- Prepare ahead so you can protect your family.
- Understand the differences between the various types of life insurance.
- Carefully calculate how much you need to protect your family—generally at least 5 to 10 years' salary.
- Reassess and adjust your insurance as your life and family changes.
When you have a family, protecting them is job number one—and that includes planning in the event of your death. Would your family be able to pay the bills, send the children to college, keep the business running without you? Fortunately, life insurance can provide your loved ones with necessary resources in their time of need.
A life insurance policy provides payment to your beneficiaries in the event of your death. They will generally receive the income tax-free and directly from the insurance company, usually without the delays that come with settling a will or estate. This makes life insurance a dependable way to provide for those you love—no matter your age.
1. What types of life insurance are available?
Life insurance generally falls into 2 categories: Term and permanent.
Term life insurance covers a specific period of time, such as 10 or 20 years, and the premium payment amount stays the same for the coverage period you select. It can be a good choice if your goal is to give your loved ones a lump sum to help replace the loss of your income; they can use it to pay for housing, college, or other financial necessities.
You can purchase term life on your own, through a group policy (such as an employer or professional group), or both. Individual policies allow you to have more control over the amount of the policy and the length of coverage, but they usually require a health assessment to determine the premium cost.
Group policies are generally set for a predetermined coverage and premium (both usually lower than individual coverage), but unless you opt for additional coverage, they rarely require a health assessment. Just remember that if you were to leave your employer, the group life insurance coverage generally ends.
Permanent life insurance has 2 subcategories, whole and universal, and both cover you for your entire life as long as your premiums are up to date. Both whole and universal life insurance also have potential benefits for wealth transfer.
Universal life insurance generally lets you choose from a single or flexible payments, and builds cash value over time. Once the value of the policy covers the cost of the insurance and administrative charges, you can choose how much you pay (within certain limits).
Whole life insurance generally has fixed premiums and a guaranteed payout amount for your beneficiaries. This can be a good choice if your term life is becoming very expensive and/or if you are considering a wealth transfer to your beneficiaries. Additionally, some whole life policies are eligible to earn dividends based on the company's earnings. Though not guaranteed, those dividends can help increase the death benefit and cash value of the policy.
Hybrid life insurance is simply a long-term care benefit attached to another type of insurance, usually whole or universal. A long-term care rider can help you cover the cost of certain types of care while you are still living (for example, nursing home costs or in-home assistance). If you don't use the long-term care benefit, your beneficiaries will receive a death benefit.
2. How much life insurance do I need?
First, calculate your family's day-to-day needs—the entire amount of money it takes to run your household each month. Next, plan for larger expenses such as college, paying off student loans, a mortgage, other debts, running a business, or potential medical issues. One simple guideline is to aim for 5 to 10 times your annual salary and bonus.
If you have a spouse/partner, it's also important to have coverage for both people, no matter how much each person earns. If something were to happen to either of you, you might need to cover unexpected costs such as additional caretaking of children or parents, or time off to settle the estate.
Once you know how much insurance coverage you ideally need, take care to avoid buying a policy with premiums you may not be able to afford in the future. Remember to include the coverage from your employer's group term policy (when available)—it can help you reach your ideal level of coverage while reducing the amount of coverage you need to buy. "It's better to buy a smaller policy with premiums you can comfortably afford than to buy a bigger policy that you have to let lapse because you can't pay the premium," says Tom Ewanich, a vice president and actuary at Fidelity Investments Life Insurance Company.
3. When should I make changes to my policy?
It's a good idea to review your need for life insurance whenever a major life event occurs—a new home, marriage, a new child, or a new job. Additionally, the cost and accessibility of life insurance can vary depending on your age and health: Generally speaking, term life insurance is often less expensive when you are younger and healthier, and the premiums generally increase with age. As you reach the age when term life is getting more expensive and you are interested in transferring some of your wealth to the next generation, then it might be time to consider changing to permanent life insurance.
Tip: As you age, if may be more difficult and more expensive to qualify for and purchase life insurance.
Over the course of your life, you'll likely have a series of short-term and long-term financial needs that change over time. Considering working with your financial professional to explore term and permanent life insurance options as part of your overall financial planning process.