Every time my husband boards an airplane, I think about what would happen to our family if something happened to him. I mainly think about the emotional loss for myself and our daughter of not having him, but at some point, I think about how this would affect us financially. There is little we can do to prevent emotional devastation when losing a loved one, but we can set ourselves and our families up to continue to live the same quality of life financially, even in absence of the income of that loved one. In our case, I decided that term life insurance would be the most effective, simplest and least expensive way to calm my anxiety.
Term Life Insurance is a simple policy; I compare it to renting an apartment. You pay rent (in this case, premiums) for the life of the policy. If the person you have insured passes during the life of the policy, you are guaranteed a certain amount of money. Term life insurance does not build up cash value; so if the insured lives, all those premiums are used just to sleep better at night. Just like renting an apartment, you don't build any equity.
Term insurance is quite inexpensive, especially if you are relatively young and don't smoke. Just to provide a ballpark, I have seen a $1 Million death benefit on a 30-year old for under $300 per year. Another client of mine is 32, has a $3 Million death benefit and pays $909 per year for insurance.
Life insurance can serve as an incredible tool to protect loved ones in the event of death of someone that they rely on for income. It can also protect your family from the loss of a loved one that doesn't necessarily create income, but that provides services that would otherwise have to be paid for. For instance, if a family loses a stay-at home mom, they would then need coverage for child-care and transportation. Life insurance can also be set up to cover the remainder of a mortgage, cover education costs, or to pay for funeral expenses. One client expressed that if her husband were to pass, she would want enough coverage to be able to sit on her sofa eating hot Cheetos and going to therapy for a year. The truth is, that kind of request can easily be calculated and it would be very easy to find an appropriate policy to meet her needs.
The rule of thumb for calculating how much insurance to get is to multiply the income that would be lost by ten years. I however, believe that instead of calculating income, it is best to calculate the amount of money that a family will need over the remainder of their lifetime. The best way to calculate that is to add up monthly expenses, anticipated tuition, remaining mortgage payments, and funeral expenses. All term insurance is paid tax free to the beneficiary, and should be invested properly in order to be preserved.
Life insurance can also be quite flexible. If your lifestyle changes while you are insured, you can always increase your life insurance by buying more. If you decide that you no longer want or need life insurance, you can simply stop paying the premiums, and the policy will end without any additional fees. You can also add riders (at an additional cost) to your life insurance policy to account for specific situations. For example, an accelerated death benefit rider is an agreement with the insurance company to pay the insured if they have been diagnosed with certain illnesses to cover healthcare costs, while the insured is still alive.
If the question comes up of whether or not you need life insurance, ask yourself the following questions;
1) Does anyone rely on me for money?
2) Do I have any debt, such as a mortgage, that would need to be paid for if I passed?
3) Does anyone rely on me for services, that would otherwise need to be paid for?
If your answer is yes to any of the above, it is wise to consider an inexpensive term life insurance policy. If you are single, with no children, and no one relying on you for money, it is likely not necessary.
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