One of the things that is important to consider when you have a family is to get life insurance. You might wonder, what is life insurance and why do I need it?
The main reason you want life insurance is so that if something happens to you, your family can be paid money so that they do not have to change their lifestyle significantly. We’ll get into the details on what life insurance is and why you’d want it below.
What is Life Insurance?
Life insurance is a type of insurance policy you can get that will pay your beneficiaries after you die.
The typical kind you’d want to look into is called term life insurance. This is where you pay the insurance company a fixed amount for a certain period of time.
If you die before the end of the insurance policy, they will pay the money out to your beneficiaries. If you die afterward the policy date ends, they do not need to pay.
I’ll walk you through an example of how I got my term life insurance.
Term Life Insurance
The first step is to reach out to a reputable life insurance company – there are many out there.
Once, you’ve found the insurance company, they will likely do a health assessment. This will help them determine how much you will pay as a premium for your insurance policy coverage.
The company I went with had me do a basic biometric screening including height, weight, and a blood sample to check cholesterol.
The information from the health assessment, combined with other factors such as my age and life expectancy helped the insurance company determine how much I would pay for a premium.
You also get to pick the length of your policy. The younger you are, the longer policy you would want to pick. This is to make sure the policy will last long enough until after all your debts are paid off, more on that later.
Isn’t the Life Insurance Through Work Enough?
A lot of people are offered free life insurance through their work. Typically, this is only 1-2 times your salary.
Personally, I don’t think that is enough. We’ll get into why below.
Why Do You Need Life Insurance?
The reason is simple so that your family can afford to live after you are gone. If you die and the family loses your salary and contributions, it will cause them hardship.
Life insurance is particularly important if you have a partner and/or children. You want to make sure that your immediate family is financially covered in case something happens to you.
Personally, if I was single, I wouldn’t have life insurance. The reason is my extended family, or whoever would inherit my stuff could sell my few items that have debt and pay them off.
However, when you have a partner and/or kids, you’d want them to be able to continue living in your house afterward. You’d also want them to be able to eat, buy clothes, and do whatever else they need to live.
What is a Beneficiary?
A beneficiary is who you would choose to leave the proceeds from your life insurance policy to. If you have a partner, you’d likely leave it to them.
Alternatively, you could leave it to your children or a trust set up for them. You could even choose to leave it to others in the instance that you and all your first line beneficiaries happen to be in the same freak accident.
How Much Life Insurance Do You Need?
The amount of life insurance you need will vary from person to person and family to family. Here are a few general pointers from my perspective.
Get enough life insurance to cover your large debts – vehicle loans, mortgages, vacation homes, etc. If you are the sole breadwinner in your family, you’d want additional coverage to account for several years’ worth of your salary on top of the debts.
Basically, you’d want enough so your immediate family doesn’t have to worry about how they are going to pay for where they live, food, and their immediate needs.
In doing some research, I found that Dave Ramsey recommends 10-12 times your income.
Thinking of all the things that you’d want to have the life insurance cover; this is the reason that the small amount offered through a workplace policy isn’t going to be enough.
If you’re married, you’d want to get life insurance on both of you, so the other one is covered in case one of you dies. This is even important if one of you stays at home because then it would cover things such as childcare and the other numerous duties you have around the house.
How Long Do You Need Life Insurance For?
You’ll have noticed above that term life insurance only lasts for so long. The idea is that hopefully by the end of the term, you won’t have as many expenses that need to be covered.
The way that my insurance lady explained it to me is that by the end of the term, the goal would be for our house to be paid off.
Typically, when you reach the age at the end of the term, you are close to retirement. You’ve had all your debts mostly paid off. Your kids, if you’ve had any, are typically in college or already graduated and on their own.
At that stage of life, you would no longer have a significant need to have life insurance. The main purpose of it is to ensure that your family can afford to live and pay off the significant debts that may be associated with having a house and vehicles.
You’ve also typically saved enough in a 401K fund, which would hopefully cover your partner’s living expenses at this time in life.
Could I Extend/Renew it?
You could. But here’s the catch, once you get older, the price of life insurance significantly increases. So, you definitely could extend the coverage or renew it, but the price will skyrocket.
It’s just the nature of life insurance. The older you get, the closer you are to death. Crude, but the truth.
So instead of extending or renewing a policy at the end, I’d consider a few other things:
- Have enough money set aside in a 401K to cover living expenses for this time frame
- Instead consider “prepaying” for funeral expenses, if you’re old enough. That would take a huge weight off family members for when the time does come. If you do prepay, make sure to save the documentation so the family knows where it is.
Should You Get Life Insurance?
Honestly, it’s up to you. You need to do what makes the most sense for yourself and your family. Life insurance might not be for everyone.
Personally, I got life insurance so I would have the peace of mind that if something happened to me or my spouse, the other one would financially be set. We’d be able to pay off our mortgage and our vehicle loans.
Just knowing that my husband would have fewer financial worries in the case that something does happen to me, brings me great peace of mind.
The decision is yours.
