Life Insurance is a topic that people like to avoid. No one wants to think about what will happen when they die, but to the best of my knowledge, it will happen to all of us at some point. So let’s take a step in understanding the value of life insurance and how it can protect your family.
When someone who contributes to your family income passes away, it greatly affects the ability to maintain your current lifestyle. In my family, both my wife and I work. If one of us should pass away, the family would need the life insurance to cover the lost income without making significant changes to our lifestyle.
In its most basic form, you have term life and whole life.
- Term life insurance covers a specific period of time. For example, you buy a term life insurance policy for 20 years with a value of $125,000. If something should happen to you within those 20 years, your beneficiary (whomever you select to receive the money) will receive $125,000. If something happens to you after the term expires, say year 21, your beneficiary will get nothing from the insurance policy.
- Whole life insurance policy will provide a payout when you die regardless of the term.
It seems like whole life is the better option, but is that true?
To answer that question, let’s discuss cost. Term life insurance costs much less than a whole life insurance policy. According to NerdWallet in 2017 the average price of a 30-year term policy with a $250,000 value is $240 per year. The average price of a $250,000 whole life police is $2,385 per year. That is a difference of $2,145, which is where it gets tricky. What will you do with that $2,145? If you invest that money with an 8% return, you will have about $270,000 at the end of 30 years. If you live an additional 10 years, you will have over $600,000 (that’s the magic of compound interest).
If you can discipline yourself to save the difference, you are probably better off with a term life policy, which would allow your family to draw enough income from the interest to replace your salary or at least cover their expenses.
Along with deciding whether you need whole life or term, you also need to consider how much coverage to get. To do so, ask yourself:
- What will your life be like in 20 or 30 years?
- Will you be married?
- Have children?
- Do you intend to replace lost income for your family or leave a financial gift to someone?
- If you aim to replace lost income, how much is needed for those you leave behind?
- What debts will your family need to pay?
On a final note, consider life insurance when you are younger. Life insurance is cheaper when you are young and healthy. Waiting until you are over 40 will result in significantly higher monthly payments.