Everyone will die someday. Will your family be protected in the event of your untimely death?
The sole purpose of life insurance is to replace your income in the event of your death. Thus, anyone with dependents who rely on their income needs to have some level of life insurance. It helps ensure your survivors continue to have the same lifestyle for years to come. It can also help pay for your funeral expenses or outstanding debts.
There are several different types of life insurance. The first category includes universal life, whole life and variable life, all of which come with a term policy as well as an investment component. These are all permanent, meaning they’re meant to last throughout your lifetime as long as you pay the premium. The investment component varies, but can include stock and bond choices, mutual funds or money market funds. Returns on these investments are usually not guaranteed. These are the types of insurance you’ve probably heard the most about, because they all earn massive commissions for insurance salespeople for years to come. But there’s another type of life insurance that doesn’t get mentioned by salespeople that I want you to know about.
Level term insurance is the simplest type of life insurance, and for most people is the best choice. You simply select a term, whether it is 10, 20 or 30 years, and a value (e.g. $500,000.) As long as your policy is active (meaning you make on-time payments each month) the insurance company pays your survivors in the event of your death. Your survivors are free to choose how the money will be spent. This type of insurance essentially earns the salesperson a fraction of what the other types can, which is why you never hear about it. But for most people, this is the most effective way to protect their family.
How much should you buy? There isn’t a golden answer that makes sense for everyone. But a good rule of thumb is to buy a policy for 5 to 7 times your annual income. Thus, if you make $100,000 a year you’ll want a policy for $500,000 to $700,000. If you have kids, it’s probably best to have a policy for 10 times your salary, or $1 million.
How long should your term be? The secret is to figure out how long you will need to financially support your dependents. Say you’re 45 years old, and your kids will be on their own in 15 years. You also want to support your spouse for the remainder of your working lifetime, which could be until age 65. So in this case you’d buy a 20 year level term policy. But keep in mind that life insurance becomes much more expensive the older you get. So if you think you may want coverage for a longer period it’s best to buy it up front when you’re younger and healthier.
Where should you buy life insurance? The internet is the best place to start. At sites like Insure.com you can compare quotes for the level of insurance you’re looking for. Look up the company’s rating by agencies like AM Best and Fitch. These organizations evaluate the financial strength of insurance companies. You want to know the company will be around for a while, so only those with the best ratings should be considered.
Who doesn’t need life insurance? Generally, if nobody depends on your income you don’t need it. Babies, children, and unmarried adults with no children fall into this category.
For the rest of us though, life insurance provides protection for your family in the event of your untimely death.