If you don’t have life insurance yet, you’ve probably had someone tell you that you need it. But is it really necessary? In this post, we’re going to cover some of the main questions that are often asked about this topic. We want to help you start thinking about the best plan for you at your stage of life.
Do I need life insurance?
The answer is: maybe. Or maybe not. Life insurance is a way of taking care of those you love when you pass. It’s generally intended to cover things like your regular income, outstanding expenses that you may be leaving behind (such as a mortgage), and funeral expenses. Truly, it could cover a wide range of things that your family counts on you for, or will be counting on you for.
At what age should I start a policy?
Typically, one of the main triggers for starting a policy is the birth of a child. Whether you are the main bread-winner for the family or a stay-at-home parent, adding a child to the family significantly increases the level of need if something were to happen to a parent. If you work full-time, you will need to account for the level of income that your family depends on you to bring in. If you stay home with your child or children, you are still providing a great service to your family. The cost of putting children in daycare and hiring out care for the daily needs of the family (such as laundry, cooking, and cleaning) would be a significant added expense upon the loss of a stay-at-home parent.
What type of life insurance should I get?
We typically recommend signing up for term life instead of whole life insurance. There are many other types, but these are the two you will likely hear about the most.
Term Life Insurance
Term life insurance is simple in that it does one thing: pays your loved ones a fixed amount if you die. Like car insurance, term life kicks in ONLY if you die. Typical policy terms are 10, 15, 20, or 30 years. During this time, the insurance company is assuming the financial risk of your death for the term of your policy. If you purchase a 20-year policy with $350,000 in coverage and you die during those 20 years, the company will write your family a $350,000 check.
Whole Life Insurance
Whole life insurance basically combines two tasks: protecting your family against your death and acting as an investment account at the same time. A whole life policy doesn’t have a specific term. Instead, you pay into it for as long as you want to keep the policy. Each month, a portion of the premium you pay goes to a cash value account. This grows with the life of the policy, so the longer you have the policy, the more cash value you have. You can cash out on this amount while you are still alive, but it generally takes decades for the cash value to exceed what you’ve paid in premiums. If you don’t cash out on the policy before you die, your family will receive a death benefit amount, but the cash value will simply go back to the insurance company.
Whole life insurance sounds okay in theory, but for a few main reasons, we don’t believe it’s the best investment. The first reason is that life insurance generally has lower investment rates compared to other available options. If you invest the same amount in a good mutual fund, you’ll build your savings more quickly.
The second reason to avoid whole life insurance is that the liabilities you’re insuring against typically don’t last for your whole life, or usually even more than a few decades. For example, toward retirement age, you’ll likely no longer have dependent children, and will probably have paid off your mortgage. At this point, there’s a significant chance that you don’t even need life insurance anymore.
How much insurance do I need?
The amount of liabilities you have will play a part in determining how much insurance you will need. It’s best to discuss these numbers with a financial advisor or life insurance agent prior to purchasing your policy. You’ll need to take into account your current obligations, such as dependents’ needs, outstanding mortgage and loans, and even future expenses like your child’s college fund (if paying for college is in your current plans).
If your kids have moved out, your mortgage is paid, and you don’t have other large, outstanding debts, you are likely at a point in life when a policy wouldn’t be much help to you. As you near retirement age, it’s probably no longer worth paying the monthly premiums to have a life insurance policy. Your assets and retirement savings can likely cover any expenses that your death may incur.
Where do I start?
If you want to learn more before diving into a policy, we discuss some different approaches to life insurance here.
If you’ve realized that getting life insurance now is right for you, we’d love to help point you in the right direction. At Milestone Wealth Management, we want you to be prepared for your financial future. Life insurance is just one aspect of making sure your family is secure. If you’re ready to start planning for the future, contact us today. We offer financial planning services, and can point you toward a highly rated life insurance agency, too. Sit down with us, and let’s create a comprehensive, confident plan for your future.
This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situations above are made.