The purpose of life insurance is to provide income to your dependants after you die. So if you have dependants you need life insurance. If you don’t, you don’t.
This means that kids don’t need life insurance, despite what the commercials say. A stay at home parent, however, does need life insurance because the services they provide to the family will have to be replaced in the event of their untimely death. Those services cost money. Is a spouse a dependant? That depends on your circumstances. Will your spouse work? If so, how much money will they earn? Will your spouse stay home with the kids until they are grown and then work? These are all questions that need to be answered.
There are two basic types of life insurance. Whole and Term. Term life means that you pay a set amount per month for a set amount of life insurance over a set term. What? You pay a monthly premium. For this you get life insurance for a set term, say 20 years. If you die within this 20 years you get the insurance amount you bought, say $300,000. Simple, and the most recommended type of life insurance. You decide how much life insurance you need and for how long you would like the protection. This decides your premium. The more or longer you want the insurance the higher the premium.
Whole life is a little more complicated and is not really ever recommended. It’s main benefit is that the insurance covers you for your whole life, hence the name. Right off the bat you can see the problem, you probably don’t need life insurance for your entire life. At some point you will not have dependants any longer. But let’s move on. Rather than just simply paying for a service like you do in term, you pay significanly more per month and that extra gets invested. So you have two parts of your insurance policy. You have the insurance part and the investment part. The plan is that eventually the investment part gets large enough that you no longer have to make your premium payments. The money made off of your investments will cover the premium. The argument against whole life is that you could invest that additional premium yourself and end up with much better results. Plus you will have a very large section of your life that you are paying for a service that you don’t technically need.
So how much life insurance do you need? You want to think about what the needs of your family will be if you were to die. Let’s say you have decided that if the mortgage was paid off your spouse could make enough to support themselves. Then all you need to do is get a life insurance policy big enough to cover the balance of your mortgage. If you want to pay off the mortgage, send the kids to college, and provide a $1,000 a month income then you will want to do the math and figure out how much that comes out to. Keep inflation in mind as well as any interest the money will earn over time.
Too much math? That’s ok. There are lots of calculators out there. Bank Rate has a pretty good one. You will need to know funeral expenses, how much monthly income your family will need, how many kids you want to send to college and how much that will cost, the ages of your kids, if there are any big one time expenses that you would like to provide, and a couple of other minor things. If you have some expenses that will occur at death, such as paying off the mortgage, you can enter them in as funeral expenses.
Once you know how much you need and what type (term!) you can go shopping. There are a lot of factors that will determine your price. How much and for how long you need it are the things you can control. Your lifestyle will also impact your premiums. Smoking while skydiving will raise the price. The things you can’t control are your age and health. The younger and healthier you are the less you will pay.
I’m interested to know who out there has life insurance and how much. Also, if you feel comfortable, please share how much you pay. It would be fun to see how it can vary. (Yes, I said fun. Now you know how much of a dork I truly am.)
