Life Insurance - Does Anyone Depend on Your Income?

Life Insurance: Protection from Financial Harm

An important part of good financial health protecting yourself from financial shocks. You want to have a solution in place for little problems and big problems that arise unexpectedly.

A small problem can turn out to be a big problem if you are not prepared. For example, $400 is not a ton of money. If you need $400 to pay for a car repair and don't have the money, however, it can be a big problem, especially if you can't get to work without your car.

Some problems are big, even without considering the financial aspect.  Your early death or your spouse's certainly fall into this category. If something tragic happens, you don't want the emotional pain to be accompanied by financial struggles. 

One way to protect your family is to buy life insurance.

Who Needs Life Insurance

Not everyone needs life insurance. It is primarily designed to protect people who are dependent on your income. If you die, life insurance coverage can continue to pay your mortgage, college costs for children, and provide enough money to cover living expenses.

There may be benefit to covering a spouse who doesn't work, to provide for child-care and other expenses. However, when prioritizing all your insurance needs, consider what protects you the most broadly from a wide range of events, before adding more than the basics to any one area.

Consider the size of your emergency fund and whether you have short-term disability insurance, to weather a crisis that has big effects, but is not long-lasting, as well as long-term disability insurance that protects you from something that is short of death but has severe long-term impact on your ability to earn a living.

Insurance companies weigh a number of factors, to determine your costs. They look at your age, your medical history and your family's medical history, and your lifestyle habits.  Smoke cigarettes and you'll pay a higher premium. Have a dangerous hobby like sky diving? Then expect to pay a higher premium if you want death from sky-diving covered. 

There are two main types of life insurance you need to review, and then decide which best fits your needs. They are term life insurance and permanent life insurance.

Term Insurance

Term life insurance provides coverage for a set number of years paid for by a regular, fixed premium. Term life insurance is ideal if you require life insurance only for a specified period of time. For instance, if you want protection for your children until they graduate from college, then a term life policy that expires when they turn 22 may be the right fit for you.

Permanent Life Insurance

Permanent life insurance provides coverage until the death of the insured. Permanent insurance is usually sold with the promise that the premium will never increase, and the benefit will increase over the face value as the policy and insured age. There are four primary types of permanent life insurance: Whole Life, Universal Life, Limited-Pay, and Endowment.

Whole Life Insurance

Whole life insurance provides coverage at a level premium and includes a cash value table that is guaranteed by the insurance company. If you want insurance that never expires and eliminates your investment risk, a whole life insurance plan may make sense for you.

Universal Life Insurance

Universal life insurance is a relatively new insurance product that provides the permanent insurance coverage of whole life with greater flexibility in premium payments as well as the potential for greater growth of cash values. Universal life is ideal for individuals who want a life insurance plan that never expires and are comfortable making investment decisions and taking risks.

Limited-Pay

Limited-pay is a form of life insurance in which the premiums are paid over a set period of time (such as 10 or 20 years) after which the policy remains in force without the need for the policy owner to pay any additional premiums. These types of policies are ideal if you want insurance for life but do not want to make payments past a certain date — such as when your retire and income may be limited.

Endowments

Endowments are a form of life insurance where the death benefit can be paid while the insured is still living. Endowments are the most expensive form of insurance because the endowment date (the date the policy pays) is earlier than in other policies. These have historically been used as tax shelters and benefit fewer people today due to changes in the tax laws.

Choosing the Right Life Insurance

Insurance companies make money selling life insurance by understanding actuarial tables better than anyone. Term life insurance is, essentially, a bet between you and the insurance company, making them a kind of bookie. They figure the odds that you will die, based on percentages. The insurance company, after looking at your age, gender, and health, occupation, and lifestyle gives you odds on your surviving the term of the policy.

Term insurance is inexpensive if you are young, looking at the monthly cost, because the odds that you will die when young are low. That doesn't mean that no one in their 20s, 30, and 40s dies, but the occurrence is unusual. If you are young and the head of a household, term insurance premiums are cheap, if you are in good health and don't smoke. It is a no-brainer decision for heads of households to make life insurance a priority.

Term insurance costs more for older people, and therein lies the disadvantage for term insurance. Term insurance may be unaffordable or unavailable for seniors or people with chronic health issues.

That is where whole life insurance has an advantage. The insurance company will average the price of the premium over the expected life of the insured. This means the insurance premiums are higher than term for the same coverage early in the policy and life of the insured, but lower when the insured is older.

What should you do if you want more life insurance coverage? Shop for a term policy. Expect a wide array of prices because insurance companies look at actuarial tables differently. Some whole life policies allow the insured to increase the amount of coverage easily. Contact your whole life insurance agent and ask if you can boost the amount of coverage. Compare the cost of a term policy verses the cost of amending your policy. You want additional coverage to help your family in the unlikely event of your demise before your child becomes an adult, but may not need it later. Look closely at a term policy as your first choice.

Part of a Larger Picture

Life insurance is something you should have, if you have a spouse and/or children dependent on your income. However, the best way to go about building good financial health is having the different areas work together. For example, if you can't afford life insurance despite spending money on only your needs and putting some money into an emergency fund, that is different than not paying attention to your spending and saying you can't afford life insurance.

In the first instance, you could stop building your emergency fund when you have only a couple of months savings built up, then look at your insurance needs.

The important thing is to be thoughtful in your planning. Consider what is important to you and make priorities. That will help you put a solid plan into action when the time comes that you can put a new piece of the puzzle together.