The central purpose of life insurance is to provide for a family’s financial needs in the event of a wage earners death. How much you need is a function of several variables particular to your family. If you live in a two-income household with young children whose needs must be provided for a number of years before they become self-sufficient, your coverage need is greater—and you should provide coverage on both wage earners.
However, even if you live in a single-income household, the wage earner isn’t the only person whose death would create a financial burden. Aside from the obvious emotional impact of the death of a spouse, partner, or parent, there are real financial implications for the death of a non-wage-earning spouse, especially when there are young children in the home. Even though the deceased parent was not earning income, someone would be needed to provide the childcare and perform the other household duties previously managed by the deceased parent.
It’s also inaccurate to assume, even in a two-person household, that expenses will be halved in the event of the death of one of the partners. Housing costs will not usually be halved, nor will utilities, clothing costs, or insurance. Additionally, there may be other financial consequences to the surviving family members. For example, psychological counseling may be advisable, especially in the case of young children who are trying to deal with the incomprehensible loss of a parent.
Because each situation is different, you should research independently and consult with a qualified insurance agent to discuss the insurance needs of your family.
But knowing how much insurance you need is only part of the equation: you must then provide the coverage needed. In the life insurance world, there are basically two choices: term life and some sort of cash-value life insurance (often referred to as “whole life”).
Term Life Insurance
Term insurance is by far the least expensive method of providing a payment to your beneficiaries (usually called the “death benefit” or the “face amount”) upon your death. In fact, for most of the people, term insurance is the only type of life insurance that is needed.
With term insurance, you pay only for the risk assumed by the insurance company to insure your life. For this reason, term insurance is much less expensive when you are young, but becomes progressively more expensive as you get older, since the likelihood of illness and death increases with age. As the name implies, term life insurance is temporary: you pay the specified premium for the specified coverage term, and at the end of that time, the policy terminates with no value. Insurance companies offer a number of variations on this basic design, with some term policies that last five, ten, or more years, and with premiums that are averaged out in cost so that they may stay the same as long as the policy is in force. Some term life insurance is renewable annually, which means that you can continue paying the premium each year as long as you want it, without having to prove that you are still in good health. Once you stop paying the premium, however, the policy terminates and has no further value.
For many young wage earners with children, some amount of term insurance is usually advisable, since it provides the largest amount of financial benefit for the smallest expense. The life insurance offered through your employer is typically term life insurance, since it provides a death benefit but usually has no value once you leave employment.
Cash Value Life Insurance
This form of insurance, which offers both a death benefit and a savings or investment component, can be divided into two basic types: whole life insurance and universal or variable life insurance. The idea behind both types is that you pay an amount of money above what is needed for the company to simply assume the risk of the policy’s face amount, and in return you can build up either a guaranteed savings amount (in the case of whole life) or a non-guaranteed investment amount that usually depends at least in part on the investment experience of the insurance company. The advantage of cash value life insurance, of course, is that it can offer you a type of savings for your future in addition to providing a death benefit for your family in the event of your passing. The disadvantage is that it requires a larger premium—often, much larger—to provide the same death benefit as term insurance, since some of your payment goes toward the investment or savings portion.
For most of the people reading this, paying the extra premium for cash value life insurance may not be the best use of your insurance dollars. There are other ways to accumulate long-term savings that are probably more practical for you, and if you need death benefit protection for your family, you can probably obtain it much less expensively with term insurance. If you believe you need life insurance with some form of cash accumulation built into it, you should consult a financial planner before making a purchase decision.
As you get older the cost of life insurance can increase dramatically, so whatever stage of life you are in today will undoubtedly determine how much coverage you can afford because of the amount you may have to pay for monthly premiums. Most insurance companies offer whole life insurance, which builds cash value, and term life insurance, which does not build cash value, but which generally carries lower premiums. Buying life insurance always requires a realistic analysis of your current financial situation and how it would be affected if your household should experience the sudden loss of income due to the untimely death of a loved one. The primary or sole wage earner of any household, regardless of age, should always try to buy adequate life insurance to provide financial protection for their family.
Whether you’re looking to purchase auto, life, health, or another type of insurance, the buying process is essentially the same. It’s important to shop around and make sure that you’re getting the right coverage for your needs and the most coverage for your money. You can get a preliminary quote by contacting the insurer or an agent by telephone or on-line. When it’s time to purchase a policy, you may have to fill out an application and, depending on the type of insurance, answer a series of questions. If you’re purchasing life or health insurance, you may be asked to take a medical exam. Rates vary widely among companies, so it pays to shop around. The following are some useful tips to help you find the best deal for your money:
Decide before shopping for life insurance what coverage you need
Consider choosing a higher deductible, the amount you must pay toward an expense before the insurance company will pay. Higher deductibles will lower your premium, but remember that you will pay more out of your own pocket if you have a claim.
Because rates vary, ask several companies and agents for price quotes. Make sure the comparison quotes you get are for the same coverage.
When getting a price quote or applying for insurance, answer questions truthfully. Wrong information could cause you to get an incorrect price quote or could lead to a denial or cancellation of coverage.
Ask your agent whether you qualify for any discounts the company may offer. Taking time to shop for insurance can reward you with better prices and better service. One insurance company’s rates could be hundreds of dollars lower than another company’s rates for policies with similar coverage. But don’t let cost be your only consideration. You should choose companies that provide good customer service and are financially stable. It’s also important to buy from licensed insurance agents and companies. Contact your state insurance board to learn more information about insurance companies.
