Jean Chatzky
Do One Thing: If you already have a life insurance policy at work, check with your HR department for a full explanation of benefits so you know exactly what your loved ones will receive in case something happens to you.
There’s no getting around it. Once you reach a certain stage in your adult life there are some things you need to consider, especially if someone else depends on your income — a spouse, children, or aging parents.
And while there’s no denying that the topic of life insurance can be difficult to talk about — it’s far better to be protected (and prepared) than the alternative.
Who Needs Life Insurance?
Josh Radman, the principal and owner of Presidio Advisor, says he often works with clients who have young families who are looking to acquire the financial protection that life insurance offers.
“Typically, those with dependents should consider third-party life insurance,” says Radman, who also points out the basic life insurance policy you may get from an employer is often insufficient to cover your needs. That description isn’t just limited to the wage earners in the family. A partner who stays at home to care for children and pets – and everything else – could also need a life insurance policy because the cost of paying someone else (or a team of others) to take over those tasks (plus laundry, cooking, cleaning, etc.) will be expensive if the spouse is no longer there to manage the household.
Who Doesn’t Need Life Insurance?
On the flip side, some people may not need life insurance. Typically those are people who don’t have financial dependents — including singles without kids who don’t have older parents or anyone else depending on them. Individuals who also have sufficient assets to cover their future expenses — and those their dependents may need — may also be able to bypass life insurance.
What Kind of Life Insurance is Available?
When it comes to the kinds of life insurance policies out there, there are two main types (and a number of types that fit under those categories.)
Term Life Insurance
Term life insurance is the simplest (and cheapest) variety. The policy lasts for a specific amount of time, such as one year or 10 or 20 years, then terminates. It includes a death benefit – with no investment attached – so when the term ends the coverage ends. Because of the attractive price point, term is typically the best option for covering the needs of most people.
Cash Value Life Insurance
Cash value coverage is a death benefit plus an investment component. Unlike term, this coverage is designed to stay in force for life (or as long as you desire.) Varieties of cash value insurance include whole life, variable life, and universal life. The investment/cash value portion of the policy means that an owner may be able to access some of the money while alive — either by withdrawing or borrowing from its value.
What Type of Life Insurance Do You Need?
Radman says he often suggests clients consider term life policies – as opposed to whole or variable life policies – because term life is the most affordable type of insurance policy and often the most appropriate.
Eddy Jurgielewicz, a lead financial planner at New Orleans-based Upbeat Wealth, says he tries to make sure his clients don’t buy more life insurance than they need. “As with other areas of a financial plan,” Jurgielewicz says, “we want to be efficient in how life insurance fits into the picture – getting the appropriate amount of coverage cost-effectively. Therefore, term insurance will almost always be the preferred policy type given its lower cost compared to other types of life insurance.”
When determining how much life insurance someone needs, experts often advise clients to ask themselves these types of questions:
- What goals would you want your loved ones to accomplish in your absence? How much would that cost?
- Do you want to pay off your mortgage?
- Is sending your kids to college a priority?
- Will you need to cover childcare costs and for how many years?
- How much will a funeral cost?
Answering those questions is typically a good barometer for how much life insurance may be necessary. You can also use online calculators (just search online for life insurance calculators) to get an estimate of how much coverage you need and how much that might cost.
Pro-tip: A life insurance policy should cover you for the length of time you have dependents, Radman explains. “So, if you have young kids, a 20- or 25-year term policy may be an appropriate policy length. Anything longer than that might just be overkill (and expensive), as you’ll be insuring yourself when your dependents are now of age and self-sufficient.”
With reporting by Casandra Andrews
Chris O'Shea
