases such as cancer or heart disease, your rates will be higher than someone that has no family history of these conditions.
In some cases, you may be denied for life insurance altogether because you’re too high of a risk for the life insurance companies to take on.
Different companies calculate premiums based on their own risk assessment of your application. That means one company may offer a lower premium than another for the same type of life insurance.
Compare quotes and ratings
When shopping for life insurance, make sure you’re comparing quotes apples to apples to find the best option for you.
For instance, when shopping for term life insurance you should make sure all quotes are for the same term length and payout amount.
You also want to take a look at each life insurance company’s financial ratings.
Understand the rating systems and where each company falls on the scale.
You want to make sure that your life insurance company will be there to pay out your claim should your family need it.
Buying Life Insurance Is an Important Decision
Purchasing life insurance is an important decision that can secure your family’s future should the worst happen to you.
Make sure you understand exactly what you’re purchasing before you make a decision.
If you don’t understand the types of insurance or the process, consult with a fiduciary financial planner. They should give an honest opinion of what type of life insurance is best for your situation.
