Life insurance is one of the best ways to make sure your loved ones don't suffer financially if something happens to you. It can seem like a pretty complicated topic at first. But once you understand the basics, it's easier to see what makes sense for you and your family.
Let's get the awkwardness out of the way
We're going to come right out and say it: Many people don't want to even think about life insurance because then they have to think about dying. That means one thing: They're human beings. Unfortunately, it leads some people to say, “I'll worry about it later."
Shifting the focus to our loved ones and the kind of life we want for them can help us face the topic. (By the way, it's a good thing if you've been able to avoid thinking about life insurance. It probably means you're pretty healthy—which is the best time to buy it.)
What does life insurance do?
Right away, it spares your loved ones a big expense. The costs of a funeral, burial or cremation, and related services are surprisingly high. Worse, the full amount is usually expected up front—there's no payment plan. Life insurance can cover this expense so your family doesn't have to come up with the cash.
More importantly, the presence of life insurance can help your loved ones continue the standard of living they're used to. Consider what it costs to stay in the family home—besides the mortgage payment, you have to factor in property taxes and maintenance. What about your children's education? The loss of your income can deliver a big blow to this and other ongoing expenses. If you didn't work outside the home, you have contributed highly valuable services, like caring for your children, that will have to be paid for now.
There are really only two types of life insurance
Do you tend to think of life insurance as being complicated? While a licensed insurance agent is required to sort out all the specific options available to you, it's helpful to know there are really only two main kinds of policies: term and whole life.
- Term life insurance answers the question: If I pass away tomorrow, what will my loved ones need? This policy lasts for a limited number of years. You pay less for these policies when you're young and more as you grow older.
- Whole life insurance answers the question: If I pass away at a later age, what will my loved ones need? As the name implies, this type of policy lasts your whole life, so long as the required premium payments are made. It provides a guaranteed cash benefit at the time of your death. Also, the rate you begin paying when you purchase the policy stays the same as you grow older.
Here's a quick look at what makes sense at different life stages:
Young adulthood
If you're young and have no real assets, a small term life policy can help out your loved ones with some situations you may not have thought about. In addition to funeral and burial expenses, your parents might end up with your medical bills if you had a serious illness. And if you have a nondischargeable student loan, they may inherit your debt.
Love, marriage, and kids
As you begin building a life with someone else, this is a good time to start investing in a whole life policy. You may also want to amp up your term life policy to cover the kind of life you're sharing. Besides your house and other property expenses, think about childcare expenses, school tuition, and more. As your kids grow older and require less from you, you can take another look at your policy. You may want to reduce your premium because you won't have as much to cover.
Retirement age
This is where it pays to have whole life insurance. You've been steadily accumulating savings and can reduce the amount of coverage you're paying for. When you turn 65, you can even take money out of retirement accounts with no tax penalty and use it for something else. Some whole life insurance plans allow you to use the cash value of the policy for yourself if you need in-home or nursing care in later life. That approach would reduce the total payout of the policy when you pass away.
While it may be unpleasant to think about, life insurance can provide major benefits to your parents, your spouse, your kids, and even you. No matter what life stage you're in or what budget you have to work with, there is a policy out there to help you protect the people who matter most.
