Life Insurance. It’s one of those things that no one likes to worry about. Of course, a death in the family is unthinkable. Being unprepared for one makes it much more difficult. And, let’s face it. We all die. Protecting your family using life insurance can provide you with peace of mind so that you don’t have to worry about the “whens” and the “what ifs”.
So who am I to tell you about life insurance? Long before I became a mommy, I got my undergraduate degree in Finance & Insurance and spent several years working in the insurance industry. My passion for life insurance grew the more I learned about the wonderful benefits it can provide, not only in death. Most people don’t get excited about spending their money on something that isn’t tangible, but life insurance is absolutely necessary to families.
How Much Do You Need?
When determining how much insurance you need, it can be helpful to use the L.I.F.E. acronym.
L: Liabilities – Your liabilities include things like your mortgage, credit card debt, auto loans, etc. Consider what items you would like to be able to pay off should something happen so the surviving spouse does not have to worry about them.
I: Income Replacement – Often families can not afford to lose the income of one spouse. Income replacement means determining how much you would need on a monthly basis and for how long to pay your bills, maintain your lifestyle, and continue saving for goals like retirement or large purchases. A common misconception is that stay-at-home parents do not need to carry life insurance. However, stay-at-home parents bring great value to a family and often devalue themselves. If you were to pass away, your surviving spouse would need to make sure everything you do can still be taken care of. This might mean hiring a nanny or housekeeper so that your spouse can continue earning an income or maybe having to spend more money eating out for a while.
F: Funeral Expenses – Many people underestimate the cost of a funeral. A basic cremation can cost in the $5,000 range while a fancier service and casket might be closer to $30,000. You also want to set aside an emergency fund for the immediate expenses associated with the loss of a loved one. A readjustment fund might be necessary to allow an appropriate time to grieve without having to work or worry about cash flow.
E: Education – Many families want to make sure that their children’s’ educations are covered partially or in full should something happen to one parent. It’s also important to consider costs of elementary and high school if you plan to send your children to a private school.
Types of Life Insurance:
There are two main types of life insurance: Term and Permanent (also known as cash value or whole life). As the name implies, term insurance is a temporary solution to provide protection for your family. The price is based on your age and health and increases as you get older. If you are young and healthy, term insurance is very inexpensive allowing you to buy a large death benefit. As you age, it may become prohibitively expensive.
Permanent insurance is a long-term solution to your needs. The price is locked in at the time of purchase and never increases. It is more expensive than temporary insurance, but also grows cash value. The cash value can be used to collateralize bank loans or borrowed against to help fund your children’s education or your retirement. It can be used as a monthly savings tool if you don’t otherwise have the discipline to put money into savings.
According to Cale Smith, Managing Director of Northwestern Mutual Financial Network of Louisiana – Baton Rouge, “Most people can benefit from having some of each type of coverage. Meeting with a local representative gives you the opportunity to discuss how much of each type is best for you and your family.”
Where Should You Get It?
Now that you know how much life insurance you need and the types available, you have to determine where you will purchase it. Many people think that the coverage provided at work is sufficient. Unfortunately, there are many reasons that you should consider getting private coverage. Most employer plans are not portable. If you lose or leave your job, you typically cannot take your coverage with you. Depending on your age and health, it may be difficult to obtain coverage when you need it should you lose the coverage provided by your employer.
There are several important things to consider when choosing a life insurance company.
- The first thing to look for is a company with AAA ratings from independent rating companies such as Moody’s, AM Best, Fitch, and Standard & Poor’s. These companies rate the financial strength of the company to determine whether the life insurer will likely be able to pay future claims.
- Consider purchasing from a mutual company instead of a stock company especially if you plan to purchase permanent insurance. Mutual companies are owned by the policyowners and pay dividends back into their policies. This allows them to take a long-term approach when making decisions for the company instead of having to answer to investors each quarter.
- Another important consideration is longevity. How long has the company been around? Chose a company with a long history of providing exceptional products and services.
Life Insurance for Kids
Ok, hang in here with me for a second. I promise I’m not trying to be morbid. Buying life insurance on your kids has almost nothing to do with the possibility that they might die prematurely. Instead, it is about protecting their future insurability. Maybe one of them will enjoy rock climbing or become a pilot. Some hobbies and professions make it more difficult or significantly more expensive to obtain insurance. Purchasing a policy for your children guarantees that they will have coverage when it’s needed, even if they can’t qualify at that time. Another great advantage of purchasing life insurance on children is that it is extremely cheap and the rate is locked in for life!
Life insurance is one of those purchases that can’t wait, especially when you have a family. You are the youngest and probably the healthiest that you will ever be. Purchasing now lets you lock in the lowest rates and means you don’t have to worry about it tomorrow. I challenge every mom to learn more about protecting her family with life insurance.
Stay away from Whole Life.
Thanks for your comment Angel, but based on my experience, I must respectfully disagree. When purchased from the right company, permanent life insurance is an important part of a financial plan. Most people need life insurance for their entire lives, and term insurance cannot fill that need. The cash value from life insurance can be borrowed against to be used for college education or major purchases, used as collateral, and can be used as a tax free supplement to your retirement income. It is also one of the few places that cash can be stored that is protected from creditors. You can also use the cash value to pay your premiums for a period of time if needed. You may also be eligible for dividends which can significantly increase the cash value in your policy and drastically lower the cost of your insurance. But, I will say that these benefits depend on purchasing your policy from a great life insurer so you must do your research prior to purchasing.
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