Nearly everyone pays for insurance...
You have health insurance in case you fall ill. You have car insurance in case of a crash. You have homeowner's insurance in case something damages your house.
But there's one thing that happens to everyone, and tens of millions of folks have no insurance – or insufficient insurance – to protect against it.
When I (Laura Bente) mention life insurance, my friends scoff at the idea.
If you're young, healthy, and without dependents, you probably feel the same.
That's likely a big reason why only about 60% of American adults have life insurance. But the truth is, no matter who you are, life insurance has benefits.
If you die unexpectedly, there's a good chance someone will be on the hook for your funeral and burial expenses... and your debt.
According to the National Funeral Directors Association, the median cost of basic funeral, viewing, and burial services in 2017 was $7,360. And it's not uncommon for funeral costs to total $15,000 or more.
Add to that any unpaid taxes, potential legal fees, debts, a mortgage... and dying gets pretty expensive. And life insurance is a relatively affordable way to protect your survivors from those costs.
That's why today, I'm covering the basics of life insurance and how to decide how much coverage you need...
What are the different types of life insurance?
When choosing life insurance, the two most common options are term life insurance and whole life insurance.
Term life insurance is the more popular of the two, mostly because it's more affordable and easier to understand than whole life insurance. Term life works like a lot of other types of insurance... You pay a set monthly premium in exchange for your beneficiaries receiving a set-value death benefit if you die within the life of your policy.
The downside is that you might make decades of payments, die right after the term ends... and get nothing.
Unlike term life, whole life insurance actually increases in value as you make payments. When you make payments to a whole life policy, you contribute to the policy's cash value. This cash value, which is additional to the death benefit, grows over time. So the longer you make payments, the greater the cash value.
The cash value grows tax-free, and you can borrow against it like a loan. And the policy lasts as long as you pay the premiums.
Lots of variables – like your age and health – determine the premiums you'd pay. But, generally speaking, you can get a term life policy for a few hundred dollars per year, while a similar whole life policy might cost you a few thousand. For most people, term life insurance gives you adequate benefits without burning a hole in your wallet.
What expenses does life insurance cover?
You can use life insurance to cover any expenses, but it's often used for debt repayment, burial costs, or your survivors' everyday living expenses. It can also cover the income your family loses when you die.
These benefits are why it's especially important to get substantial life insurance coverage if you have anyone depending on you and your income.
But even if you don't have any dependents, life insurance is useful. As we mentioned, life insurance covers funeral costs and debt repayment. This removes the cost burden from your family.
That's one less thing for a grieving family to do after the loss of a loved one.
Now, the type of expenses covered and the duration of coverage depends on the policy. And although it's extremely rare, an insurance company can fight a claim depending on the circumstances around someone's death, including suicide and death from a preexisting condition like cancer.
Make sure to check your policy so you know the exact terms.
Can I just use the insurance my employer provides?
As a benefit, many companies offer term life policies, typically with a payout of around $50,000 for little to no cost. The first $50,000 of employer-provided group term life insurance is a tax-free benefit. If you don't have debt or dependents, that might be more than enough for you. But if you have a mortgage, a spouse, and kids, $50,000 won't go far. (You might be able to buy additional coverage on that same policy, but not all employers offer this option.)
You should also know that if you leave your employer, you likely won't be able to keep the policy unless your employer allows you to convert it to an individual permanent life insurance policy. But keep in mind, you'd then be on the hook to pay the premiums on the policy, and you might be able to find better rates elsewhere. So don't be afraid to shop around for a new policy if you're leaving your employer and aren't starting a new job with an equivalent benefit.
How much life insurance do I need?
This is one of the parts of life insurance most people have a hard time figuring out. You want to make sure you have enough to cover the expenses you want it to. But too much, and you'll end up paying higher premiums for a policy you don't need.
There are lots of different calculations... Three of the most common calculation methods are the capital needs analysis, the human life value, and the income replacement value.
The capital needs analysis is the most thorough of the three, as it goes through your income, expenses, and assets to determine exactly what your family would need if you died.
The calculations can get complicated. Using an online calculator (like this one from Bankrate) to help you determine what you need can make the process simpler. But there are a few things you should consider – and try to calculate on your own...
1. How much your family would need to cover immediate expenses like funeral costs and debt. Some debt – like student loans – is discharged at death. Things like mortgages and car loans, however, must be repaid.
2. The amount of income you'd want to replace. Let's say you are your household's breadwinner. Your death would likely put a serious financial strain on your family when it comes to regular monthly expenses.
3. What future expenses you'd want to cover. If you're leaving children behind, decide how much you'd want left for tuition, weddings, etc.
Finally, you need to take all of your assets into consideration, including the values of your bank accounts, retirement accounts, and property.
Write out a full list of assets, as well as debts and dependents, and take the time to determine how much you need before meeting with any insurance salesmen.
If my employer's coverage isn't enough, where should I buy life insurance?
As I mentioned before, your employer might offer the option to allow you to buy supplemental insurance, but it might not be exactly what you need or even give you the best rates. So shop around to find the best deal. Policygenius can help you decide how much you need and lets you compare insurance rates.
Once you have your policy, don't forget to share the details of it with your beneficiaries...
Each year, more than $7 billion in life insurance benefits go unclaimed. That means when the policyholder dies, no one files to collect as a beneficiary. So don't forget to review your beneficiaries annually, make any necessary changes, and let your beneficiary know. That way, the life insurance you've been paying for will help your loved ones cover your debts and funeral expense – just as you'd planned.
I've really only skimmed the surface. But I hope this information can help you figure out your own life insurance needs.
Do you have more questions on life insurance? Send them to [email protected].
What We're Reading...
- How to find unclaimed life insurance policies.
- Something different: How beavers took down Internet service for some Canadians.
Here's to our health, wealth, and a great retirement,
Laura Bente, CFP® with Dr. David Eifrig
April 29, 2021