The Importance of Life Insurance
Life insurance might seem like a daunting topic, filled with confusing terms and concepts. However, its significance in ensuring your family’s financial security cannot be overstated.
Just as you wouldn’t neglect home or auto insurance, life insurance is crucial for protecting your loved ones from financial hardship in the event of your untimely passing. It helps make sure that your family has the means to cover debts, maintain their lifestyle, and achieve long-term financial goals like higher education.
How Life Insurance Works: A Simple Explanation
Life insurance policies help your loved ones financially when you’re no longer around. At its core, life insurance is a contract between you and an insurance company. You pay regular premiums, and in return, the insurer agrees to pay a death benefit to your beneficiaries upon your passing. This death benefit can help your family cover immediate expenses such as funeral costs, as well as ongoing financial obligations like mortgage payments or daily living expenses. Essentially, life insurance provides a financial safety net to ensure that your family is taken care of when you are no longer around to do so.
Who needs to have life insurance?
Life insurance is right for almost everyone, even if you’re young. People in their 20s, 30s and even 40s often overlook life insurance. For one, it requires addressing an uncomfortable question. Many younger people also think a policy simply isn’t right for them given their age and family situations.
Opening a policy when you’re young and healthy could be a smart choice. You’re likely to get the best rates and terms because policies will be more expensive as you age. The more time it takes to open a policy, the more risk you face that an unexpected event could leave your family without coverage or financial help.
Which type of life insurance may be best for you?
Depending on where you’re at in your life, it’s important to know exactly which type of life insurance is best for you or if you need any at all. Different options include:
TERM LIFE INSURANCE
Term life insurance that has an expiration date. These terms often last 10, 15, 20, 25, or 30 years. This policy covers your family from when you take it out to the end of your set term. Younger individuals and families often opt for term life insurance. This is because they need more immediate protection and their future needs are less certain.
Many try to match their policy with financial obligations or goals. For example, a homeowner with 25 years remaining on their mortgage might take out a policy of the same length.
Or let’s say you’re 30 and plan to have kids soon. In that case, signing up for a 30-year policy would lock in your premiums for the next 30 years. At 59, you would be paying the same amount per month as you did at age 30.
The tradeoff is that the starting premium for a 30-year policy tends to be higher than say, a 10-year policy—precisely because you’re locked in. You also don’t know how much your life circumstances will change in 20 or 30 years – what types of new expenses you’ll incur, your income, inheritances, etc. In the long run, though, a 30-year term will usually be cheaper than three consecutive 10-year terms.
WHOLE LIFE INSURANCE
Like term life insurance, whole life policies provide a death benefit and other benefits that we’ll get into later. But they have a key difference: A whole life policy never expires. The main advantage of a whole life policy is that it builds cash value. A portion of each premium payment you make is put away in a different account that can be invested or accessed through a loan.
UNIVERSAL LIFE INSURANCE
A universal life policy is another form of permanent life insurance. The difference is that it gives the policy owner much more flexibility in terms of their premiums and cash value. Whereas a term or whole life policy locks in your rate, a universal policy allows you to pay what you’re able to or want to with each premium. It also allows you to adjust your death benefit during the policy, which can’t be done with other types of life insurance.
Signing up for a life insurance policy (whole or term) sooner rather than later can help you lock in lower premiums. If you have dependents, such as children, a spouse, or parents you’re caring for – and lack significant wealth – it may be in your best interest to purchase a policy even if you are relatively young.
Should anything happen to you, you have the peace of mind to know that you’ll leave your loved ones with the financial means to settle any remaining expenses, cover the costs of a funeral, and have some money left over for the future.
Are there more benefits in a life insurance policy outside of a death benefit?
Many life insurance policies offer riders and other perks along with a death benefit. Riders are optional adjustments that you can make to your policy to increase your coverage and fit your needs. Common riders include:
- Accidental death and dismemberment. This rider extends your coverage and can provide for your family in the event of an accident that leads to a disability or death (i.e., an accident involving public transportation).
- Long-term care. If a policy owner needs funds to cover long-term care expenses, this rider, when activated, will provide monthly payments to cover those costs.
- Premium waiver. This rider can waive premiums after that event so coverage is not lost if the policy owner cannot pay the monthly costs of their policy.
A life insurance policy can open doors to other benefits and savings, too. Many life insurance companies will give policyholders discounts on health and wellness products and services, like gym memberships. You can research different providers to find the best offer for you.
When Should You Get Life Insurance?
The best time to get life insurance is when you have financial responsibilities and people who depend on your income. This includes having a spouse, children, aging parents, or any other dependents. Additionally, if you have significant debts like a mortgage, student loans, or business loans, life insurance ensures that these obligations do not become a burden on your family.
Getting life insurance at a young age is beneficial because premiums are generally lower when you are young and healthy. Waiting until you are older or have health issues can result in higher premiums or even make you uninsurable. Therefore, it’s wise to secure a policy as soon as you have financial responsibilities.
How Much Life Insurance Coverage Do You Need?
Determining the right amount of life insurance coverage depends on your specific financial needs and obligations. Here are two common methods to calculate your coverage:
Income Multiplier Method
A straightforward approach is to multiply your annual income by 10. For example, if you earn $90,000 per year, you would need $900,000 in coverage. This method provides a rough estimate and should be adjusted based on your unique circumstances.
DIME Method
This method provides a more detailed calculation by considering four main factors:
- Debt: Total personal debts, including credit card balances, business loans, car loans, and student loans.
- Income: Your annual income multiplied by the number of years your family would need financial support.
- Mortgage: The outstanding balance on your mortgage and property taxes.
- Education: The cost of college for each of your children.
By adding these amounts together, you can determine a more accurate estimate of your life insurance needs.
Benefits of Securing Life Insurance at a Young Age
Securing life insurance at a young age offers several advantages. Firstly, premiums are typically lower when you are young and healthy, allowing you to lock in an affordable rate for the duration of the policy. Additionally, purchasing a policy early reduces the risk of becoming uninsurable due to health issues that may develop later in life.
Young policyholders also benefit from the peace of mind that comes with knowing their loved ones are protected. Even if you do not have dependents now, securing a policy early can be a proactive step toward ensuring future financial security for your family.
How do I have a conversation about life insurance?
Conversations about life insurance may be difficult to start. Here are our top tips for initiating the conversation.
- Start early: Begin the conversation when there is ample time to explore options and secure favorable rates.
- Be open and honest: Clearly communicate your intentions and the reasons behind your decision to purchase life insurance.
- Seek the help of a insurance professional: Insurance agents can provide valuable guidance and help you navigate the complexities of choosing the right policy.
Remember, life insurance is not just for you; it’s for those you leave behind. By taking the time to understand your options and secure the right coverage, you ensure that your loved ones are protected and financially secure, no matter what the future holds.
Bank Midwest can help make this process easier on you by connecting you with an insurance agent, who will guide you through your choices.
Post updated. Originally published March 16, 2022.