This critical post covers the Fundamentals of Life Insurance. It focuses on how Life Insurance applies to various circumstances, and outlines how you can start now.
Click here to read more posts in the “Getting Started Series”.
WHAT IS LIFE INSURANCE?
A core theme of this blog is the concept of Mêtis and applying it in the day-to-day. Life Insurance fits within the scope! It is a great way to protect your family and loved ones against the unfortunate event of an untimely death. This post focuses on the essential concepts of life insurance coverage outside of what is broadly available from your employer.
At a basic level, Life Insurance contracts are legal documents that consist of a variety of terms and features. These options are designed to meet the unique array of needs a policyholder may be faced with. A life insurance policy provides a death benefit to the beneficiaries in exchange for premiums paid to the insurance company. Depending on the terms and types of the policy, the premiums are paid at various intervals over the course of time.
Life Insurance comes in many forms and variations. Some of the major categorizations of available options are Term and Whole Life insurance policies. Under each of those, there are myriad flavors and specifications. (Always make time to read and understand the contract before you sign!)
Fundamentals of Term Life Insurance
Generally speaking, Term policies are fixed for a set length of time (e.g. 10 years). Term policies provide a specific death benefit from the insurance company to the beneficiaries upon death of the insured. (Provided the death of the insured occurs within the term of the contract). Term policies are generally the cheapest option.
Term policies can be further identified as either level or decreasing terms. Most are level, which means the death benefit is constant. (Decreasing means the death benefit decreases at a set point over the term).
In both cases, keep in mind that the policy will not last forever. At the end of the term they are of no value. If you decide to stop paying the premium, or if the policy is surrendered, the contract will be terminated.
Fundamentals of Whole Life Insurance (also called Permanent Insurance)
To differentiate, Whole Life policies are for the whole life of the insured. Subdivisions of this category include Traditional Whole Life, Universal Life, and Variable Universal policies.
Unique aspects of these policies include the “cash” part, (also referred to as investment portion) and then the insurance. Whole Life is more consistent in terms of structure, and Universal tends to offer more custom options.
The ability to toggle and customize facets of the contract is an attractive benefit for some. That benefit comes with a higher cost and you should approach Whole Life policies with caution. Make sure you actually need these types of benefits before purchasing them. With all the flexibility and robust nature of the policy, there are also a lot of rules to keep in mind. Consider consulting with a firm or individual that specializes in estate management and insurance to see if this is as good fit and will achieve the desired results.
IS THERE A NEED FOR LIFE INSURANCE?
Firstly, it is important to note that while insurance needs and policy types vary for the individual, my opinion is that there should always be an insurance policy in place for every household.
A Candid Conversation
Part of being a good father and husband means providing for the family. This of course holds true and applies while I’m alive. And, if I am called home early, I believe it applies to a certain extent then as well.
Personally, I have coverage through my work and through an individual policy as well. However, keep in mind that individual needs will vary depending on those unique circumstances. I bought as much as we could afford with the budget that my wife and I have in place at this time.
In my opinion, and for my current situation, Term policies are generally the most-affordable, allow for a straight-forward and most-desirable overall approach to achieving coverage. Over the course of the stated term of the policy, the goal is to become self-insured at the end. I have heard Dave Ramsey say the best approach is to buy term and invest the difference. I tend to agree with him there! Buying a term policy, paying the premium and then investing in an IRA is a powerful combination.
How much Life Insurance is needed?
When it comes to this question, I recommend using the 5 W’s. Who, What, When, Where, and Why… There are various time-value-of-money calculators on the internet that will help with some basic calculations in that regard.
For example, in the event that you and your spouse pass away, providing a college fund for your children might cost more than you think! Also, if you or your spouse are the sole source of income for the family, a life-time of wages could be quite difficult to replace.
All that said, I recommend buying a Term Life policy for what you can afford, plus a little stretch. Generally speaking, earners will make more over time; you’ll be able to afford more as you make more. In all if it, be forward-thinking!
Take this step forward today! Get some quotes, and get the policies in place that will support and enrich loved ones in your life.
A word to the wise: make sure to be honest and complete when filling out the application. Don’t be afraid to call the company, ask direct questions and investigate what doesn’t make sense.
Consult a trustworthy professional with technical questions to address any unique tax, or other financial questions.
I also recommend paying an attorney to review any questions related to your Living Trust. An attorney will be able to capture your intent and setup legal framework within the Trust.
Thanks very much for reading the post. GREAT WORK on the progress so far! But don’t stop with this step! Check out the next part of the series here.
Here are a few more posts that might interest you:
- Passive Income Aggressive Retirement: The Secret to Freedom, Flexibility, and Financial Independence | My Honest Review
- Bettering Your Budget
- Establishing an Emergency Fund
THANK YOU FOR STOPPING BY
Thanks for checking out Mêtis Money Matters! We certainly appreciate it. If you’re new to our blog, or for more information on how you can start your financial journey today, be sure to check out our “Getting Started” Series.
To stay current on new material, please consider subscribing, today.
Also, please check us out on social media as we continue to grow and develop more content.
Feel free to leave us a comment or question. We would love to hear from you – let’s keep the conversation going in the comments, below!