Why You Need Life Insurance if You Have a Young Family
Life insurance is probably one of the last things you want to shop for.
No one wants to think about death, and that’s part of what buying life insurance forces you to do.
Making sure your family is financially secure if you die is the main purpose of life insurance. But for relatively little monthly in a premium you pay, it can also be an investment.
Why People Don't Have Life Insurance
Only 59% of Americans have life insurance, about half of those are underinsured, according to LIMRA, an association of life insurance companies.
More people may not be buying policies because they don’t understand how life insurance work and think they can’t afford it. A 2016 study by LIMRA found that 83% of people would consider buying life insurance if it was easier to understand.
We’re here to help you figure some of that out.
Oh, and that group life insurance policy you have through work? Don’t expect that to be near enough to cover your family’s needs.
Employers sometimes offer free or low-cost life insurance to employees. Often, the policy is only valid for as long as you work there. The death benefits are usually low, creating average coverage gaps of $225,000, LIMRA estimates.
A policy at work may make you think you don’t need coverage on your own. If anything, group life insurance should be complimentary to a policy you already have.
The Primary Reason to Get Life Insurance
This may sound like a no-brainer, but it should be clear why you’re buying life insurance: to protect your family from a financial crisis.
If your family would be in dire straits without your income, then life insurance is a selfless purchase that can help them after you’re gone.
If you have children, your spouse will need that money to pay for their living expenses, college education, paying the mortgage and other loans, and paying for funeral expenses.
A life insurance advisor can help you determine how much life insurance you need. To start, look at how much you’re contributing to the family’s income and expenses. Factor in child care, mortgage, credit card debt, and any other costs of running a household each month.
A life insurance calculator can help too. Many types can be found online to help determine how many years of income your family will need (such as when your children graduate from college and your home is paid off).
A Second Reason to Be Insured
Life insurance can also be used as an investment vehicle.
Whole life insurance policies do that their name implies: provide insurance for an entire lifetime. Term insurance policies, on the other hand, provide coverage for a specified amount of time, such as 10 or 20 years.
Some of the money paid into a whole life policy accumulates “cash value” in a tax-sheltered investment account that the policyholder can borrow against. The cash value is a guaranteed rate of investment return on a portion of the money paid in the premium. Taxes aren’t paid on the gains while they’re accumulating.
While the returns are lower and the fees higher than other types of investments, borrowing against the cash value of a permanent life insurance policy such as whole life insurance can be worthwhile if it isn’t your main form of retirement savings. The policy can also be surrendered for cash. If a loan against the policy isn’t repaid with interest, then the death benefit is reduced.
For people in a high tax bracket who have maxed out their retirement options, a whole life insurance policy can make sense, especially if they need life insurance. As an investment, permanent insurance pays returns similar to bonds and can benefit risk-averse investors.
A Related Investment Option
Instead of buying a permanent life insurance policy, you can save money by buying term life insurance.
The money saved on premiums can be invested on your own in a retirement savings plan. Maximizing an IRA or 401(k) can provide tax benefits also.
Another Advantage of Term Life Insurance
Term life insurance is the most common type of life insurance, mainly because it’s affordable for most people.
Coverage is for a certain term, such as 10, 20 or 30 years, and is only paid out if the insured dies during that term. Coverage expires when the term ends.
Why would a young person only want life insurance for 30 years? If you’ve bought a house with a 30-year mortgage, a 30-year term policy would allow your spouse to pay off the mortgage if you die before the home is paid off.
The idea behind term policies is that your family will no longer need the money when the term expires. Major costs such as mortgages and college are already paid for during the policy’s term, and the surviving spouse has enough money for living expenses.
Whole life insurance, also called a permanent life insurance policy, can cost 10 to 20 times what a term policy would. Your heirs will be paid whenever you die, which drives up the price.
Buying Life Insurance Online
The online insurer Bestow sells insurance plans with $50,000 to $1 million in coverage for as little as $8 per month. Policy terms can be for 10 or 20 years.
Qualifying doesn’t require seeing a doctor for a checkup. Fill out Bestow’s online form in minutes to get a quote almost instantly. The only requirement is that applicants must be under age 54.
That’s a lot easier than what a traditional insurance company will often require. A medical exam may be required to determine if any medical conditions could lower an applicant’s life expectancy. Denial of an application due to a health condition could affect future insurance applications.