By Haley Tolitsky, CFP
September was life insurance awareness month, but it’s not too late to protect yourself and your loved ones before the end of the year. Thinking about death is not easy or fun, but it is important. A common misconception, especially among younger individuals, is that you don’t need life insurance or it is too expensive. If you have anyone in your life that relies on you financially, you most likely need life insurance, and the good news is, it probably costs less than you think.
This article discusses term life insurance only. Be wary of any salesperson who tries to sell you on a whole or permanent life insurance policy (life insurance with a cash value), as that product is typically very expensive and unnecessary for most individuals. Always do your research!
How do I know if I need life insurance?
Term life insurance provides a tax-free death benefit (cash) to your listed beneficiary(ies) when you pass away. This could be your spouse, children, aging parent, etc. If someone in your family is supported by your income, then you most likely need to have a policy to protect them. If you were to pass away, the death benefit provided to your beneficiary would be used to help cover their immediate and future expenses. Other signs you need life insurance include:
- You have minor children. Life insurance could help cover their expenses, such as groceries, daycare and education. Although stay-at-home parents may not have income, consider the costs of their housework and childcare duties that would be costly to provide if they weren’t around.
- You have debt. Cosigners and joint owners on your mortgage, student loans and other loans would be responsible for your debt if you passed away.
- To cover the costs of your funeral. This takes the burden off of your loved ones.
- You own a business with a partner and/or employees.
How much coverage should I have?
When applying for life insurance, you will need to elect the death benefit amount that your beneficiary would receive and term, a.k.a. the length the policy is active (often 10, 20 or 30 years). To help to determine the appropriate death benefit, consider how much money your loved ones would need to cover their living expenses and for how many years. Also, factor in any outstanding debt that would need to be paid off, including your mortgage, private student loans, credit cards and car loans. If you have children, don’t forget about childcare costs and college education.
When selecting the term, consider how long your family would need the full death benefit. Many elect the term to end once their children are out of college and can support themselves, their mortgage paid off and/or surviving spouse can live off of savings and investments.
You also can “stack” life insurance, meaning you purchase two policies: one with a higher death benefit and shorter term to cover current debts and family lifestyle and another with a lower death benefit but longer term to lock in your low premium. Check out this example:
How do I apply?
It usually is a pretty quick and easy process to apply for life insurance. You can do so online or through a life insurance agent. You will complete an application that asks for your medical history and may be required to complete a short medical exam. Then, the application will go through underwriting, where the company reviews your case. Once approved, you will sign the policy and pay the premium, which puts the policy into effect.
Remember, the younger and healthier you are, the cheaper your life insurance policy will be. Once your term expires, the policy is no longer valid, and if you still need life insurance, you will have to reapply based on your new age and health status and face a higher annual premium. It can be beneficial to lock in your low-cost premium for a long term (20 to 30 years) while you are young and healthy.
A standard rule of thumb says six to ten times your annual salary is an acceptable amount of life insurance, but don’t forget about your children and debt. Use an online life insurance needs calculator to help determine the amount of coverage you should apply for.
Always list a contingent beneficiary. The death benefit would go to your contingent beneficiary if your primary beneficiary is deceased. Review your beneficiaries annually, as they override your will! The last thing you want is your death benefit to go to the wrong person.
Many employers offer group term life insurance as a workplace benefit. This is great since it usually is low-cost or free, but there are a few drawbacks, including not having enough coverage, potentially loosing your coverage if you leave your employer and the death benefit is often taxable to the beneficiary. You should accept the free or inexpensive insurance offered by your employer, but consider purchasing your own individual term life policy for additional protection.
Shop around to ensure you are paying a reasonable premium with a reputable life insurance company, and set-up autopayments if you can to ensure you do not miss a payment and lose coverage.
About the author: Haley Tolitsky, CFP®
Haley Tolitsky, CFP®, is a CERTIFIED FINANCIAL PLANNER™ with Cooke Capital in Wilmington, NC, providing highly personalized financial planning and investment management services. She is passionate about financial empowerment, specifically for women and the next generation, and loves the opportunity to motivate and guide others to take charge of their financial lives. Haley can be reached at firstname.lastname@example.org.
Securities offered through The Strategic Financial Alliance, Inc. (SFA), Member FINRA, SIPC. Advisory services offered through Allegiance Financial Group Advisory Services, LLC (AFGAS). SFA, AFGAS, and Cooke Capital, Inc. are not affiliated. Supervising office 703-242-7900.
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