How I Knew it Was Time to Get Life Insurance - And When You Will
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At some undefined point in time, college graduates leave their youth behind and enter into adulthood. This transition into adulthood comes with many potential changes, like marriage.
But it also comes with much greater financial responsibility and the need to protect one's assets and family.
One such thing that you'll encounter on this journey is buying life insurance. Today, I'm going to talk about how I knew it was time for me to get life insurance.
What is life insurance?
Life insurance is a type of insurance policy that allows individuals to buy coverage that protects their loved ones and beneficiaries in the event of a policy holder's death. A type of financial product, a policy is intended to provide financial stability in the event of death.
Here's how it works.
After you take a policy, you'll pay ongoing monthly premiums. These premiums will earn you life insurance coverage, which will pay out a death benefit in the event of your passing.
An agreement between a policy holder and an insurance company, life insurance works similar to other types of insurance.
What is the purpose of life insurance?
Life insurance policies have a number of purposes, but arguably none of them are as important as the peace of mind that life insurance policies are intended to provide policy holders and their families.
In addition to this, however, life insurance is intended to help cover and provide money for/to:
Funeral, burial, and other death related expenses
Money for education for a policy holder's children or dependents
Repay any large or small debts
Replace one's income
Typically, one's policy is tailored towards present and future income replacement costs, but also may take into account his/her dependent's future needs, like money for college.
What are the different types of life insurance?
Those searching for a policy typically have two options when looking for a life insurance policy:
Term policy
Permanent policy
1. Term policies
Term policies provide policy holders with the option to buy life insurance for a set period of time, usually between 10-30 years in length. If the policy holder dies before the term policy expires, then the policy's beneficiaries will receive the death benefit.
But if/when the policy holder outlives the term of the policy, then the policy expires, without any benefits paid out.
Prices on term policies are usually lower than permanent policies, since the coverage is temporary. As such, term policies are most often used to cover mortgages or other liabilities until they are paid off.
2. Permanent policies
Permanent life insurance policies work differently, by providing coverage for the rest of a policyholder's life, or until cancelled, so long as premiums continue to be paid.
Permanent policies tend to have cash values that grow over time. As time goes on, this cash grows tax-deferred, and in some instances, policy holders may be able to access this cash in one of two ways:
Borrow against the cash value
Surrender the policy in exchange for cash
Sometimes, Americans look to surrender policies for cash as a type of investment vehicle, but returns tend to be lower than what you could earn in the stock or bond markets.
When should you get life insurance?
There is no perfect age that you should buy life insurance at.
It depends more upon your individual circumstances and financial situation. There are a number of life events and indicators, however, that indicate that it may be time for you to consider getting a life insurance policy.
For example,
Buying a home
Getting married
Starting a family
Estate planning
1. Buying a home
When most individuals buy homes, they take on hundreds of thousands of dollars of mortgage debt. In fact, it is likely the largest amount of debt they will ever take on. All of this debt comes with responsibility and the need to contingency plan.
The mortgage debt doesn't just disappear upon death, and without payments continuing to be made, your bank will likely begin the foreclosure process on the home.
2. Getting married
For most people, getting married is the first time in life that somebody else will be financially dependent upon you and your income. Similar to when you buy a home, this is not something that should be taken lightly.
Upon your death, your spouse likely will not be responsible for your debt (though this could vary by state and type of debt), but any of your unpaid obligations may need to be paid from your estate.
Plus, your death will be hard enough on a spouse, and you don't really want to add a financial burden to this as well.
3. Starting a family
For many, starting a family is the next big life change after you get married. Similar to marriage, having children further increases others' financial dependence on you. And while most people already have life insurance before having children, this life event can be a great opportunity for you to revisit your coverage.
A general rule of thumb is to make sure that you have enough coverage to protect/replace/cover:
Your home
Your income
Your children's financial needs until they are grown up
It can be hard to estimate exactly how much money you'll need to do this, but a financial professional can help.
4. Estate planning purposes
As you age, it is also important to make sure that you have enough insurance to cover your funeral and burial expenses, but many retirees with large enough nest eggs and grown children begin to cut back on their insurance at the time when their premiums continue to increase.
With fewer financial obligations to protect, your goals change somewhat.
These four milestones happen to millions of people per year and are an indicator that you need to begin to think about others in the event of your passing.
When I knew I needed life insurance
About a year ago, it struck me that I needed life insurance. I had been married for about two months at the time and had also just closed on a house - my first experience with homeownership.
In the span of just sixty days, I had gone from a kid in his mid-twenties to a man that had a wife and owed $300,000 to a bank. If something were to happen to me, my wife's income alone was not enough to afford our mortgage (neither was mine, for the record).
That was a wake-up call for sure.
But it wasn't the only one. After we officially moved into our home, we both realized that we needed to cover more than our mortgage and car debt. We also needed to have financial protection in the event that one of us died at the same time that:
An HVAC system needed to be replaced
We needed a new roof
Our home was built in the late 1960s, so things are bound to need updating and replacement, just as they would in any home. It is important to prepare for that, particularly if you don't have a fully funded emergency fund yet.
But it is still important to consider other catastrophes that could occur, like one of us dying in an economic crisis where the surviving spouse also lost his/her job.
Once I was able to rattle off a list of risks my wife may face if I perish, I knew it was time to buy insurance.
How much life insurance do you need?
We've talked a lot about understanding when it is time to buy life insurance, but how do you know exactly how much coverage is right for you. I have a few suggestions to help you out.
1. Project future expenses
My first tip is to understand what your future expenses may look like. If you have children, include any funds needed to get them through college. Other future expenses that you should consider include:
Medical bills and healthcare
Day to day cost of living
Retirement
2. Estimate future income
You want to be able to replace your future income for as long as you can in the event that you're not around to earn those dollars. It will depend on your age, your savings, and whether you are near retirement, but I recommend that you buy more coverage than you think you need, since it tends to be very affordable.
Some personal finance experts have published more concrete rules to help Americans make this decision too. Among those that I've seen online include:
Ten times your income (plus $100,000 per child for college, if applicable)
Enough to replace your income off the interest if you were to save/invest the payout
Best life insurance for young adults
I am not licensed or credentialed to sell insurance products, but there is a very reputable place for young adults like me to purchase life insurance.
1. Through your employer
Oftentimes, purchasing additional coverage through your employer is the most economical way to gain access to the insurance that you need. My current employer (as well as my previous ones too) offer two times my salary for free as a standard benefit. Someone earning $70,000, for instance, would have a $140,000 policy.
Like I mentioned, in most cases, you can increase this coverage to a greater multiple of your salary at really affordable rates!
Life insurance frequently asked questions
Life insurance is a complicated topic, and you probably have questions. Here are some answers to questions that may be on your mind.
1. Should you get life insurance in your 20s?
Ultimately, just because I got life insurance in my 20s doesn't mean that it may be right for you too. It is important that you look at a whole host of factors to help you decide, including:
Whether you have a spouse or any dependents
Whether they rely on you financially
Whether your death would cause financial stress for your family
It isn't a fun topic to think about, but it is necessary.
2. Is life insurance a good investment?
I'm not a financial advisor, but I don't view life insurance as an investment because it generally can't be used to build wealth during your lifetime.
Rather, I view life insurance as a safety net that protects your loved ones should they be responsible for your financial obligations after your death.
Conclusion
Life insurance isn't a fun topic to think or talk about. But it is important to assure that you don't leave your loved ones in an even harder position should something happen to you.
At what age do you think you'll purchase life insurance, and why? Tell me in the comments below!
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