Securing Your Family’s Future with Life Insurance
Because life insurance is optional—unlike car insurance and, increasingly, health insurance—it’s often not even a consideration when it comes to budgeting monthly expenses.
Not budgeting for life insurance can be a costly, even tragic, mistake. And most families probably don’t realize how affordable life insurance can be, depending on which type you choose. There are two basic types of life insurance—term and whole.
Term Life Insurance
With this kind of plan, you decide how long you want your life to be insured. For many families, that might just be until their last child finishes college. Or it could be when you reach retirement age. You can buy a term policy to cover the period between now and that point in the future, be it 10, 15, or 30 years away. Then you figure out how much insurance you need for that period (more on that below), and shop around for the best deal you can get.
Each year (or month), you pay a fixed premium, based on your age, health, and how much insurance you want to buy. If you die during that term—even if it’s the day after you sign the contract—your family will receive the face value of the policy, whether it’s $500,000, $1,000,000, or any other amount that you paid for. If you die the day after the term expires, your family gets nothing.
Term life premiums are surprisingly affordable. In fact, most experts agree that term life insurance is the most sensible option: It offers inexpensive coverage during the time when the loss of a spouse’s or parent’s income would be most destructive.
Whole Life Insurance
Some people, however, choose whole life insurance, which means you’re covered from the day you buy the policy until the day you die. Premiums for whole life insurance are much higher than those for term life insurance, but the money you contribute goes back to your family after your death. You can even use your cash balance for emergencies. For example, you can take out a low interest loan on the cash value of your account, or you can use the cash value to pay for medical care in the event of terminal illness. However, if you deplete the cash value of your policy, your family will receive that much less when you die.
Most financial planners say that if you have the extra money required to pay the premiums on a whole life plan, you should use it to invest it in a good savings or retirement plan instead.
How Much Insurance Should You Buy?
Figuring out how much term life insurance to buy is fairly straightforward. In fact, there are many term life insurance calculators available online. In a nutshell, however, the amount you buy should be able to at least replace the amount of money you contribute each year to your household.
If you earn $50,000 a year, you’ll want to buy at least $500,000 worth of life insurance: $750,000 or $1,000,000 would be an even better number, especially if you’re younger and would expect to earn raises over time.
Accidental Death and Dismemberment (AD&D) Insurance
This is a special type of insurance you can think of as an add-on to life insurance. This type of policy only covers accidental death (or the loss of limbs). Overall, the chance of accidental death is very low—only 5 percent of deaths result from accidents. If you have to choose between a cheap AD&D policy and a slightly more expensive term life policy, you’re much better off with the term life. It’s worth buying AD&D insurance if you work in a dangerous job (and aren’t covered for it by your employer).