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Life insurance is an important part of smart financial planning. It may be the last thing on your mind when you're in your twenties and starting a new career or family, but buying life insurance when you are young can be a great way to save money and protect your family in the future. Unfortunately, there is a lot of misconceptions about what you need to know about buying life insurance.
We are going to try and clear up the some aspect about buying life insurance, Hopefully, after reading this you will be able to start shopping for a policy as an informed consumer. Namely, you will learn:
- How your life insurance needs change throughout your life
- The difference between whole and term life insurance
- Some tips to make shopping for a life insurance policy easier
Life Insurance Buying Variables
Your needs for life insurance change throughout your life. But they will be most strongly governed by the number of people who depend on you for their basic needs.
So if you are still single and have no children, you may have little need for life insurance, you will need coverage. But, if you have a spouse or dependents, your life insurance needs will be very different.
Single with No Children
If you have no dependents, it's unlikely that your death would create a financial hardship for anyone in your life and you probably do not need life insurance. There are exceptions to this, such as if you have a parent relying on you for support.
On the other hand, it's still a good idea to buy a life insurance policy while you're young. The younger you are when you buy your first life insurance insurance policy, the lower your rates will be.
So if you fit in this category, you will need to consider whether you want to save and invest your money, or lock into a life insurance policy at lower rates on the (good) chance that you will need it in the future.
Married couples with no kids may or may not need life insurance. Consider whether the death of one spouse would be a financial strain. Would the survivor be able to afford the mortgage, bills, funeral costs, and living expenses?
Even if both spouses are working, it's a good idea to buy at least a modest life insurance policy to protect the other spouse. Life insurance is more important when only one spouse is working.
And, of course, you will want to consider whether you plan on having children. If that is the case, you may want to consider buying a life insurance policy sooner than later, as policy rates are dependent both on your age and health at the time you take the policy out.
Married or Single with Kids
Families with children have the greatest need for life insurance, especially if the household relies upon a single income.
Regardless of how many people in the family work, there will be a need for child care and education for the kids if a parent dies. Think of life insurance as a safety net for your children if something happens to you.
During retirement, you may be living on a pension or Social Security with assets that can give loved ones money after you die. In this case, your need for life insurance will probably not be high, but it may be a good idea to at least buy a small life insurance policy that will cover funeral expenses.
Should I Buy Life Insurance When I'm Young?
While there are hundreds of factors that determine your life insurance premium, your age is one of the biggest. This is because life insurance is a matter of risk. When a life insurance company issues a policy, they are taking the risk that you will die before your policy expires, in which case they issue a payout.
The term of the policy is also a risk. The longer you hold your policy, the more money the life insurance company earns and the greater the chance that you will cancel the policy.
The goal of the life insurance company is minimizing the risk of an early payout on every policy, so they want you to live as long as possible. This is true with whole and term life insurance, but especially with term policies.
Term life insurance remains in force for a limited period of time, usually 30 years. If you do not die during the term, no death benefit is ever paid out and the premiums you pay are mostly profit. The younger you are when you buy life insurance, the less likely the insurance company will ever pay a claim on your policy.
Another important reason to buy life insurance young? Along with lower premiums, you won't have to worry about insurability in the future if something happens to your health.
Term vs Whole Life Insurance: Which Makes More Sense for Me?
There are several types of life insurance, but the two broad types are term life insurance and whole or permanent life insurance.
Term life insurance has a specific term, such as 10, 20, or 30 years. If you have a 30-year term policy, your premiums will stay the same for 30 years, and the insurance company will pay the death benefit if you die during the 30-year period. At the end of the term, your coverage is usually gone, although some policies allow you to convert to a whole policy.
Whole life insurance is much more expensive than term life insurance because it remains in effect until you die. This type of policy also has cash value. While permanent life insurance generally gives you a savings or investment feature, it's generally not as effective as an IRA or 401k.
Most people are better off choosing term life insurance, which has lower premiums and covers you when you need insurance the most. There are some situations in which you will be better off with whole life insurance. As an example, whole insurance is a better choice if you have handicapped children who will be financially dependent on you for their entire lives.
Term life insurance does not build cash value, but it's usually a better option for younger people and families who need financial protection against lost income during a specific time frame, especially because it comes with a more affordable premium.
Stacking Your Term Life Policies
I know some people who will took out three different term life policies when they had kids: one for 30 years; one for 20 years; and one for 10 years.
Their thought was that as time passes, their family should be making and saving more money. So the needs for life insurance would be reduced. Especially after their kids were out of the house. So their staggered policies automatically expire as their life insurance needs are reduced.
While this may not be the right strategy for you, it is something to think about.
The Final Takeaway
Life insurance is an easy way to make sure your loved ones are protected financially if something happens to you. And an insurance policy is probably more affordable than you may think. A study by Life Happens and LIMRA found that 80% of consumers overestimate the cost of life insurance, and Millennials usually believe life insurance is 3x more expensive than it really is.
Life insurance premiums tend to be lower than other types of insurance and you can probably get coverage for $35 to $100 per month.