When couples start thinking about the big financial decisions they need to make, life insurance often isn’t part of the mix.
If you never thought you needed it, just ask yourself: If you passed on unexpectedly, would your death put your family’s financial security at risk?
If your answer is "yes," then life insurance is a must.
The good news is that, while you’re young at least, you can often purchase a lot of coverage without necessarily breaking the bank. The main questions you need to ask are, “How much coverage do I need?” and “What kind of insurance should I get?”
Think about the people who depend on the income you provide to pay for your family’s living expenses, mortgage, and outstanding debts: Your spouse or partner. Your children. A special needs child. Maybe even your parents.
What would happen if that income were no longer coming in? If you can envision your family having to sell your home, move to a less expensive state, and give up their plans to attend college, then you are probably a good candidate for life insurance.
For our family, we first shopped for life insurance when I was pregnant with my first child. At that time, my husband and I were new homeowners. We wanted to make sure that if either of us passed away, our benefit would cover the cost of our mortgage and our children’s college costs.
How much coverage is appropriate?
Life insurance isn’t cheap. And the costs go up as you age. Still, you want to be able to purchase as much coverage as you can afford. So how much? Start by thinking about some of the major costs you’d want an insurance benefit to pay off.
- Your mortgage. If you own a house, you want to get enough coverage to at least pay the outstanding principal in your mortgage so your family won’t have to worry about making monthly payments. But you might want to add a bit more to cover several years of real estate taxes and ongoing maintenance costs, like painting, a new roof, or a replacement furnace.
- Your children’s college costs. Tuition, room and board may cost upwards of $100,000 a year at private colleges by the time your young children graduate high school. Expect that at least 25% of those costs will come out of your (or your surviving spouse's or partner's) pocket.
How your premium will be determined
The cost of life insurance will vary depending on your age and health when you apply for coverage. Generally, the younger and healthier you are the lower your premiums will be.
You will need to go through a health screening, usually conducted by a medical professional under contract with the insurance company. These screenings often involve blood tests and a review of your medical history.
Which type of life insurance is right for you?
That depends on your needs and budget. The two most common types are term life and whole life insurance.
Term life insurance
Term life insurance covers a person’s life for only a certain number of years and provides a fixed benefit amount of your choice.
You only pay for the coverage when you need it. Your choice of coverage and term should depend on the financial protection you’ll want to provide.
For example, if you have a 30-year mortgage, you may want to consider a 20- to 30-year term policy that will pay off the balance should you pass away during that time.
The advantage of long-term policies is that the annual premium will not rise during that period, even if you start having health issues. However, annual premiums will generally be higher than shorter-term premiums.
When the term is over you can either renew your coverage or let it lapse. Keep in mind that when you renew your coverage the premiums will rise, since they will be determined by your age and physical condition.
The main advantage of term life insurance is that it costs less than whole life. But it may not be the best choice in certain circumstances.
Whole life insurance
Whole life insurance policies are designed to provide financial protection for your family your entire life. It may be more appropriate than term life insurance for parents of special needs children or wealthier families who need estate planning help to cover estate taxes with a life policy.
Whole life is more complex and more expensive than term life insurance because it has a cash value. As you make premium payments the cash value accrues. So, in some ways, it’s like having a savings account. You can use this cash value to provide income during retirement or for other needs throughout your life.
Other factors that can affect your insurance decisions
It's important to check the ability of the company to meet their ongoing obligations to policyholders. Life insurance providers are rated by independent rating agencies such as A.M. Best, Standard & Poor’s, Moody’s and FitchRatings. (Note: You may have to pay these firms to view their ratings).
If you have ongoing health issues or a family history of cancer or other chronic diseases, or if evaluating different providers is too complex to do on your own, consider working with a life insurance advisor.
These professionals can help you find the right coverage within your budget. Sometimes they’ll know which companies will offer better premiums based on your medical history. Typically, insurance advisors don’t charge you a fee. They are compensated by the insurance company directly.
Before you buy a policy you may also want to meet with a financial advisor, who can help you estimate your family’s future financial needs in the event of your death. The figure they come up with may help you determine how much coverage you need and how long your policy should last.
This material has been provided for general informational purposes only. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult an insurance advisor or your financial advisor for specific insurance-related assistance.
This article was authored by Joelle Spear and Jeffrey Briskin. Joelle is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or firstname.lastname@example.org. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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