A couple of years ago, a dear friend of mine died suddenly from an ordinary illness. She was 27. Amidst the shock, one of the things that helped her husband in the midst of his grief: Years earlier, they had taken out life insurance policies.
At the time they couldn’t imagine needing these policies any time soon, but since they were so young the premiums were incredibly cheap, so they decided to make it a financial priority. Then, she died. While nothing could replace her loss, this money helped him as he started to create a new life without her.
He has remarked to me numerous times since how grateful he was they made that decision. When my husband was seriously injured in a car accident over a year ago now, I remember feeling the same way. Even though we didn’t need to take advantage of our life insurance policy, I was grateful that we had one in place just in case.
Having the right amount of insurance can ease transitions, lessen the financial burden, and allow you to make decisions based on your values, not the amount of money in your bank account — all during what might be some of the toughest moments life brings. So, what’s ”the right amount?” Walk through the questions below to see what might work best for you.
· Do I need it? While most people should have life insurance, there are a few cases where it might not be necessary. Consider these scenarios: First, is there anyone depending on you, like a spouse, child, or aging parent? If so (and you aren’t independently wealthy), you’ll likely need life insurance. Second, if you were to die suddenly, would you have debts or expenses that would need to be paid? This might include a mortgage or lease, or even funeral expenses. If you can cover these costs (if any) from other savings, you may not need life insurance. But if you can’t, or it would be a financial hardship for your family, life insurance can help to fill in the gap.
Tip: Know which debts (and contracts) will need to be fulfilled. Your estate will be responsible for paying back any private student loans (federal ones will be forgiven upon your death), credit card debt, mortgage payments, and car/apartment lease payments until the end of the lease. Take a good look at your full financial picture to see what you might owe.
· How much do I need? There are lots of rules of thumb for getting the right amount of life insurance, but it really depends on your family’s unique situation. I appreciate this calculator from NerdWallet. It starts with your obligations: What would your family need to cover if you passed away? Include your annual salary (times the number of years you need to replace that income), your debt (including any student loans, credit cards, or mortgage balances), and any future needs (such as your child’s college education and funeral costs). If there’s a stay-at-home parent or part-time worker in your family, be sure to include the costs of any childcare that might arise.
Tip: This is a situation where rounding the number up might be smart, as likely your cost of living (and hopefully your salary and benefits) will increase over time, and you want this policy to work over the long-term.
· How long should it last? You’ll need to make some assumptions about the future. Will you need to support your dependents forever, or just until they graduate from college? How long might your spouse need support from you: just while they are working, or until they pass away? Term life insurance lasts for a specific number of years, but once you stop paying for it, its benefit disappears. Whole or universal life policies may be more expensive, but they usually accumulate cash value. There are lots of varieties of life insurance; get to know the differences between them in this NerdWallet article.
Tip: Not sure where to start? Many employers offer term life insurance policies that cover you while you are their employee, and, especially if you are young, it can be relatively inexpensive. First, take a look at whether or not your employer offers any basic life insurance coverage as part of your benefits. For instance, mine offers $50,000 worth of coverage flat out. Then, see how much it might cost to add on coverage for you, a spouse, or your dependents. I was able to add another $200,000 in coverage through my employer for about $20/month.
· Do you need a payout? One of the drawbacks of term insurance is that there is no “cash value” payout of the policy once the term expires. So, for instance, if you choose to get coverage through your employer and you pass away after you retire from that employer, unless you get another policy there will be no money paid to your heirs. Key factors to consider are what you plan to do with it. In addition to covering expenses and debts, sometimes people want to use the money in their life insurance policy to provide an inheritance, or as a chance to give a more generous gift to charity.
Tip: Before you rush to consider a policy that offers a payout, think about what other assets you have. Could your retirement savings, other investment accounts, or tangible assets (home, car, or jewelry) fulfill this need, or do you need more? Be sure to take the extra cost of this policy over time into consideration, especially if you’re planning to live a long life.
While preparing for your death is never fun to think about, it’s important for your peace of mind (and your heirs’ well-being) that you do so early. The sooner you start, the lower the premiums will be generally.
Have tips on purchasing life insurance? Share below!
This Thursday, Nov. 21, I’ll be going live on Facebook at 8pm Central. I’ll be highlighting a few key benefits — including life insurance — that you may not know your employer offers. Only have Instagram? Don’t worry — I’ll be posting the recording to IGTV later.