When Should You Consider Getting Life Insurance?
Coffee insurance - something my husband might look into.
If you have dependents that need financial support if you pass away, then you should get life insurance. Even if you are a stay at home parent, you should consider purchasing life insurance. Life insurance should not be considered an investment.
How much life insurance coverage should you get?
This will vary person to person. I used MSN’s Life Insurance Needs Estimator to get an amount that would fit for our circumstances. I entered some data and was given the ballpark figure of $100,000. Please use MSN’s helpful tool to get a ballpark figure for yourself.
Some questions you should ask yourself:
- How many years before you retire?
- Are you financially responsible for anyone other than yourself?
- In the event of your death, how much annual income would your spouse or partner be able to provide to compensate for the loss of yours?
- What is the approximate balance owed on your mortgage?
Deciding on Which Type of Life Insurance
What’s the difference between term and whole life insurance? Term life insurance is insurance that pays the face value of the policy to the beneficiary when the insured dies. Term insurance can be for a set amount of years (typically up to 30 years).
Whole life insurance, on the other hand, involves investments that can increase in cash value. Some people, including a boss if mine, have mentioned borrowing against their whole life insurance policy. When you die, your family also receives the face value of the policy, not the money earned.
While term life insurance can be a smart choice if you choose to invest the savings, a reader made the following observation:
In all my years selling life insurance, I have not seen one person who purchased term with the idea of banking the difference between term and whole life continue their savings program longer than a year.
It’s a great idea, in theory, but you’re bucking up against human nature to spend money if it’s available. I do know many people who, in this recent financial debacle, find comfort in the fact that their whole life policies were unaffected and remain the best “investment” they have today.
I think the reader has a point, but there is a solution to that. Automate the money saved into your investments.
Your Thoughts
If you have life insurance, how much coverage do you have? How did you determine the amount?
Photo Credit: quinn.anya
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Personally, I have $2 million on me, mostly in term insurance that will have to be renewed once my youngest son gets out of college. Why so much? If something happened to me, my wife would never have to work outside of the home (she doesn’t work outside the home now). Life wouldn’t be turned upside down for her in terms of income. I have three kids, and we plan to pay for weddings, college, and who knows what else? Besides, 5% interest on $2 million is only $100,000 and after taxes, about $60,000.
I wonder if I need more than $2 million!
Thanks Ron for giving such a reasonable explanation for your life insurance coverage. You and your wife have really thought this out!
I have USAA and I’ve thought looooong and hard about this topic. I was THIS close to doing whole life, but I stopped b/c frankly, it’s too much cash out flow for me, and I promised to live soley on my base salary.
If you have extra disposable income, I’d look into whole life if you don’t have discipline saving. 20 year term life is not bad either b/c in 20 years, you should have had all your debt paid off hopefully.
Good point on examining the amount of discipline. It is a bit harder for me to sustain something unless I automate withdrawals, transfers, etc. It’s made a huge difference in my life.
I think whenever you mix two different purposes (investment vehicle, and insurance) you just end up paying more in fees. I think if someone really spent the time to break down a whole life insurance, probably less people would participate.
So in essence, the consumer is “paying up” for a bundled service so we don’t have to look at too many things.
As long as you have your insurance coverage to cover at least half your debt obligations, that’s probably all that matters. Paying the mortgage is the biggest worry I have for my wife, but she can always sell the house.
This is the second time I’ve seen you post it, am I still confused. I hate to be repetitive because I think I asked the same question before. Why do you say that with a whole life policy you only get the face amount and not any of the cash value? The true structure of a whole life policy is an increasing face amount that pays out a majority of the cash value on top of the original face amount. The problem with participating whole life insurance, most of the time, is not the policies themselves but the agents selling them. I did a post on this titles “Life Insurance Secrets” It’s probably more of a rant but I look forward to hearing what you think.
EoW, I got most of the information about life insurance from MSN, Smart Money, and Dave Ramsey’s site. That particular statement about face value on whole life I found on Dave’s site.
Thanks for sharing the Life Insurance Secrets post.
I found your explanation eye-opening especially your comments on the cash value on whole life insurance.
“These premiums are also where the rumors arise with cash value in life insurance. These target premiums produce small returns and can take 15 years to produce positive results. “